Danemark Limited v BAA plc

Under the Companies Act 1985, section 726(1), the court has a complete discretion whether to order security for costs.

Where security is likely to stifle a company’s claim, the court must balance the claimant’s loss if the action ends against the defendant’s exposure to further unrecoverable costs. Already incurred unsecured costs remain relevant to the overall picture but should carry limited weight in that particular balancing exercise.

A late application may be reconsidered after a material change in the evidential position, but timing will generally weigh against an order where little further cost remains. Prospects of success may be considered without detailed examination of the merits unless a high degree of probability is shown.

Danemark, a small company, claimed nearly £300,000 under two alleged consultancy agreements. BAA denied entering into the agreements and alleged that they were forged. Shortly before trial, both parties’ experts agreed that the first agreement was forged, while the authenticity of the second remained disputed.

After earlier security orders and a recent refusal of further security, His Honour Judge Rivlin QC, sitting as a High Court Judge in the Queen’s Bench Division, ordered an additional £112,500 security, with dismissal in default. Danemark appealed, arguing that the application should not have been reopened and that the order would stifle the claim. The central issue was whether the discretion under the Companies Act 1985, section 726(1), had been properly exercised.

Appeal allowed with costs. Lord Justice Phillips delivered the judgment and Lord Justice Mummery agreed.

1. The trial judge was entitled to reconsider security for costs despite an earlier refusal. The claimant’s expert report constituted an important development and had dramatically altered the apparent strength of the parties’ cases. The application could therefore be reviewed afresh, even at the opening of the trial.
2. The principles summarised in Keary Developments Limited v Tarmac Construction Ltd [1995] 3 All ER 534 were applicable. Section 726(1) confers a complete discretion, but an order likely to stifle a claim requires a specific balancing exercise. The court must weigh the claimant’s loss if prevented from pursuing the claim against the defendant’s exposure to further costs which could not be recovered.
3. Where the claimant and those behind it can meet an order, security will normally cover past and future costs. The position differs where compliance is impossible and the order is likely to end the action. Costs already incurred remain relevant to the overall picture, but they were already unsecured whether or not the trial proceeded and therefore carried little weight in the particular balance.
4. The court may consider prospects of success, but should not examine the merits in detail unless a high degree of probability of success or failure is demonstrated. Here the judge had not found that BAA had established a strong prima facie case of fraud, and other documentary evidence supported Danemark’s claim. The serious allegations and the timing of the application made an order stopping the claim at the start of trial particularly draconian.
5. The judge had not carried out the required balance. He treated previously incurred costs as immaterial while ordering security in respect of both past and future costs. In the circumstances, no judge could properly conclude that Danemark’s claim should be stifled to protect BAA against the residual costs of the trial. The appeal was accordingly allowed.

1. Court of Appeal (Civil Division): Allowed the appeal with costs.
2. Queen’s Bench Division: His Honour Judge Rivlin QC, sitting as a High Court Judge, ordered additional security of £112,500 under the Companies Act 1985, section 726(1), with the action to stand dismissed if security was not provided.