Thistle Hotels Ltd v Gamma Four Ltd.& Ors

Security for costs may be ordered against a counterclaiming defendant where the counterclaim has an independent vitality and is more than a mere defence, even if it arises from the same transaction as the claim. The court must examine the substance of the counterclaim and its effect on the issues, time and costs of the action.

In deciding whether security is just, the court considers all the circumstances, including the defendant’s ability to meet an adverse costs order, the liquidity of its assets, enforcement difficulties, delay, oppression and the risk of stifling a genuine claim. A net asset balance does not establish an ability to pay costs when due.

Thistle Hotels sought security for the costs of counterclaims brought by Gamma Four and Euro and UK Property in substantial litigation concerning the sale of hotel businesses. The application relied principally on the defendants’ alleged inability to pay an adverse costs order and their residence outside the jurisdiction.

The counterclaims concerned deferred-tax accounting, alleged breaches of warranty, misrepresentation and rectification. Gamma and Euro argued that the counterclaims arose from the same transaction as Thistle’s claims, operated as an equitable set-off or defence, and should not attract security. They also alleged delay and abuse of process.

1. Jurisdiction and ability to pay. The court had jurisdiction under CPR rules 25.12 and 25.13(2)(a) and (c). The evidence showed, on the balance of probabilities, that Gamma and Euro lacked readily available assets of their own to meet an adverse costs order. A company’s net asset balance is not determinative; the court must consider the nature and liquidity of the assets and whether they will be available when the costs order falls due. Assets held by subsidiaries could not simply be treated as available to a parent.
2. Non-residence. Non-residence alone was insufficient. However, the court could take account of obvious enforcement realities without formal evidence. Enforcement against assets connected with a British Virgin Islands company and held through other companies would involve additional costs and delay.
3. Nature of the counterclaims. The relevant authorities required the substance of each counterclaim to be examined. A counterclaim was not immune from security merely because it arose from the same transaction or could be relevant to an equitable set-off. The question was whether it merely operated as a defence or had an independent vitality as a cross-action.
4. The breach of warranty, misrepresentation and rectification claims required substantial factual and expert evidence concerning deferred tax, the Principal Accounts and net asset value. They therefore enlarged the action beyond mere self-defence. The court declined to determine the detailed merits or contractual construction issues on an interim application.
5. Discretion. The court considered the prospects of success only in accordance with the usual caution against detailed merits investigations on an interim application. There was no undue delay, abuse or evidence that security would stifle the counterclaims. In all the circumstances, it was just to protect Thistle against potentially irrecoverable costs.

An order for security for costs was made.