Hart Investments Ltd v Larchpark Ltd. & Anor

On an application for security for costs against a company’s counterclaim, the statutory condition that the company may be unable to pay costs does not itself determine the application. The court must exercise its discretion by considering the counterclaim’s independent substance, its prospects, any evidence that security would stifle it, the cause of the company’s financial difficulties, the timing of the application and compliance with court orders.

A counterclaim with an independent commercial and factual life may attract security even though it arises from the same broad project as the claim. Security should be proportionate and should not make the counterclaim economically futile.

Hart Investments Ltd brought claims against Larchpark Ltd and an engineer concerning the collapse of property on which Larchpark had worked, together with a separate trespass claim. Larchpark, which was in liquidation, advanced an amended counterclaim for payment for work carried out between November 2002 and September 2004.

Hart applied for security for costs under section 726(1) of the Companies Act 1985, seeking a stay of the counterclaim until security was provided. Hart also sought a stay because Larchpark had failed to pay a court fee and an earlier costs order. The issues were whether the counterclaim was independent of the defence to Hart’s claims, how the discretionary factors should be applied, and what amount and form of security were appropriate.

1. Applications granted. Larchpark was ordered to provide security for costs of the counterclaim. The counterclaim was stayed until the security and two outstanding payments of £900 were paid.

2. Section 726(1) of the Companies Act 1985 established the necessary condition because Larchpark’s liquidator accepted that the company could not pay Hart’s costs if the counterclaim failed. The provision nevertheless left the court with a discretion.

3. The relevant discretionary factors, drawn principally from Sir Lindsay Parkinson & Co. v Triplan [1973] QB 609, included the counterclaim’s prospects, possible oppression or stifling, responsibility for the company’s lack of means, and the timing of the application. The prospects of both the counterclaim and Hart’s main claim were reasonably arguable, making that factor neutral.

4. The counterclaim had an independent vitality. It concerned the value of work carried out over a lengthy period and did not constitute merely a defence to the collapse claim or the later trespass claim. The substantial position of the parties, rather than the formal pleading relationship, was decisive.

5. Larchpark produced no adequate evidence that security would stifle the counterclaim or that funds could not be obtained from another source. The court therefore declined to treat stifling as a reason against security. The evidence also did not establish that Hart had caused Larchpark’s insolvency; the chronology and financial documents pointed at least as strongly to the company’s own financial conduct.

6. Larchpark’s failure to pay the court fee and earlier costs order was relevant to the discretion. The timing objection failed because the application had been made well before the amended counterclaim was formulated. The possible delay before trial of the counterclaim did not prevent security being ordered.

7. The sum sought, £75,420, was excessive and insufficiently supported. Applying a broad-brush approach and taking account of case and trial management, £25,000 was fair and reasonable. It was to be paid into court within 14 days, failing which the counterclaim would remain stayed.