Eagle Ltd v Falcon Ltd

An application for security for costs under CPR 25.12 and CPR 25.13 involves two stages. The defendant must first show a reason to believe that the claimant will be unable to pay an adverse costs order. The court then decides whether security is just in all the circumstances. The first stage requires more than mere doubt, but does not require proof on the balance of probabilities. Balance-sheet insolvency and reliable evidence of an inability to pay may suffice. The court should not ordinarily investigate the merits of the underlying claim unless success or failure is highly probable. Security must be proportionate. Contractual credits, deposits and intra-group debts may not provide adequate security where their value or enforceability is uncertain.

Eagle Ltd brought proceedings against Falcon Ltd concerning alleged breaches of telecommunications supply agreements. Falcon applied for security for its costs to the end of disclosure, relying principally on Eagle’s financial position and the uncertain financial position of related companies.

The application required the court to decide whether the threshold in CPR 25.13(2)(c) was met, whether an order would be just and non-oppressive, and what amount and form of security were appropriate.

1. Threshold. The application satisfied the two-stage test under CPR 25.13. Falcon had to show a reason to believe that Eagle would be unable to pay Falcon’s costs if ordered to do so. That was a lesser test than the insolvency provisions in Insolvency Act 1986, and the detailed distinction between balance-sheet and cash-flow insolvency was not necessary.
2. Eagle’s balance-sheet insolvency, auditors’ going-concern warnings and its admission that it lacked sufficient cash were sufficient. In any event, the evidence also established, on the balance of probabilities, that Eagle could not pay its debts as they fell due. The uncertain and undocumented intra-group debts reinforced that conclusion.
3. Discretion. The merits of the claim and defence were treated as neutral. The court should not turn a security application into a mini-trial unless a high degree of success or failure was clear. There was no adequate evidence that Falcon had caused Eagle’s financial difficulties, and no evidence that security would stifle the claim. It was just, and indeed would have been unjust not, to order security.
4. Amount and form. Eagle’s pre-payment balance, termination-charge credits and contractual deposit did not constitute security for Falcon’s costs. The requested figure had increased substantially and without adequate explanation. A proportionate figure was £295,000, limited to the disclosure stage and excluding costs attributable to the separate injunction application. A parent-company guarantee was inadequate because of the financial uncertainty surrounding the relevant companies. Security was to be provided by payment into court or a bank guarantee within 28 days.