Ceto Shipping Corporation v Savory Shipping Inc

Where a claimant company cannot pay an adverse costs order, the defendant has a prima facie entitlement to security. The court must then consider whether security would stifle a genuine claim. The claimant must show that neither it nor its owner, backers or other interested persons could raise the required funds. The inquiry is realistic and unrestricted, and the evidence must be full, frank, clear and unequivocal.

Where a claim and mirror counterclaim concern the same underlying entitlement, security will ordinarily be inappropriate because striking out the claim may leave the dispute to be determined through the counterclaim without effective relief for the claimant. That principle is not conclusive, but a defendant’s refusal to give an undertaking not to pursue the counterclaim if the claim is struck out is highly material. Separate damages claims may nevertheless attract security.

The claimant charterers sought declarations and damages concerning whether ownership of a vessel, or the proceeds of its judicial sale, had transferred under a bareboat charter. The defendant shipowners counterclaimed declarations that they remained the owners.

The defendant applied for security for costs under Civil Procedure Rules 1998, rule 25.13. The claimant accepted that it could not pay an adverse costs order, but argued that security would stifle a genuine claim and that security was inappropriate because the counterclaim substantially mirrored the claim. The issues were whether the evidence established stifling and whether the mirror-image counterclaim justified refusing security.

1. Security and stifling. The application engaged Civil Procedure Rules 1998, rules 25.12 and 25.13. Ceto’s inability to pay an adverse costs order created a prima facie entitlement to security. The court nevertheless had to consider whether an order would stifle a genuine claim. The merits were not normally appropriate for determination at this stage.
2. The relevant question was whether Ceto could raise the money from any source, including its owner, directors, shareholders, backers or other interested persons. There was no artificial limit on the inquiries. The evidence had to be assessed realistically and had to be full, frank, clear and unequivocal. Ceto’s owner had a history of non-compliance with court orders and incomplete disclosure, requiring caution in assessing her evidence.
3. The evidence showed that Ceto had continued several substantial proceedings and had made significant legal payments despite asserting complete impecuniosity. Its evidence did not adequately explain the source or timing of those funds and was not full and frank. The court was not satisfied that security would stifle the claim.
4. Mirror counterclaim. The ordinary principle is that security is generally inappropriate where the counterclaim is based on the same facts or issues as the claim, since the dispute may continue through the counterclaim. The principle is not conclusive and the particular circumstances remain decisive. Here, however, the proceedings concerned entitlement to a fixed fund in Singapore. If Ceto’s claim were stayed and struck out, the entitlement might be determined without Ceto obtaining relief.
5. Savory’s refusal to give the undertaking contemplated in Dumrul v Standard Chartered Bank was highly material. Security was therefore refused for the mirror-image declaratory claim. Ceto’s separate damages claim was different. Security was ordered for the costs of that part of the claim, in an amount to be determined, with payment expected to be staged.