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Security for Costs where a Company is Reticent to Reveal its Financial Position – Ashley Cukier on Sarpd v Addax

Reproduced from Practical Law with the permission of the publishers. For further information visit or call 020 7542 6664. The original article can be accessed HERE.

Ashley Cukier discusses Sarpd Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120; a significant decision of the Court of Appeal for companies that are reticent to reveal their financial position.

The “Panama Papers” have been attracting considerable attention over recent days, as investigators and journalists now begin the process of poring over the unprecedented leak of some 11.5 million files from the world’s fourth biggest offshore law firm, Mossack Fonseca.

What may, perhaps, have escaped the attention of legal practitioners in this country is a recent judgment of the Court of Appeal (Longmore LJ, Sales LJ, Baker J) in which the question of financial secrecy similarly arose, albeit in a different context. And while the issue of security for costs might not always attract the headlines, the judgment of the Court of Appeal in Sarpd Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120 is significant for companies litigating in the English courts that are, for whatever reason, reticent to reveal their financial position.
The Underlying Dispute
The parties’ substantive dispute, as Sales LJ, delivering the judgment of the court, explained, arose out of “a comparatively ordinary international purchase contract”. The claimant, Sarpd Oil International Ltd (Sarpd), a company incorporated in the British Virgin Islands, had bought a quantity of gas oil from the defendant, Addax Energy SA (Addax), a Swiss-incorporated company. 

Sarpd alleged that the gas oil itself did not meet contractual specifications and accordingly claimed damages or an indemnity from Addax. Addax denied that the oil provided to Sarpd failed to meet the terms of the contractual specifications and argued that, in any event, it had been agreed between the parties that a certificate of quality in respect of samples taken from a mother ship would be final and conclusive of the quality of the oil shipped.
Further, Addax also argued that if the gas oil did not meet the contractual specifications, that was in fact the fault of a third party, Glencore Energy UK Ltd (Glencore), from whom Addax bought the oil “on essentially back to back terms”. Accordingly, Addax had brought Part 20 proceedings against Glencore for damages or an indemnity in respect of Sarpd’s claim.

The Applications and The Judgment at First Instance

In May 2015, Addax made an application seeking an order that Sarpd give security for its costs of the proceedings. At paragraph 2 of the judgment, Sales LJ set out the well-known provisions of CPR 25, which provide (at CPR  25.12) that “a defendant may apply for security for his costs” of proceedings and (at CPR 25.13(1)) that the court “may make an order for security for costs under rule 25.12” if:

“(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(i) One of more of the conditions in paragraph (2) applies; or,

(ii) An enactment permits the court to require security for costs.”

Addax sought to rely on only one of the several conditions set out at CPR 25.13(2), namely condition (c) that “the claimant is a company or other body (whether incorporated inside or outside Great Britain)” and “there is reason to believe that it will be unable to pay the Defendant’s costs if ordered to do so”.
Addax sought an order that Sarpd give security for its costs of the proceedings by paying into court the sum total of £896,161.27 which, it was argued, would cover:
  • Costs incurred by Addax in defending Sarpd’s claim.
  • Costs incurred by Addax in passing the claim on to Glencore, being “the inevitable result of [Sarpd] bringing the claim”.
  • Costs incurred by Glencore in defending the Part 20 claim (which, if successful, would inevitably fall to be paid by Addax, who would then be entitled to recover those costs from Sarpd).
Before Andrew Smith J at first instance, Addax argued that the evidence relating to Sarpd’s ability to pay its costs was limited, because Sarpd had said nothing about its financial position and Addax had access to little information. For example, it did not know whether, and if so where, Sarpd had any assets against which Addax could enforce an order, and pointed to the fact that no information about Sarpd’s finances was publicly available. Sarpd’s BVI solicitors had, in a letter, confirmed that under the applicable BVI legislation, Sarpd would have been obliged to keep financial records sufficient to show and explain its transactions, and for its financial position at any time to be determined with reasonable accuracy. However, such records did not need to be kept in the BVI, still less be made publicly available. This, it was argued, meant,that Sarpd had failed to provide evidence of good financial standing or put up security, all of which meant that condition (c) of rule 25.13(2) was satisfied. Sarpd, in response, contended that Addax had not asked for any information regarding Sarpd’s financial standing when requesting security, and that the hurdle set out by condition (c) had not been scaled.

Andrew Smith J held that despite Sarpd’s “reticence” about disclosing information regarding its financial position, on the state of the evidence there was no reason to believe that Sarpd would be unable to pay Addax’s costs if ordered to do so. The obvious explanation for Sarpd’s reticence had been to strengthen Sarpd’s hand in settlement negotiations by fomenting doubt about whether Addax would be able to recover its costs even if it defeated the claim. In any event, the learned judge held, this was not a reason to suppose that Sarpd could not pay the costs if it lost.
Further, and notably, Andrew Smith J added that he suspected that it had become a “practice” of the Commercial Court to order security for costs in circumstances where a company had not led publicly available accounts, had no discernible assets and declined to reveal its financial position. However, if such practice had developed, he stated, the practice was not justified and he would not follow it.
Lewison LJ gave Addax permission to appeal, since the appeal raised an important point of practice and had a real prospect of success. It is upon the Court of Appeal’s approach to this primary issue, namely how courts ought to deal with a company’s reticence to disclose information in the context of an application for security for costs under CPR 25.13(2)(c), that this article is predominantly focused.

“Reason to Believe… Unable to Pay”: The Court of Appeal’s Judgment

Sales LJ first considered the legal authorities pertinent to the interpretation of CPR 25.13(2)(c). In Re Unisoft Group (No 2) [1993] BCLC 532, Sir Donald Nicholls VC had considered an application under section 726(1) of the Companies Act 1985, which empowered the court to order security for costs in almost identical terms to CPR 25:

“if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defendant’s costs if successful in his defence”.

Sir Donald rejected the contention made by the claimant in those proceedings that the court had to be satisfied (of the company’s inability to pay) on a “balance of probabilities”. The court merely had to have “reason to believe”, and there was no basis, on an ordinary reading of the provision, for the court to require applicants to satisfy the court on a “balance of probabilities” of the claimant company’s inability to pay. 
Similarly, Sales LJ referred to the judgment of the Court of Appeal in Jirehouse Capital and another v Beller and another [2008] EWCA Civ 908, where Arden LJ (with whom Moore-Bick and Mummery LLJ agreed) rejected the contention that Sir Donald (in Unisoft) had not in fact rejected the “balance of probabilities” test. It therefore followed, Sales LJ explained, that:

“it is not sufficient for the court or the defendant to be left in doubt about a claimant’s inability to pay the defendant’s costs if the claimant loses. Nor is it sufficient […] to paraphrase the wording of the rule[…] The court must simply have reason to believe that the claimant will not be able to pay [the costs]”.

(Sarpd v Addax, at paragraph 13.)

Accordingly, in the view of the Court of Appeal, Andrew Smith J was “plainly wrong” in deeming that there was no reason to believe that Sarpd would be unable to pay Addax’s costs if ordered to do so.
Notably, the Court of Appeal took a dim view of the company’s failure, when repeatedly given the opportunity, to show its ability to pay:

“If a company is given every opportunity to show that it can pay a defendant’s costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant’s costs, it will be unable to do so. The judge said that the obvious explanation of the refusal was that Sarpd wanted, for the purposes of settlement negotiations, to leave Addax in doubt about whether it would recover its costs, even if it defeated the claim. But the thinking behind that is that it is permissible for Sarpd to give Addax reason to believe it will be unable to recover its costs, but at the same time assert that there is no reason for the court so to believe. That is illogical and unacceptable.”

(Sarpd v Addax, Sales LJ at paragraph 17.)

Sales LJ further made the point that, insofar as a company might want to keep its financial position confidential “for business reasons” (as given by way of explanation by Sarpd in oral argument): 

“arrangements can always be made by the court if a litigant has legitimate business reasons for keeping something confidential. No application was made for the court to sit in private or to avoid referring in public to relevant financial amounts.”

(Sarpd v Addax, at paragraph 18.)

Turning to Addax’s argument that Sarpd, in its reticence to reveal its financial position, was in breach of the overriding objective and the parties’ duty to cooperate to that end (CPR 1.1 and 1.3), Sales LJ explained that, in the view of the court, whilst it may be right that CPR 1.3 did not require a respondent “voluntarily to fill gaps in an applicant’s evidence in order to assist an applicant to discharge a burden of proof”, the court “can and should take account of deliberate reticence as a part of the overall picture”. Therefore, as regards the question of any “practice” of the Commercial Court:

“Any evaluation has to be made on the totality of the evidence before the court; part of that totality is the absence of relevant evidence from the only party who is able to provide it. If therefore there were to be a practice of the Commercial Court (as to which we cannot express a view from our own experience) that security for costs will often be granted against a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position, our view is that the practice is a sound one and, as Lewison LJ noted, is an important point of practice which should either be upheld or rejected at appellate level. We would uphold it.”

(Sarpd v Addax, Sales LJ at paragraph 19.)

Conclusions to be Drawn

Practitioners will note the force with which the Court of Appeal expressed its disapproval of claimant companies refusing to disclose financial information whilst simultaneously opposing applications for security for costs. To approve of this conduct, as Sales LJ expressed, would involve the court approving of a mutually incompatible scenario by which a claimant company, on the one hand, sows doubt in the mind of the defendant that it will ever be able to pay the defendant’s costs if ordered to do so, and yet, on the other hand, asks the court to dispel any doubt it might have as to the company’s ability to do so. That, in the view of the court, is “illogical and unacceptable” and the rule can be seen to operate weightily against such a legal paradox. Rather, the Court of Appeal has now adopted and affirmed the “sound” practice of the Commercial Court that security for costs will often be granted against a company “who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position”.
Further, it would appear that, in evaluating a company’s “reticence” to disclose information about its financial affairs, the Court of Appeal in Sarpd v Addax has in fact taken a stronger view than even required by the language of condition (c) of CPR 25.13(2). Note how the provision itself requires a mere “reason to believe”; yet, the Court of Appeal appears first, in rejecting the balance of probabilities test, to deem “any” reason to believe to be sufficient before, markedly, going further and stating that a reticence or failure to disclose the company’s financial position provides “every” reason to believe that, if and when it is required to pay a defendant’s costs, the claimant company will be unable to do so.
There are further lessons that practitioners will draw from the court’s judgment, particularly those dealing with client companies whose financial position is not a matter of public record and/or whose officers are reticent to disclose the company’s financial position in proceedings. The judgment in Sarpd v Addax will mean that, in such circumstances, where the company is faced with a security for costs application, company officers (and their legal advisors) might well be tasked effectively with assessing the extent to which the company values financial secrecy over all else, even if that means potentially surrendering to a very “winnable” application, and paying into court substantial sums which, in reality, the company could quite easily pay.

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