SW TRUSTEES PRIVATE LIMITED (IN COMPULSORY LIQUIDATION) & Anor v TEODROS ASHENAFI TESEMMA & 5 Ors

Facts

SW Trustees Private Limited was put into insolvent liquidation on 21 June 2019, with Farooq Ahmad Mann as liquidator. Its only creditors, the SGI Creditors, held an arbitration award against it and agreed under a court-approved funding agreement to indemnify the liquidator for the costs of litigation. In March 2021 the company and the liquidator began Suit 229 against several defendants, including Teodros Ashenafi Tesemma, a former director and sole shareholder. The plaintiffs' case was that he conspired with others to cause the company's shares in two companies to be transferred for no consideration. His defence was that the shares were always held on trust for another entity, which authorised their disposal; the plaintiffs dispute the authenticity of his documents.

General discovery ended in October 2021, and by August 2022 the parties were in specific discovery and had estimated witnesses and trial days. The first defendant applied for security for costs of $310,000 for pre-trial, trial and post-trial costs only on 28 February 2023. An Assistant Registrar dismissed the application, mainly for delay. After that decision the plaintiffs said they would amend their Statement of Claim, and the trial dates were vacated. The first defendant appealed (Registrar's Appeal No 80 of 2023).

Issues

1. What circumstances the court should weigh in deciding whether ordering security for costs is just.
2. Whether the merits of the parties' cases can always be considered, and how closely.
3. Whether the first defendant's delay in applying for security, and any prejudice to the plaintiffs, should defeat the application.
4. Whether an order for security would stifle the plaintiffs' claim.

Holding

Goh Yihan JC allowed the first defendant's appeal in part. He was entitled in principle to security for the costs of trial and post-trial work, and was at liberty to apply for it at the appropriate time once the amended claim made the length of trial clear; that later application would turn on the facts then prevailing. Security for pre-trial costs was refused because the application came too late. Costs of the appeal were to be agreed or addressed in submissions within 14 days.

Reasoning

Both the company (under s 388(1) of the Companies Act, as an insolvent company) and the liquidator (as a nominal plaintiff under O 23 r 1(1)(b)) fell within the court's power to order security. The court grouped the relevant circumstances under three purposes: protecting a defendant who cannot avoid being sued, not stifling a genuine claim, and fair play between the parties.

The merits are always relevant, but are assessed on the face of the evidence without a detailed inquiry. Here each side had a plausible case, so the merits were neutral. The policy that an insolvent company should generally give security was not immutable. The estate costs rule did not adequately protect the first defendant, since any payment would come only near the end of the liquidation and the creditors' indemnity would not in practice reach him.

On delay, the court held that delay must be assessed separately for each category of costs, as security is often sought in stages. The first defendant had delayed without explanation on pre-trial costs, measured from October 2021. For trial and post-trial costs the relevant date was August 2022, and the gap of about four to five months was explained by his former solicitors discharging themselves and new solicitors being appointed and dealing with another application. Failing to seek security earlier did not act as a representation that none would ever be sought, and any uncrystallised prejudice to the plaintiffs could not outweigh the definite risk to the first defendant of unrecoverable costs. The creditors had only stated unwillingness, not a refusal, to fund security, so there was no significant probability of the claim being stifled.

From the judgment