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Security for costs

Order 29: security for costs applications against natural persons

In PASRM Limited v. Companies Act [2024] IEHC 529 Sanfey J was required to decide which party should be awarded the costs of an application for security for costs. The case in question was brought by the respondent to the security application, a minority shareholder in a company called PASRM Limited, seeking various remedies pursuant to section 212 of the Companies Act 2014 alleging oppression and disregard of his interests as a minority shareholder. Although the applicant had been ordinarily resident in Ireland for a number of years prior to issuing proceedings, he had relocated back to his home in the United States by the time proceedings were issued. This led to the respondents issuing their own application pursuant to Order 29 rule 1 of the Rules of the Superior Courts (RSC) preventing the applicant from continuing with his litigation without first providing security for their legal costs in the event he was unsuccessful.

Security for costs applications are often initiated out of fear that the applicant in the main proceedings (in this case, the section 212 oppression proceedings) has fled the European Union (where enforcement of Irish judgements is normally straightforward by virtue of the inter-community enforcement rules) and has therefore made it almost impossible to enforce a costs order against him in the event that he should lose the underlying litigation. In other words, litigants bringing applications seeking security for costs under Order 29 RSC are concerned that they will not be able to recover the costs of the proceedings issued against them by the foreign litigant if they are successful in defending them. To alleviate this very genuine concern, they ask the court for an order requiring the foreign litigant to provide some form of security which will then be made available to them if they are successful in defending the substantive proceedings. This should not be confused with security for costs orders under section 52 of the Companies Act 2014 – those are orders against companies (not natural persons) and are subject to entirely different considerations as set out in the jurisprudence.

In all applications for security for costs – but more especially when the litigant against whom security is sought is a natural person – the court will weigh the injustice which would be caused to the applicant if it was unable to enforce an eventual costs order versus the injustice to the respondent if it was prevented by geographical considerations from seeking redress for legitimate grievances. The courts have developed a sophisticated machinery to assist in balancing these competing interests. In order to succeed in an application for security for costs under Order 29 RSC, the applicant must show that:

1. The respondent is ordinarily resident in a country outside the European Union or Lugano Convention signatory, and

2. The applicant has a prima facie defence to the substantive claim against it.

Once these elements are shown, the onus then shifts to the respondent to demonstrate "special circumstances" which would nevertheless justify the refusal of an order for security for costs.

Security for costs: Re PASRM Limited

In the PASRM case, the applicant was able to show that the respondent was ordinarily residing in the United States – indeed this was admitted by the respondent – and that its intended defence of acquiescence (namely, that the respondent had acquiesced to the conduct which he was now claiming amounted to "oppression") was a prima facie defence. Sanfey J, in the High Court, agreed that the applicant had met the relatively low bar required of it. He then turned to the question of whether there existed "special circumstances" which nevertheless required that the application should be refused.

"Special circumstances" justifying refusal of security for costs

Over the years, the Courts have developed a number of categories of such "exceptional circumstances", primarily in the context of applications against companies under section 52 of the Companies Act 2014. For example, companies in those applications often argue that their insolvency was caused by the acts of the applicant – that if it was not for the wrongful conduct for which they are bringing the main proceedings against the applicant, there would be no question about their ability to meet an adverse costs order against them. In other words, they argue that the applicant for security, having caused them to become insolvent, should not now take advantage of that position by preventing them from seeking a remedy for the wrongful conduct.

As previously noted, applications for security for costs made against companies under section 52 are very different from those against natural persons under Order 29 RSC. In the case of the former, the applicant must show that the respondent company is insolvent, whereas the respondent's poverty is not relevant in an application under the latter. All that matters is that the respondent is resident outside the European Union. Therefore, the common "special circumstance" discussed above which is relied upon in section 52 cases is of no assistance to respondents in applications under Order 29.

A novel version of this "special circumstance" was, however, successfully raised by the respondent in PASRM. He argued, not that his impecuniosity was caused by the applicant's oppressive conduct, but that his decision to leave Ireland was caused by the respondent's solicitor threatening to report him to immigration authorities in circumstances where, according to the solicitor, the respondent's visa did not permit him to remain in the country. As it turned out, this was not correct and the respondent was fully entitled to remain in the jurisdiction. According to the respondent, he did not find this out until he had settled back in the States. His move was, according to him, caused (at least in part) by the applicant's solicitor's wrongful threat. Sanfey J held:

"If [the respondent] had remained in the country and initiated the s.212 proceedings, the jurisprudence would seem to indicate that a security for costs application could not be brought against him, as he would most likely be regarded as ordinarily resident in this country. In that case, the respondents would be facing the situation often experienced by a well-resourced defendant sued by an impecunious plaintiff, in that an award of costs after a successful defence of the action could not be executed or recovered against the plaintiff. What has given them the opportunity to bring the application is the return of [the respondent] to the US, in circumstances to which, it seems to me, they themselves have contributed by the erroneous statements as to the legality of [the respondent] residence in this country in the letter of 04 June 2020 and the meeting of 30 July 2020."

Sanfey J thus concluded, in much the same way as the applicant in security applications under section 52 can be said to have contributed to the circumstance necessitating its application, that the applicant would not have had the opportunity to bring its application but for the wrongful conduct of its solicitor.

Thus, the respondent successfully defended the security application brought against him. The next question was who should be awarded the costs of that application?

Application for costs

Having refused the security for costs application, Sanfey J adjourned the matter to allow the parties to make submissions regarding whether or not he should deviate from the ordinary rule that "costs follow the event" enshrined in Order 99 RSC. While it was not open to the losing party, the applicant, to argue that it should be awarded the costs of its unsuccessful application, it did present a spirited argument that the appropriate order was "costs in the cause", meaning that the winner of the substantive proceedings should also get the costs of the security application. The basis for this submission was that, although it had lost its application, the applicant was successful in meeting the onus of proving that the respondent was resident outside the EU and that it had a prima facie defence to the substantive case.

Sanfey J decided that the ordinary rule would apply and that the respondent, being the successful party, would be awarded his costs, although the eventual costs order was stayed to the conclusion of the substantive proceedings. He was unimpressed with the applicant's submission regarding its limited success in some elements of the application, pointing out that it is quite common in security for costs applications for the applicant to succeed on those points and for the matter to ultimately be decided by the existence of "special circumstances". He said this:

"In many, if not most O.29 applications, this third element is where the real contest between the parties lies. A defendant usually brings the application knowing that the success or otherwise of the application is uncertain, as the court's view of whether or not there are special circumstances will determine whether or not the motion succeeds. A decision to initiate such an application is generally brought with a view to either procuring the security sought in respect of costs, or imposing a financial burden on the plaintiff which he cannot discharge, thereby bringing about the collapse or withdrawal of the proceedings."

In other words, Sanfey J was of the view that the applicant was aware prior to issuing its application that it would need to succeed in all three limbs of the test. Success in only the first two was not enough. Having taken the risk off nevertheless issuing the motion and losing the application, it was only right that the applicant should be penalised in costs. Indeed, he went on to say that it would require some "very unusual circumstance" to justify a costs order being refused in favour of the successful respondent.

Sanfey J also had regard to the reason the applicant had failed in its application as perhaps justifying the costs order which followed. The reason for its failure was due to the wrongful statement made by its agent (the solicitor) to the respondent which caused him to leave the jurisdiction. There appears in the judgment to be a suggestion of misconduct by the solicitor, although not necessarily bad faith:

"In the exercise of my discretion as to the award of costs, I am also mindful that, as set out in the judgment, it appears that the applicant leaving the jurisdiction and returning to the United States - thus enabling the respondents to satisfy the first of the three elements necessary to succeed in the application - appears to have been at least to some degree prompted or procured by inaccurate statements as to the law in a letter from the respondents' solicitor."

It probably did not help that the firm of which the solicitor in question was a partner was the same firm which had originally assisted the respondent in procuring his visa to come to Ireland in the first place.

Perhaps the most important consideration in deciding that the successful respondent was entitled to his costs was the fact that the questions and findings in the security application were discrete to that application. They would not be revisited in the substantive proceedings, and neither would the outcome of those proceedings have any bearing on the findings in the security application. In other words, even if the applicant ultimately succeeded in defending the substantive proceedings, this would not change the fact that it should not have brought the security for costs application. This particular point is important because it applies across the board to all applications for security for costs – they are not related to the substantive proceedings and, as such, it is highly unlikely that there will follow anything other than a costs order against a losing party in applications for security for costs.

Author: Mahmud Samad BL
Publication date: 30th January 2025