A primer on security for costs (from a Defendant’s perspective) (part 2 of 2) 📷
In part 1, I outlined a scenario where the Plaintiff sought to challenge the application for security. Consider now the inverse: what does the Defendant have to do to show that it is deserving of security for costs? An interesting place to start when considering this question in a Malaysian context would be the stance outlined in the UK. Part 25 of the Civil Procedure Rules outlines the conditions that need to be satisfied in an application for security for costs.
For ease of reference, the relevant conditions of Part 25 are paraphrased below:-
a) The Plaintiff is resident out of the jurisdiction;
b) The Plaintiff is insolvent;
c) The Plaintiff has changed and/or is withholding its address;
d) The Plaintiff is a nominal party;
e) The Plaintiff has taken steps in relation to his assets that would make it difficult to enforce an order for costs.
Security will not be ordered merely because any one of the above conditions is met. Rather, a presiding Judge will have to consider all the relevant circumstances surrounding a case, utilise the above as a guideline and decide accordingly.
1. The Plaintiff is resident out of jurisdiction and has limited assets (or there are none) within the jurisdiction
In a move that some may view as being excessively jingoistic, having a place of business that is out of the jurisdiction of the Court may act as the basis for ordering security for costs. Security for costs will not be awarded as of right against a company that is resident out of jurisdiction (Kasturi Palm Products v Palmex Industries Sdn Bhd [1986] 2 MLJ 310; S&S Power Switchgear Ltd v Toprank Corp Sdn Bhd [2005] 2 MLJ 69; Aeronave SPA v Westland Charters Ltd [1971] 3 All ER 531).
Despite the above, it ought to be kept in mind that for the purposes of an application for security for costs, being a foreign company is never a boon. In Adarsh Pandit v Viking Engineering Sdn Bhd [1996] MLJU 594, Her Ladyship Datuk Zainun Ali JC (as Her Ladyship was then known) stated as follows:-
It is undisputed that the Plaintiff has no property within jurisdiction. As case laws such as Shaik Ali v Shaik Mohamed [1983] MLJ 310 and Ace King Ltd v Circus American Ltd & Ors [1985] 2 MLJ 75 have shown, Courts are more likely to order security for costs to be given to the Defendant in such circumstances, since it is clear as illustrated by Lord Denning M R in Aeronave S P A & Westland Charters [1971] 1 WLR 1146 that: "It is the usual practice of the Courts to make a foreign plaintiff give security for costs. But it does so, as a matter of [1996] MLJU 594 at 13 discretion, because it is just to do so. After all, if the defendant succeeds and gets an order for his costs, it is not right that he should have to go to a foreign county to enforce the order." Even assuming the Plaintiff has property within jurisdiction, it is not sufficient ground for this Court to disallow security. Moreover the mere fact of Plaintiff owning property in a country which has reciprocal enforcement of judgment agreement with Malaysia, is not also a ground for the Court refusing to order security, since the enforcement is not automatic. This point is illustrated in the case of Faridah Begum [1995] 2 MLJ 404 and Ng Hui Lip [1951] MLJ 57, which is distinguished from Coldham v Rant Australia Gold Mining Co [1940] MLJ 50.
[EMPHASIS ADDED]
It is interesting to note that despite the Plaintiff’s resident country (India) being a country where Malaysian judgments are reciprocally enforceable, Her Ladyship still held that security ought to be provided.
The reasoning provided by Her Ladyship is that enforcement is not automatic and quite rightfully so, why should a Defendant be put to additional cost and effort to enforce a Judgment? When compared to domestic enforcement, foreign enforcement is a very different kettle of fish.
The costs of domestic litigation, together with the costs of enforcement, would be made known to the Defendant before any action is undertaken. Foreign enforcement on the other hand, would necessitate the engagement of solicitors in two jurisdictions (local and foreign) and would be an additional cost unforeseen by the Defendant.
This would be financially onerous to the Defendant who has already been put out of pocket by the Plaintiff’s action. For countries that do not enjoy reciprocal enforcement of judgments, the position taken by the Malaysian Courts is well encapsulated in the decision of His Lordship Stephen Chung JC in GH-USA Valve Co v Techno Rada Sdn Bhd [2012] MLJU 92:-
7. There are several factors that the court has to consider, one of which is the likelihood of the plaintiffs success in the action. However, it has been held that the merits of the case ought not to be discussed at this stage of the proceedings unless it can be clearly shown that the plaintiffs case has no merits or is a sham or an abuse of the process of the court. Another factor is the plaintiff’s or the defendant's rights of enforcement of the judgment under the law or any treaty: Porzelack KG v Porzelack (UK) Ltd [1987] 1 AH ER 1074. The USA is not one of the reciprocating countries listed in the First Schedule of the Reciprocal Enforcement of Judgment Act, 1958. In the event the Defendant is successful in this action, it will be difficult to enforce the order of cost against the Plaintiff. 8. The Plaintiffs claim against the Defendant is for RM798.366.61. The application for security for costs of RM50.000.00 is less than 10% of the claim, is within the 25% guideline and is not oppressive: Raju Rajaram Pillai v MMC Power Sdn. Bhd. & Anor [2000] 4 CLJ 189, Air Marketing Asia Pacific Pty Ltd v Damai Puri Resort & Spa Sdn. Bhd. [2011] 1 LNS 159. 9. The Defendant's application is allowed. The Plaintiff is to pay the sum of RM50,000.00 into court within 60 days from today which is to be kept in an interest bearing fixed deposit account. Costs of RM500.00 to the Defendant for this application.
[EMPHASIS ADDED]
2. Insolvency
Insolvency is a terrible state to be in for a Plaintiff company and it is compounded when the Defendant puts in its application for security. Small solace for a Plaintiff who is an individual is the fact that being impecunious does not act as an automatic grant of the Defendant’s application (Faridah Begum Bte Abdullah v Dato’ Michael Chong [1995] 2 MLJ 404).
The situation is different for corporations. In Aiwa (Malaysia) Sdn Bhd v Lim Beng Huan & Anor [1996] MLJU 606, His Lordship Jeffrey Tan J (as His Lordship was then known) stated that to be insolvent would be a bane for corporations that wear the mantle of Plaintiff in a security for costs application.
As put by His Lordship:-
In relation to security for costs.... for a natural person, the basic rule is that he will not be ordered to give security for costs, however poor he is. To that basic rule there are certain exceptions.... In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite: Pearson & Ors v Naydler & Ors (1977) 1 WLR 899 at 904 per Megarry V-C.
Indeed, section 351(1) of the Companies Act 1965 provides as follows: "Where a company is plaintiff in any action or other legal proceeding the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."
The rationale underlying section 363(1) of the Companies Act (Vic) (which is in pari materia with our s. 351 and the English 447) was explained thus by Street CJ, in Buckley v Bennell Design Constructions Pty. Limited (1974) 1 ACLR 301 :
"It reflects the concern of the legislature that in permitting the incorporation of a limited liability entity it was necessary to ensure that persons who might have dealings whether voluntary or involuntary with such entity should have protection against the consequences of limited liability. In cases of contract the other party to the dealing is on notice of the limited liability of the company and the transaction being voluntary could be presumed to be competent to look after his own interests in that regard. Where, however, a company commences litigation against another party that other party could find himself involuntarily prejudiced by the limited liability character of the plaintiff who had commenced proceedings against him. To protect the other party from the consequences of limited liability there has always been in company legislation a provision along the lines of sec. 363(1) of Act."
To order the security sought, it must appear by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence.
A company in liquidation would be sufficient "reason to believe" that its assets would be insufficient to pay its costs, unless evidence or special circumstances to the contrary was given or shown, and a defendant would be entitled to security for costs under the Companies Act [Northampton Coal, Iron and Waggon Co V Midland Waggon Co. (1878) 7 Ch D 500].
In Pure Spirit Co v Fowler (1890) 25 QBD 235, Denman and Charles JJ. observed that a court is bound to order security for costs where the company is in liquidation, and there is no evidence to rebut the inference that the assets will be insufficient to pay the defendant's costs if successful.
[EMPHASIS ADDED]
In Doree Industries (M) Sdn Bhd v Sri Ram & Co [2007] 1 MLJ 722, His Lordship Balia Yusof J (as His Lordship was then known) stated unequivocally that once the Defendant has proven that the Plaintiff is insolvent, the onus is then shifted to the Plaintiff to satisfy the Court as to why security ought not be provided.
In Strukturmas (Selangor) Sdn Bhd v Majlis Perbandaran Petaling Jaya [2001] 3 MLJ 344, the High Court held that the Plaintiff’s silence as to its finances would vitiate its resistance of the Defendant’s application. As put by His Lordship Kamalanathan Ratnam J:-
It is important that when an application is made by a party for security for costs against another, the opposing party must state affirmatively that it would be in a position to pay the taxed costs preferably with supporting documents showing its ability to pay the costs.
the Court of Appeal held that s 351(1) of the Act provides for a two-stage inquiry in the process of arriving at the conclusion as to whether security for costs should be awarded in a particular case in which the plaintiff is a company; that is, the court has to determine: (i) whether there is credible evidence; and (ii) whether that evidence, when found to be credible, supports the belief that the company will be unable to pay the costs of a successful defendant.
Applying this test, I find that the plaintiff will be unable to pay the costs if the defendant succeeds in the appeal and in the exercise of my discretion after evaluating the available credible evidence, I was of the view that security for costs ought to be given in this case.
Since in this case both parties have had the opportunity of showing the court all relevant facts pertinent to the issue before the court, in order to do justice, the court must make its decision only upon the assessment of those facts before the court.
[EMPHASIS ADDED]
Refer further:-
a) Hongnion Sdn Bhd v HSBC Bank (Malaysia) Sdn Bhd [2013] MLJU 283
b) KD Resources Sdn Bhd v Ng Boon Jieh & Son Realty Sdn Bhd [2002] MLJU 627
3. Changing and/or withholding one’s address
If, during the course of litigation, the Plaintiff changes its address and/or refuses to disclose its address, the Defendant may alight upon the same and utilise it in its application for security.
The rationale behind this is that the Plaintiff is seeking to scurry away its assets and prevent them from being discoverable (and thereby, evading the consequences of litigation).
In Luminous Crossroads Sdn Bhd vLim Kong Huat Construction [2001] MLJU 475, His Lordship Low Hop Bing J (as His Lordship was then known) found as much and stated that the actions of the Plaintiff in changing its address were clearly to evade the consequences of litigation. As a result, the Plaintiff was required to furnish security for costs.
Refer further:-
a) Mas Anita bt Abdullah v Lew Wai Koung (No. 1) [2013] 8 MLJ 698
b) Aoun v Bahri and another [2002] 3 All ER 182
c) Ontulmus and others v Collett and others [2014] All ER (D) 185 (Feb)
4. The Plaintiff is a nominal party
Suing in a nominal capacity is very rarely encountered in a corporate litigation scenario. As such, I shall leave this discussion for another day.
5. Failure to satisfy a previous judgment
In certain scenarios, the failure of the Plaintiff to satisfy a previous judgment (in a separate legal suit) will serve as leverage for the Defendant’s application for security.
In Mas Asnita bt Abdullah v Lew Wai Koung (No. 1) [2013] 8 MLJ 698, the Defendant had obtained a previous judgment in an unrelated suit against the Plaintiff for arrears in rental. The Plaintiff did not settle the sum owed but instead, initiated a fresh action against the Defendant.
Her Ladyship Yeoh Wee Siam J stated as follows:-
[3] According to the evidence, the defendant had obtained a judgment against the plaintiff on 13 September 2011 in the Kuala Lumpur Sessions Court vide Summons No 52–16151 of 2011 for arrears in rental amounting to RM6,750, interest at 8%pa, costs of RM408 and vacant possession but the plaintiff still fails, refuses and/or neglects to pay the amount to the defendant until the date of the filing of this action, eventhough the plaintiff was served with a sealed copy of the judgment. This fact alone, without prejudice to the merits of the present case, shows that the plaintiff is capable of not paying costs to the defendant should the plaintiff's claim be later dismissed by the court and costs be ordered against the plaintiff.
[EMPHASIS ADDED]
From this, it is clear that a Plaintiff must settle any and all previous litigation that it has undertaken (with the Defendant) if it intends to seriously challenge an application for security.
Concluding remarks
From the above and from reading part 1, it is clear that the Defendant has several tools at its disposal in picking the lock that is security for costs. However, this is counter-balanced by the safeguards put in place by common law for the Plaintiff.
An ultimatum with regard to security cannot be given and it would be a fool’s errand to even attempt to do so. Each case will turn on its individual facts and as is with facts, there is a world of difference between them and the truth.
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