A primer on security for costs (from a Plaintiff’s perspective) (part 1 of 2)
Corporate litigation, as with any undertaking, carries an inherent danger. When litigation commences, the general rule is that one party shall succeed and the other shall fail.
For the Plaintiff, success comes in the form of being awarded a favourable Judgment. The Defendant’s success is more modest in nature. Barring a counterclaim, success for the Defendant will result in the Plaintiff’s action being set aside.
In all the excitement of commencing and defending an action, one figure tends to fall to the wayside: costs
What are costs?
In a legal context, costs refer to the legal fees that one party has had to expend (either as Plaintiff or Defendant).
Costs are almost always awarded against the losing party. The rationale behind awarding costs is simple; if the losing party had not necessitated (or initiated) a legal suit, the successful litigant would not have had to bear any legal fees.
Securing costs before litigation commences: why is this important?
One concern that plagues many Defendants would be this: in the event the Plaintiff fails, will the Plaintiff be able to satisfy any order made as to costs?
Consider a simple example.
Newco sues Oldco for breach of contract. Newco claims the sum of RM100,000,000.00 as damages. The breach is highly disputed and Oldco strongly contests the allegations put forth by Newco.
For the sake of illustration, assume that both Newco and Oldco have a 50-50 chance of success.
Oldco carries out a company search on Newco and discovers that Newco is teetering on the brink of insolvency.
To defend this action, Oldco has taken on the best solicitors and Counsel to argue the matter. The legal bill for defending the suit will cost Oldco RM1,000,000.00.
Oldco is now faced with a grave concern: in defending Newco’s suit, it shall be RM1,000,000.00 out of pocket. Should Newco become insolvent, Oldco will have a very slim chance of recovering its legal costs.
This is where section 351 of the Companies Act, 1965 [Editorial note: This article was written when the Companies Act, 1965 was still relevant. The same has been repealed and replaced by the Companies Act 2016. The cases cited may still be relevant, though readers are strictly advised to take care when drafting and considering their applications] becomes relevant.
Applying for security for costs
Section 351 grants Oldco the option of making an application to Court, seeking an order that Newco provide sufficient security for the costs incurred by Oldco before any litigation is to commence.
In Oldco doing so, Newco is faced with a dilemma; ought it pay the costs sought as security into Court (or to Oldco’s solicitors as stakeholders), or should it challenge Oldco’s application for security for costs?
Every turn of a litigious screw has its torque grounded in a suit’s peculiar facts. For Newco, it has to carefully consider the scales; does challenging Oldco’s application for security outweigh the risks of the suit being stayed?
Newco must keep in mind that the Malaysian Courts have held that a failure to provide security for costs is considered a valid ground for striking out a suit (Badrul Zaman bin P.S. Md. Zakariah v Mohd Aris bin Chonin and others [2006] MLJU 340).
The gauntlet is thrown down and the duel is met
For the sake of this discussion, one must assume that Newco challenges Oldco’s application for security. It would then behove Newco’s solicitors to consider how best to challenge Oldco’s application. As stated before, each case will turn on its individual facts. However, there are several pronouncements (with regard to factual situations) within the annals of common law that Newco will be able to avail itself of.
A consideration of the law and the burden of proof
To begin with, the Court shall enjoy an absolute discretion in deciding whether an application for security ought to be allowed or dismissed (Skrine & Co v MBf Capital Bhd & Anor [1998] 3 MLJ 649; Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 2 All ER 273).
The burden of proving that security for costs ought to be awarded lies squarely on Oldco’s shoulders (Kejuruteraan Taipan (M) Sdn Bhd v Loh & Loh Construction Sdn Bhd [2007] 1 MLJ 578). This militates in favour of Newco as Oldco first has to establish its case before the application for security can progress (the second part of this article shall deal with Oldco’s burden).
The test for a security for costs application under Section 351 was enunciated by the Court of Appeal in Skrine & Co v MBf Capital Bhd & Anor [1998] 3 MLJ 649. Here, the Court of Appeal set-out that the proper procedure to adopt when considering any application under Section 351 would be a two-step process of inquiry. As put by his Lordship Gopal Sri Ram JCA (as his Lordship was then known):
As may be seen; and this is borne out by the authorities decided upon the parallel provisions in other common law jurisdictions; the section provides for a two stage inquiry in the process of arriving at the conclusion as to 1998 3 MLJ 649 at 658 whether security for costs should be awarded in a particular case in which the plaintiff is a company. The first step is for the court hearing an application in this regard to determine whether there is credible evidence. The second step is to ascertain 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.
[EMPHASIS ADDED]
As such, a Court must firstly ask itself whether there is credible evidence that security for costs needs to be paid. Secondly, it must consider whether the evidence adduced, if credible, supports the Defendant’s claim that the Plaintiff will be unable to pay the Defendant’s costs.
Working again on hypotheticals, assume that Oldco has successfully satisfied the burden. The onus is then shifted onto Newco to show why security ought not be provided. There are several considerations which the Courts have deemed important when dismissing an application for security. In this article, I shall consider a few of them.
Factors that weigh against awarding security for costs
1. Delay
Delay, even more so when it is inordinate and unexplained, is always a deal-breaker.
The Courts have been quick to dismiss and slow to aid a tardy applicant. Kejuruteraan Taipan is instructive on this point, with His Lordship Mohd Hishamudin J (as His Lordship was then known) stating as follows:
[3] Secondly, there has been inordinate delay on the part of the defendant in making the present application (see Yee Hua Holdings Sdn Bhd & Anor v Chin Yew Nam & Ors [1999] MLJU 93). The plaintiff company was wound–up on 26 May 2000. The plaintiff company filed the present suit in April 2001. Yet the present application by the defendant (that is to say, encl 21) was only filed in January 2004 — a lapse of almost three years. The defendant's explanation for this long delay is that since the plaintiff has been wound up, therefore, they (the plaintiff) have to apply for the leave/permission of the official receiver first before they could proceed with the present action; and, in the event the official receiver refuses to grant leave, then an application or security for costs would be unnecessary. I find this explanation unsatisfactory. If indeed leave of the official receiver (for the plaintiff to sue the defendant) was such an important consideration to the defendant, then, why did the defendant file the present application only in January 2004 when leave was granted by the official receiver much earlier on 22 July 2003? Why did the defendant wait until January 2004 to file the present application? Appeal dismissed with costs. [EMPHASIS ADDED]
From this, it is plain to see that even a delay of 3 years (which, in a litigious context, is relatively short) will serve to weaken an application for security for costs considerably.
Kejuruteraan Taipan was affirmed by the Court of Appeal in Haidakota (M) Sdn Bhd v Tan Tiam Chai & Another Appeal [2009] 1 CLJ 699. The words of His Lordship Gopal Sri Ram JCA (as His Lordship was then known) are, as always, illuminating:
The starting point is s. 351 of the Companies Act 1965 (“the Act”) which confers a very wide discretion on the High Court to order a company to provide security for costs in an action brought by it or indeed against it. But the discretion is not untrammeled. Nor is it unprincipled. For there are settled guidelines upon which the discretion falls to be exercised. First, the application for security for costs must be made with reasonable promptitude after the issue of the writ. Delay is a good reason for the court to exercise discretion against the parties applying for security. See Kejuruteraan Taipan (M) Sdn Bhd v. Loh & Loh Contruction Sdn Bhd[2007] 1 CLJ 210. [EMPHASIS ADDED]
As such, should Oldco be tardy in initiating its application for security for costs, Newco will be granted a golden opportunity upon which it may challenge (and successfully obliterate) Oldco’s application.
Refer further:-
i) Raman Chettiar v Palaniappa Chettiar and Another (1939) 8 MLJ (FMSR) 165
ii) Syarikat Kesemua Sdn Bhd v Barawan Razak & Ors [2004] 7 CLJ 563
iii) Tan Sri Abdul Aziz Zain & Ors v United Overseas Land Ltd & Ors [1998] 4 CLJ 321
iv) The Co-Operative Central Bank Limited v YM Raja Tan Sri Aznam Bin Raja Haji Ahmad & Anor [2004] MLJU 16
v) Yee Hua Holdings Sdn Bhd & Anor v Chin Yew Nam & Ors [1999] 2 CLJ 63
2. Failure to justify the amount sought as security
Failing to justify the sum that one has sought as security is also a failing which will militate against the Defendant’s application for security. An outline of costs ought to be annexed to the application for security and a failure to do so could well be fatal.
In Ever Right Sdn Bhd v Akitek Bandaran (Sabah) Sdn Bhd [K24-52-2006], His Lordship David Wong Dak Wah J (as His Lordship was then known) stated as follows:
Amount of security As regards the amount of RM30,000.00 imposed by the Deputy Registrar, there is no evidence or justification by the defendant’ s counsel as to how the sum of RM30,000.00 was arrived at. It is trite law that whenever an amount is requested from the court be it in the form of damages or costs, parties must justify or prove it. Here there is nothing. Counsel should follow what was done by the counsel in the case of Bennes Engineering Sdn Bhd v .Hong Leong Assurance Berhad (reported in www.highcourt.sabah.sarawak.gov.my (2006 cases -Sarawak) and that is, to particularize the amount claimed.
[EMPHASIS ADDED]
In the case of Ashin Sdn Bhd v Datuk Bandar Kuala Lumpur & Ors [1999] 4 CLJ 115, his Lordship RK Nathan J, in dismissing an application for security for costs, stated as follows:
Finally, there is no counterclaim to this action. The 2nd defendant merely asked for RM100,000 or such further sum as security for costs to defend this action. The plaintiff’s claim in itself amounts to RM3.59 million. The learned Deputy Registrar only awarded RM37,000 as security for costs. In support of its claim for RM100,000 the 2nd defendant itemised its estimated costs as follows: (a) All correspondence, perusing documents in preparation of the case RM25,000.00 (b) Attending Court for interlocutory matters (at a rate of RM120.000 per attendance) 20 days RM 2,400.00 (c) Attending Court for the trial (at a rate of RM500.00 per attendance) 10 days RM 5,000.00 (d) Preparation and overall getting-up RM55,000.00 (e) Photocopying charges RM15,000.00 Seriously looking into the figures stated therein, I am unable to find any evidence of justification in the affidavit in support of the application for security for costs affirmed by the 2nd defendant’s director. To me it is more a figure based on guess work rather than an educated and calculated estimate of figures.
It was on all these considerations that I made the order I did.
[EMPHASIS ADDED]
It is important to note that in Ashin Sdn Bhd, the Defendant did make an effort to enumerate and justify the amount sought as security. Despite this, His Lordship RK Nathan saw through the same and pointed out that the figures were based solely on guesswork as opposed to reasonably assessed costs.
Hence, it is of the imperative that the applicant justify why a particular amount is being sought as security before proceeding with the same (application).
Refer further:-
i) Sir Lindsay Parkinson & Co. Ltd. v Triplan Ltd. [1973] 2 All ER 273
3. The Defendant’s conduct brought about the Plaintiff’s winding-up
In some factual scenarios, the Defendant may have wronged the Plaintiff. Due to the Defendant’s actions, the Plaintiff sustains significant losses and is (Plaintiff) unable to continue operations. As a consequence of the Defendant’s actions, the Plaintiff becomes insolvent but not before the Plaintiff has initiated a suit against the Defendant.
Normally, insolvency would knell the death bell for the Plaintiff in an application for security. However, when the Courts have been made cognisant of the Defendant’s conduct, an application for security may well fail.
In Kwang Hap Siang (Service Station) Sdn Bhd v Caltex Oil Malaysia Ltd & Anor [2007] 9 CLJ 709, His Lordship Kang Hwee Gee J was faced with an application for security for costs, wherein the Defendant potentially had a hand in the Plaintiff’s impecunious position. His Lordship stated as follows:-
On the contrary it would not be too far fetched to assume that there is a possibility that the defendants may have been the cause of the plaintiff’s loss that may have led to its being impecunious. An order that the plaintiff should be made to pay security for costs would be most unjust under the circumstances as to do so would mean that the plaintiff would be denied its day in court merely by its poverty for which the defendants may possibly be the cause.
[EMPHASIS ADDED]
Similarly, in Tan Sri Abdul Aziz Zain, His Lordship Abdul Hamid Mohamad J (as his Lordship was then known as) stated as follows:-
But it was due to the failure of the project which the plaintiffs alleged was due to the faults on the part of the defendants, which is to be decided at the trial. The Supreme Court had held that the plaintiffs’ claim (and also defence in the other two actions) were sustainable. To allow this application [the application for security] may stifle the plaintiffs’ action after nine years when it is nearing a trial.
[EMPHASIS ADDED]
The Court of Appeal also held as much in Haidakota. As put by His Lordship Gopal Sri Ram JCA:
[4] Turning to the facts of the present case, it is clear that the plaintiff company’s action against the first set of defendants is based on their alleged breach of fiduciary duties and against the second set of defendants for their voluntarily assisting in such breach. The plaintiff’s claim cannot by any stretch of imagination be described as frivolous and vexatious. Its answer to the application for security for costs is that it finds itself in a financially strained position, because of the defendants’ acts and omissions. In these circumstances it would, in our judgment, be oppressive to require the plaintiff, the alleged victim of serious wrongs committed upon it, to be required to furnish security for costs in favour of those accused of having put it in the position in which it finds itself.
[EMPHASIS ADDED]
There appears to be an emphasis on equity here, as the Defendant should not be seen to profit from his own wrong-doing. In such circumstances, it is perfectly justifiable for a Court to dismiss the Defendant’s application outright.
4. The application for security is meant to stifle a bona fide suit
Where it is clear that the Plaintiff’s suit is genuine and the Defendant seeks to stultify it with an application for security, the Court may well dismiss the application.
In Tan Sri Abdul Aziz Zain, the Court of Appeal set the position out very clearly:-
[3] The Supreme Court Practice 1993 lists out some of the matters which the court may take into account, which are,inter alia, the bona fides of the plaintiff’s claim, its prospects of success, whether the application for security is being used to stifle a genuine claim, whether the defendant’s conduct was a cause of the plaintiff’s lack of means, and whether the application for security was made late in the proceedings. [4] The instant action was commenced in 1990, and there had been many applications and appeals since then. The plaintiffs had also applied for a trial date to be fixed. Furthermore, the Supreme Court had held that the plaintiffs’ claim and their defence to the defendants’ two actions were sustainable. Therefore, to now allow the defendants’ application for security for costs could stifle the plaintiffs’ action.
[EMPHASIS ADDED]
It’s interesting to note that in Tan Sri Abdul Aziz Zain, His Lordship held that even where security for costs ‘could’ stifle a genuine claim, it (application for security for costs) should be dismissed. This ground acts as an equitable position which the Courts can “fallback” upon in the event the Defendant is acting unjustly.
Refer further:-
i) Quality Tractors (M) Sdn Bhd v United Asian Bank Bhd [1980] 1 MLJ 95
ii) Haidakota, supra
iii) Kwang Hap Siang, supra
iv) Tan Sri Aziz Zain, supra
v) Kejuruteraan Taipan (M) Sdn Bhd, supra
5. An undertaking by a director
In certain scenarios, a director may be personally vested in a company. This could be due to a myriad of reasons but in general, it is because the director nurtured the company from its fledgling days up till it (company) took flight.
A director may decide that he would like to provide an undertaking to satisfy any order made as to costs. An undertaking to pay costs is legally enforceable (Third World Development Ltd & Anor v Atang Latief & Anor [1990] 1 MLJ 385)
In MBF Capital Bhd v Tommy Thomas & Anor [1998] MLJU 229, Kamalanathan Ratnam J agreed that an undertaking provided by MBF was sufficient to meet the costs of the defendants in the event they (defendants) succeed. As put by His Lordship:
Dato' Siva then quite correctly conceded that it be taken that the 2nd plaintiff is, due to the suspension, unable to meet the costs and confirmed that the 1st plaintiff had, therefore given an undertaking to meet the costs of all the defendants in respect of the 2nd plaintiff, in the event the defendants are successful. He also pointed out that that undertaking was in Enclosure 126 as exhibit GD-3. On this concession, Enclosure 93 came to an abrupt end by all parties agreeing that the only remaining [1998] MLJU 229 at 7 issue was the ability of the 1st plaintiff to meet the undertaking. … In his joint reply to all the enclosures Dato' Siva pointed out that the total bills facing the plaintiffs in the event the claim is dismissed amounts to RM1.220 million. It was his submission that the undertaking given by the 1st plaintiff in respect of meeting the 2nd plaintiff's costs, was sufficient and that there was no need for the 1st plaintiff to provide any security on its own behalf as it was well endowed with assets. … I am satisfied that it is not possible to form a rational belief that the 1st plaintiff is unable to pay the total costs amounting to RM1.220 million when it has shown by credible evidence that it has assets worth billions. I accept the submission of Dato' Siva that for purposes of evaluating the credible evidence, it is necessary for the Court to consider all other relevant factors that might have contributed to the unstable position of the party required to furnish the security. I see no reason to reject the unaudited accounts submitted by a public listed company as a sufficiently accurate reflection of the affairs of the said company. Upon the whole of the material before me I am satisfied that the applicants have failed to discharge the burden of proof by producing credible evidence that the 1st plaintiff will be unable to pay the costs of the applicants in the amounts estimated by them and totalling RM1.22 million.
Having heard all the arguments, I made the following orders: (1) The 1st plaintiff was to provide security for costs in respect of the 2nd plaintiff only. [1998] MLJU 229 at 13 (2) The letter of undertaking given as shown in Enclosure 104 Exhibit GD-3 is sufficient to meet the costs of the defendants in the event they succeed. [EMPHASIS ADDED]
The Australian decision of M A Productions Pty Ltd v Austarama Television Pty Ltd & Anor (1982) 7 ACLR 97 is also of note. Here, His Lordship Needham J, sitting in the Supreme Court of New South Wales, held that an undertaking provided by the director of a company to satisfy any order made as to costs would be sufficient to satisfy an application for security for costs. As put by His Lordship:
I think that the principle that his Honour set out, and which I have cited, at p 304, is the principle which should be applied. That is, that so far as possible the court should do justice to each of the parties, attempting not to prejudice the defendant and attempting not, if possible, to shut out the plaintiff from litigating its complaints. … Balancing the conflicting interests involved it seems to me that a just order would be that Mr Maran Gunew[Director of the Plaintiff company] should give a written undertaking to the court that, if costs are awarded against the plaintiff in these proceedings, he would execute such a charge as the court ordered over his interest in the house to meet a maximum claim of $10,000. [EMPHASIS ADDED]
Refer further:-
a) PT Bumi International Tankers v Man B&W Diesel S E Asia Pte Ltd and Another (No. 2) [2004] 3 SLR 69
b) 57 Moss Rd Pty Ltd v T&M Buckley [2010] QSC 278
c) Clyde Industries Ltd v Ryad Engineering Pty Ltd BC9301087
d) Circaz Pty Ltd and Others v Manolidis and Others [2003] NSWSC 455
e) Printing Circles Inc v Compass Group Canada Ltd 88 O.R.(3d) 685
f) Berry v Inovia Security Pty Ltd [2014] FCA 357
Concluding remarks
In essence, there are many methods which a Plaintiff has at its disposal to render an application for security comatose. The above outlines substantive techniques which the Plaintiff may utilise to gain the upper hand. Of course, this is not exhaustive as the factual matrix of each individual case resides upon shifting sands.
In my next article, I shall consider the issue of security for costs from the Defendant’s (Applicant’s) perspective; how would a Defendant go about convincing a Judge that security ought to be provided, despite the Plaintiff’s remonstrations to the contrary?
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