Texuna International Ltd v Cairn Energy Plc
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Gross,Mr Justice Gross |
| Judgment Date | 17 May 2004 |
| Neutral Citation | [2004] EWHC 1102 (Comm) |
| Docket Number | Case No: 2002/1340 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 17 May 2004 |
[2004] EWHC 1102 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Gross
Case No: 2002/1340
Mr Sudhanshu Swaroop (instructed by Morgan Walker) for the Claimant
Mr Giles Wheeler (instructed by CMS Cameron McKenna) for the Defendant
Hearing dates: 23 April, & 7 May, 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
INTRODUCTION
This is an application by the Defendant for security for costs in the amount of £500,000 or such other sum that the Court deems appropriate, brought pursuant to CPR 25.13(1)(a) and (2)(a) and/or (c).
CPR 25.13 provides as follows:
"(1) The court may make an order for security for costs … if-
(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and
(b) (i) one or more of the conditions in paragraph (2) applies…
(2) The conditions are-
(a) the claimant is-
(i) resident out of the jurisdiction; but
(ii) not resident in a Brussels Contracting State, a Lugano Contracting State or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982;
….
(c) 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….."
The application was opposed by Mr. Swaroop, who appeared for the Claimant, on the following grounds:
i) The Claimant was resident within the jurisdiction;
ii) It had not been shown that the Claimant would be unable to pay the Defendant's costs;
iii) As a matter of discretion, relying, inter alia, on Nasser v United Bank of Kuwait [2001] EWCA Civ 556 [2002] 1 WLR 1868 (CA), no such order should be made;
iv) If any order was to be made it should be in a minimal or reduced amount.
For present purposes, the factual background is helpfully summarised in the initial skeleton argument of Mr Wheeler, who appeared for the Defendant:
" 5. The Defendant ('Cairn') is a Scottish company which is in the business of exploring for hydrocarbon reserves around the world. The Claimant ('Texuna') is a Hong Kong registered company which principally trades as 'importers, exporters and marketing agents'. Cairn and Texuna together bid for oil exploration rights in the part of the Caspian Sea within the territory of Turkmenistan. The bid was unsuccessful and has given rise to Texuna's claims against Cairn in these proceedings.
6. …..Texuna originally claimed only US$550,000 by way of repayment of US$1,000,000 which was drawn down by Cairn under a letter of credit issued on behalf of Texuna. However, Texuna's claim has been expanded by amendments and, since the service of Further Information by Texuna on 22 August 2003, Texuna's claim for damages has been substantially higher, with the amount claimed now exceeding US$121 million."
Without more ado, I turn directly to the principal issues.
(I) RESIDENCE
Realistically, the question here is simply whether the Claimant is resident in Hong Kong, as submitted by the Defendant, or in England, as contended for by the Claimant. The burden of proof rests on the Defendant to show that the Claimant is resident out of the jurisdiction and not in a relevant Contracting or Regulation State.
The meaning of "resident" in this context was dealt with by Lindsay J., in In re Little Olympian Ltd [1995] 1 WLR 560, esp. at pp. 566–569. The inquiry is as to the location of the company's central management and control or, put another way, as to where its real business is carried on. The inquiry is factual; all the circumstances need to be taken into account and given such weight as is appropriate.
Various factors here pointed to a Hong Kong residence. First, the Claimant was incorporated there; secondly, its principal office was in Hong Kong; thirdly, its accounts were prepared in Hong Kong dollars and audited in Hong Kong. Conversely, the Claimant placed reliance, in particular, on the residence in this country of Mr. and Mrs. Agarwal, directors said to manage and control the working of the company.
On balance thus far, I would already have been inclined to prefer the Defendant's argument that the Claimant was resident in Hong Kong. However, there is, to my mind, a further matter which resolved this issue plainly in favour of the Defendant. The Claimant has paid no corporation tax here; on that footing, the only legitimate working assumption is that the Claimant was not resident here. Had the Claimant been resident here, it would have been liable to corporation tax: see, ss. 6, 8 and 11 of the Income and Corporation Taxes Act 1988 and Halsbury's Laws of England (4 th ed., reissue), vol. 23(1), at paras. 835 and 836.
For my part, I can see no good reason why the working assumption on which the Claimant's tax position is based should be displaced for the purposes of this application. In the light of such considerations, Mr. Swaroop ultimately did not press this point. In the event, I am amply satisfied that the Claimant is resident in Hong Kong and therefore out of the jurisdiction and not in a relevant Contracting or Regulation State. It follows that threshold condition CPR 25.13(2)(a) is satisfied.
(II) INABILITY TO PAY
I come next to the question raised by CPR 25.13(2)(c), namely whether there is reason to believe that the Claimant "will" be unable to pay the Defendant's costs if ordered to do so. In the light of the decision of Sir Donald Nicholls V-C (as he then was) in Re Unisoft Group Ltd (No.2) [1993] BCLC 532, the test here was common ground: the burden was on the Defendant to show that the Claimant will be unable to pay. For the reasons given by Sir Donald Nicholls V-C, that test is not "watered down" by the presence of the wording "reason to believe". I emphasise that the inquiry is whether the Claimant "will be unable" to pay the Defendant's costs if ordered to do so – not whether it might be unable to pay them.
For the Defendant, Mr Wheeler's argument, which sought to rely on an investigation conducted by accountants Robson Rhodes, proceeded as follows:
i) While they could not be ignored, not much weight could be given to the unaudited management accounts of 31 st March, 2004. Accordingly, the audited accounts of 31 st March, 2003 were critical.
ii) Having regard to the balance sheet, by far the most valuable asset was an interest in and joint venture with an associated company ("Crotex"), which in turn owns a Moscow shopping mall or superstore. However, the Claimant's auditors, Peter Y.H. Lam & Co., Certified Public Accountants, Hong Kong ("the auditors") themselves spoke of the "fundamental uncertainty" in respect of the value of that interest by reason of it not having been subject to any or any proper audit. Moreover, there was no explanation for the dramatic upwards revaluation of the Crotex interest in the Claimant's books – a revaluation from some HK$12 million at cost to HK$245 million in the balance sheet.
iii) As to other current assets, prepayments by the Claimants were properly classified as such as assets – but, the moneys having been paid away, would not be realisable to pay a substantial bill for costs.
iv) Having regard to current liabilities, the current bank balances and cash were negative; they revealed a dependence on overdraft or borrowing facilities.
v) What remained were trade and other receivables ("receivables") which, in net terms on the balance sheet, amounted to some HK$30 million; even if reduced further by the amount of the previous year's bad debts, these came to some HK$20 million; but matters did not rest with the balance sheet.
vi) While, given the audited accounts, it had to be assumed that the receivables represented moneys likely to come in, there was no basis for thinking that they would be available to meet a bill for costs. Having regard to the profit and loss statement ("the P&L statement") and the figures for cash flow from operating activities, it was apparent that, but for the interest in Crotex, the Claimant was trading as a loss.
vii) Therefore in summary, the Claimant's ability to pay an order for costs hinged on the receivables but there was no basis for thinking that those would be available to discharge such an order, given that, the Crotex interest apart, the Claimant was trading at a loss. As no reliance could be placed on the management accounts, there was nothing to correct this picture, as presented by the 31 st March, 2003 audited accounts.
For the Claimant, Mr. Swaroop responded as follows:
i) There was no basis for any conclusion that the Claimant would be unable to pay the costs of the proceedings if ordered to do so.
ii) Though there was, he said, no need to do so, he was content to exclude from consideration all amounts attributable to Crotex, prepayments and bank balances.
iii) Robson Rhodes —unlike Mr. Wheeler – had not grappled with the receivables; the points made by Mr. Wheeler in that regard were therefore unsupported by accountancy evidence.
iv) In any event, there was no sound basis for Mr. Wheeler's approach; as at the 31 st March, 2003, the receivables constituted an asset properly designated as such in the balance sheet; the figures from the P&L statement and cash flow calculations had already been factored in, serving to reduce the bank balances and cash figure; unless the Defendant was to mount a challenge to the audited accounts (which it had not done), there was no basis for concluding that the receivables did not represent assets which would be available to...
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