Thistle Hotels Ltd (formerly Thistle Hotels Plc) v Gamma Four Ltd; Thistle Hotels Ltd v Orb Estates Plc
| Jurisdiction | England & Wales |
| Judge | Miss Sonia Proudman QC |
| Judgment Date | 03 February 2004 |
| Neutral Citation | [2004] EWHC 322 (Ch) |
| Docket Number | CaseNo:HC02C00491 |
| Court | Chancery Division |
| Date | 03 February 2004 |
[2004] EWHC 322 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Miss Sonia Proudman Qc
Sitting As A Deputy Judge Of The Chancery Division
CaseNo:HC02C00491
Mr David Blayney (instructed by Clifford Chance LLP, Solicitors) for the Claimant
Mr Paul Downes and Mr Charles Dougherty (instructed by Memery Crystal, Solicitors) for the Defendants
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.
Hearing date: 17th December 2003
1. This is an application by the Claimant, Thistle Hotels Limited ("Thistle") for security for the costs of counterclaims made by two of the defendants, Gamma Four Limited ("Gamma") and Euro and UK Property Ltd ("Euro"). The application regarding the position of another defendant, Orb Estates PLC ("Orb"), a company in administration, has been dealt with already by a consent order.
2. The court may only order security for costs under CPR rule 25.12 if (i) it is satisfied, having regard to all the circumstances of the case, that it is just to do so, and (ii) one or more of the conditions specified in CPR rule 25.13(2) is or are met or an enactment permits the court to require security. In this application the jurisdiction is invoked primarily under CPR r,25.13 (2)(c) on the basis (which is disputed) that there is reason to believe that Gamma and Euro will be unable to pay Thistle's costs of the relevant counterclaims if ordered to do so, and also under CPR r.25.13.(2)(a) on the basis that (as is common ground) both Gamma and Euro are companies resident outside the jurisdiction, and not resident in a Brussels Contracting State, a Lugano Contracting State or a Regulation State. Gamma and Euro submit that an order is inappropriate in any event, because the counterclaim arises out of the same transaction as, and reflects their substantive defence to, Thistle's claims. Gamma and Euro also submit for other reasons that the discretion to order security ought not to be exercised in this case and that delay in making the application constitutes an abuse of process.
3. The action concerns a transaction whereby 37 of the 55 hotels belonging to the 4th to 17th defendants ("the Hotel Group"), companies owned by Thistle, were transferred to a group of companies ("the Orb Group"), of which Gamma, Orb, Euro, the 18th defendant Hotel Portfolio II UK Limited ("HP UK") and Sceptre Hotels UK Limited ("Sceptre"), are members. The transfer was effected by a sale to Gamma of the shares in the 4th to 6th defendants, of which the 7th to 17th defendants are subsidiaries. Orb and Euro guaranteed Gamma's liabilities under the share sale agreement ("SSA"). Prior to the sale Thistle effected an internal reorganisation by which the 18 hotels that were not to be included in the sale were removed from the Hotel Group's ownership. As a result of that reorganisation, the Hotel Group incurred substantial liabilities ("the intra-group indebtedness") to Thistle. Immediately after the acquisition Gamma sold on its interests within the Orb Group (I was not taken to the details) so that the hotels became vested in HPUK. Thistle continues to manage the hotels pursuant to Operating and Relationship Agreements.
Ability to meet an award of costs
4. Gamma is a non-trading holding company incorporated in accordance with the laws of Jersey. Euro is a company incorporated in accordance with the laws of the British Virgin Islands and is also a non-trading holding company. Euro is the beneficial owner of the shares in Gamma, Sceptre and another Jersey company, Hotel Portfolio II (Jersey) Limited ("HP Jersey"). HP Jersey holds the shares of HPUK. HPUK and Sceptre (both of which are UK companies) respectively own 32 and 5 of the hotels (all of which are in the UK) although Thistle queries the regularity of Sceptre's acquisition.
5. Mr Downes, Counsel representing Gamma and Euro, submitted that Thistle has not established that Gamma and Euro would be unable to meet an adverse costs order. He relies on the summarised draft pro forma balance sheets of Gamma, Euro, HPUK and Sceptre.
6. Gamma's pro forma balance sheet purports to show (as at 31st March 2003) net assets of over �1 lm. Witness statements from Mr Kosky of Clifford Chance LLP, Thistle's solicitors, supported by Mr Stephen Lewis FCA, head of Clifford Chance's forensic accounting department, explain in detail Thistle's reasoning for its contention that (a) the balance sheet includes double counting of certain assets and (b) in any event the investments shown on the balance sheet must be inferred to be illiquid. In either case there would be, it is said, an insufficiency of current assets to meet Gamma's current liabilities.
7. Euro's pro forma balance sheet purports to show net assets of some �3.77m as at 30th June 2003. Euro's assets are entirely composed of investments in subsidiary companies. Again, Mr Kosky's witness statement explains in detail Thistle's reasons for believing that Euro has substantial liabilities and no currently realisable assets.
8. Mr Downes's submissions on the question of ability to pay concentrated primarily on the asset position of Euro's subsidiaries, HPUK and Sceptre, which had, according to the balance sheets of those companies, (purporting to show the asset position in July 2003 �there is a query about the date) �20m in cash between them as well as the hotels. He submits (describing this as an "unchallenged fact" in his skeleton argument) that the value of those assets could be realised for enforcement purposes.
9. I do not see that the position of Euro's subsidiaries avails Gamma at all. Even in relation to Euro, the assets of HPUK and Sceptre are not necessarily directly available to their parent company. So far from supporting the submission that Euro could raid the assets of its subsidiaries at will to pay costs of the action, the evidence points in the opposite direction. Euro's shares in HP Jersey are subject to two charges securing very substantial liabilities which would prevent realisation of HP Jersey's assets. Secondly, while HPUK's pro forma balance sheet shows total net assets of nearly �51.5m, this depends on the accuracy of the value ascribed to its tangible assets (presumably principally the 32 hotels) of nearly �816m, and the ability to collect its balance sheet debts of �54.1m, some of which must plainly include intra-group lending which is likely to be unrealisable. Thirdly, a caution against dealings has been registered at the Land Registry against the 32 hotels and other real property owned by HPUK, relating to undertakings involving the transfer of �35m of the proceeds of sale of the property to the cautioner. Euro has not answered Thistle's allegation that the balance sheet does not take account of this liability. Fourthly, Thistle maintains that the �18.7 shown as cash in the balance sheet is tied in to the security structure of the acquisition and is already earmarked for capital expenditure pursuant to the Relationship Agreement with Thistle. Again, there has been no rebuttal of this reasoned allegation. As to Sceptre, while its net assets are shown as �277,000, Thistle contends its net current liabilities exceed its readily realisable assets and Sceptre's assets (including its 5 hotels) are charged as security for substantial loan facilities. Further, as to the cash balances in both HPUK and Euro, Thistle's evidence as to the business, company structure and borrowing is such that it seems to me unlikely that cash in those companies is available for distribution to parent companies by way of dividend or otherwise.
10. As Mr Rands, a partner in Memery Crystal, the defendants' solicitors, accepts in his witness statement, his clients originally instructed him, in response to a request from Thistle, to agree to provide a balance sheet for HP Jersey and profit and loss accounts and cashflow statements for Gamma, Euro, HPUK and Jersey. A timetable was agreed but after the pro forma balance sheets were prepared the defendants declined to furnish further information, saying that sufficient details of available assets were contained in those balance sheets. No response has been given to Thistle's detailed analysis of the figures (on which Mr Blayney relied) other than that Gamma and Euro do not agree with it. Mr Downes said little more than that the costs of production of further documents would be disproportionate and that there was no basis upon which the court could properly find that the bottom line figures shown in those balance sheets were untrue or incorrect.
11. Even if I were to accept the net asset position as shown, (and leaving aside the fact that the balance sheets were several months old by the date of the hearing) I do not accept that a net asset balance is determinative of the question whether a company can pay a costs liability when it falls due. That issue involves consideration of the nature and liquidity of the assets. In Re Unisoft Group Ltd(No 2) [1993] BCLC 532, Sir Donald Nicholls V-C considered the test for the purposes of deciding whether a company will be unable to pay the defendant's costs if successful in his defence in the context of an application under s. 726 of the Companies Act 1985. Although the present application is not made under that provision it is common ground that the same principles apply. Nicholls V-C said (at p.533):
"Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met? That is a question to be judged and answered as matters...
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