SW Trustees Pte Ltd (in compulsory liquidation) and another v Teodros Ashenafi Tesemma and others ( Teodros Ashenafi Tesemma, third party) [2023] SGHC 160

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This is Mr Teodros Ashenafi Tesemma’s (“the first defendant”) appeal against the decision of the learned Assistant Registrar (“the learned AR”) in HC/SUM 519/2023 (“SUM 519”) to dismiss his application for security for costs (“SFC”) in the sum of $310,000 for pre-trial, trial, and post-trial costs against the plaintiffs in HC/S 229/2021 (“Suit 229”). While the parties raised several issues during the appeal before me, the main issue to be determined is whether the first defendant’s delay in bringing his application for SFC (if there was indeed such a delay) prejudiced the plaintiffs’ conduct of Suit 229, to the extent that it overwhelms the public policy in favour of ordering SFC against an impecunious company. This issue arises given that the first plaintiff, SW Trustees Private Limited, is in compulsory liquidation.

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In March 2021, the plaintiffs commenced Suit 229 against the defendants. This was done with the court’s permission, which was granted under s 144(1) of the Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) in HC/SUM 62/2021 (“SUM 62”). Importantly for present purposes, in SUM 62, the second plaintiff was also granted authorisation to enter into a funding agreement with the SGI Creditors (“the Funding Agreement”). Under the Funding Agreement, the SGI Creditors are to indemnify the second plaintiff in respect of all legal fees, costs, and expenses in pursuing Suit 229.

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It is therefore important to rationalise the non-exhaustive list of relevant circumstances through the purposes behind the provision of SFC. In this regard, the provision of SFC can be resolved into at least three key purposes, namely: (a) to protect the defendant, who cannot avoid being sued, by enabling him to recover costs from the plaintiff out of a fund within the jurisdiction in the event that the claim against him by the plaintiff proves to be unsuccessful; (b) to ensure, within the limits of protecting the defendant, that the plaintiff’s ability to pursue his claim is not stifled; and (c) to maintain a sense of fair play between the parties even amidst the cut-and-thrust of civil litigation. In my respectful view, rationalising the apparently open-ended list of circumstances through these purposes will avoid the inherent dangers of simply relying on a non-exhaustive list of circumstances.

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I turn now to the three purposes set out above. First, it is well established that the primary purpose behind the provision of SFC is to protect the defendant by enabling him to recover costs from the plaintiff out of a fund within the jurisdiction in the event that the claim against him proves to be unsuccessful. In this regard, the Court of Appeal in SIC College accepted (at [75]) that SFC is meant to protect the defendant “who is forced into litigation at the election of someone else against adverse costs consequences of that litigation” (citing the English Court of Appeal decision of Autoweld Systems Ltd v Kito Enterprises LLC [2010] EWCA Civ 1469 at [59]). Thus, while a plaintiff has a choice whether to commence proceedings against another party, and therefore run the risk of suing a party who may not be good for costs, the same cannot be said of a defendant, who cannot choose not to be sued. As such, the law treats the defendant in this regard slightly more favourably (see Singapore Civil Procedure 2021 vol 1 (Cavinder Bull gen ed) (Sweet & Maxwell, 2021) (“White Book”) at para 23/0/2). The circumstances relevant to assessing whether this first purpose is met would include: (a) the prospects of the defendant succeeding in the proceedings, subject to the practical circumstance that the court will not investigate in considerable detail the likelihood of success in the action (see the Federal Court of Australia decision of Gartner v Ernst & Young (No 3) [2003] FCA 1437 (“Gartner”) at [10]); (b) the ease with which a defendant may enforce a judgment for costs against a plaintiff in a jurisdiction (see the English Court of Appeal decision of Thune and another v London Properties Ltd and others [1990] 1 WLR 562 at 570); and (c) whether, in the event of an adverse cost order being made against the plaintiff, there is reason to believe that the plaintiff’s litigation funders will not respond so as to enable the defendant’s costs to be paid (see the English High Court decision of Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc (2013) 147 ConLR 240 at [41]–[42]).

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Second, it is also clear that the law on the provision of SFC does not only consider the interests of the defendant. The law also has to consider whether the provision of SFC would be too oppressive to the plaintiff (see White Book at para 23/3/5). Thus, in the High Court decision of Pandian Marimuthu v Guan Leong Construction Pte Ltd [2001] 2 SLR(R) 18, G P Selvam J explained (at [12]) that there must be appreciable degree of certainty that there will be a judgment for costs in favour of the defendant. Were it otherwise, “the order for security will be purposeless and will defeat the ends of essential justice when the plaintiff is disabled or unable to secure the security”. The learned judge went on to explain that “[t]he court should be circumspect to ensure that the defendant’s purpose of seeking security for costs is not to quell the plaintiff’s quest for justice”. In this regard, the circumstances relevant to assessing whether this second purpose is met would include: (a) the prospects of the plaintiff succeeding in the proceedings, subject again to the caveat that the court will not generally enter into a detailed examination of the merits (see the High Court decision of Sembawang Engineering Pte Ltd v Priser Asia Engineering Pte Ltd [1992] 2 SLR(R) 358 at [25]); (b) whether an order for SFC would preclude the plaintiff from pursuing its claim (see Gartner at [10]); and (c) whether any impecuniosity of the plaintiff arises out of the defendant’s alleged breaches (see again Gartner at [10]).

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Third, another purpose behind the provision of SFC is to ensure a sense of fair play between the parties. This explains why the courts have taken into account considerations such as: (a) whether the application for SFC is made to embarrass the plaintiff (see Raman Chettiar v Palaniappa Chettiar and another [1939] MLJ 165); (b) whether the defendant brought the application for security for costs promptly (see Gartner at [10]) or if he used the application as a chip to be played at a most advantageous time to stifle a bona fide claim (see SIC College at [79], citing the Court of Appeal of the Supreme Court of Western Australia decision of Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 (“Christou”) at [20]); (c) whether there is a significant extent of overlap between the defence or claim and any counterclaim, such that the plaintiff’s claim might be prejudiced while the defendant might be indirectly aided in pursuing its counterclaim (see SIC College at [78]–[84]); (d) whether the conduct of either the plaintiff or the defendant was reproachable (see the Federal Court of Australia decision of Hopeshore Pty Ltd v Melroad Equipment Pty Ltd (2004) 51 ACSR 259 at [39]); and (e) whether the order for security for costs will affect any innocent third parties (see the High Court decision of Gateway Land Pte Ltd v Turner (East Asia) Pte Ltd [1987] SLR(R) 746 at [11]).

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For reasons that I will explain, I allow the first defendant’s appeal in part. To begin with, and this is not disputed, I find that the first defendant satisfies the first stage of the applicable test. As will be recalled, the first stage asks whether the court’s discretion to order security for costs under O 23 r 1(1) and/or s 388(1) has been invoked. In this regard, there is no doubt that the plaintiffs come within the relevant provisions so that the court’s discretion to order SFC is invoked.

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First, in relation to the first plaintiff, the relevant provision is s 388(1). This section requires the first defendant to show “by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant”. In this regard, the first plaintiff is an insolvent company in liquidation, which is prima facie evidence that it is impecunious in the sense that it will be unable to pay the first defendant’s costs, unless the contrary is proven (see White Book at para 23/3/19). Indeed, there is nothing displacing this starting point given that the first plaintiff’s statement of account maintained with the Official Receiver shows its account balance to be $8,333.03 as at 29 March 2023.

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The Court of Appeal’s statement in ECRC Land, that the balance is in favour of ordering SFC for a defendant who faces litigation by an impecunious company, is in line with Chan J’s concern in Frantonios Marine about the defendant being “saddled with unpaid costs that the plaintiff corporation will not be able to pay”. Indeed, as Chan J elaborated, the rationale behind this proposition is commonsensical: since it is clear from the impecuniosity of the plaintiff company that it will be unlikely to pay the defendant’s costs, it must follow that the defendant ought to be protected against litigation that it cannot avoid. As such, in the words of the learned judge, “[i]nterested parties not prepared to provide the funds to meet the security for costs orders, generally ought not to be allowed to finance and launch litigation using the impecunious plaintiff corporation as a shield” (see Frantonios Marine at [53]).

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It is, however, telling that neither ECRC Land nor Frantonios Marine mandated that a court must always order SFC in favour of a defendant when the defendant is faced with litigation by an impecunious company. In this regard, I respectfully agree with the learned AR that the shifting of the balance in favour of ordering SFC for the defendant in this situation “is not an immutable one”. It is important, following the learned AR’s views, to recognise that it is not in every case where a defendant is faced with litigation by an impecunious company, that an order for SFC will be made. This is because the circumstances of each case may vary. For example, a defendant who is sued by an impecunious company may have a completely unsustainable defence. In such a case, the court will rightly favour the company’s interest in pursuing its claim over the defendant’s interest to be able to recover its costs.

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I turn next to consider whether the first defendant will recover the costs of the litigation in any event if the SFC were not granted. In this regard, the plaintiffs argue that granting SFC would not be needed as the first defendant’s costs are indemnified under the estate costs rule. This rule was explained by the Court of Appeal in ECRC Land (at [9]):

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In addition to the rule that a successful litigant against a company in liquidation is entitled to be paid his costs in priority to the other general expenses of the liquidation and all other unsecured debts, the estate costs rule also provides that a liquidator who breaches that rule is personally liable for any shortfall in the opponent’s costs recovery which is caused by the breach of the rule (see ECRC Land at [20]–[21]). In this case, the plaintiffs argue that since the second plaintiff has an indemnity from the SGI Creditors that was endorsed by an order of court, the estate costs rule in substance gives all the defendants, including the first defendant, the benefit of the indemnity without them having to ask from it. As I understand it, this is presumably because the second plaintiff would be personally liable for the first defendant’s costs if such costs are not paid out in accordance with the estate costs rule, and in such a situation, the second plaintiff can likely discharge that liability by relying on the indemnity from the SGI Creditors.

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With respect, I do not agree with the plaintiffs’ contentions. To begin with, it presupposes that the first plaintiff would have enough assets at the end of the liquidation to make any meaningful payment towards the defendant’s costs. But even if it could be assumed that the first defendant’s costs could be meaningfully paid under the estate costs rule, he would still have to wait for the entire liquidation process to be completed before a dividend can be paid. This might be a long and drawn-out process, and the plaintiffs do not provide any indication as to how long it might take. This is unsatisfactory, especially when viewed in light of one of the key purposes of ordering SFC, which is to ensure that a defendant can readily and easily recover his costs if the plaintiff’s claim against him proves to be unsuccessful. Finally, I do not think that the indemnity from the SGI Creditors gives, in effect, an indemnity to the first defendant. This is because the indemnity would only be effective if the second plaintiff is personally liable for the first defendant’s costs. For this to happen, the second plaintiff must have contravened the estate costs rule by making, for instance, dividends that do not observe the proper priority of the first defendant over the other unsecured creditors. There is no reason for the second plaintiff to do so and make himself personally liable (albeit apparently having the protection of the indemnity). As such, I do not think that the indemnity from the SGI Creditors would benefit the first defendant.

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In summary, in so far as the circumstances that pertain to protecting the first defendant from adverse costs consequences are concerned, I find them to be neutral as to whether SFC should be ordered in favour of the first defendant. First, I do not find that the first defendant has an overwhelmingly strong defence in his favour. Second, while the cases do say that a defendant being sued by an impecunious company should usually be entitled to SFC, this is not an immutable rule. This will ultimately depend on the circumstances of the case. Third, while I acknowledge that the first defendant may be able to recover his costs under the estate costs rule, it is unsatisfactory that he can only be paid a dividend near the end of the liquidation process. In other words, I do not find any compelling reason viewed from the first defendant’s perspective to order SFC in his favour.

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I come now to the question of delay, which I alluded to earlier at [43] as a potential consideration that operates against the general policy of granting SFC in favour of defendants in proceedings commenced by an impecunious company. This was a point that the parties pressed most strongly before me. The plaintiffs assert that the first defendant’s delay in applying for SFC amounted to 727 days from the date Suit 229 was commenced. On the other hand, the first defendant says that it was only in August 2022 when it became viable for him to estimate his costs exposure in Suit 229. This is because, so the first defendant argues, August 2022 was when the parties were able to put together their lists of witnesses and estimate the number of trial dates required.

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First, I find that the first defendant provided a satisfactory explanation for the delay in applying for SFC, at least in respect of trial and post-trial work. In this regard, it is not helpful for parties to measure delay in purely quantitative terms, so that the longer the delay, the less likely that a court would award SFC. Rather, I agree with the learned AR that the crux of the matter “is the point in which a defendant can properly ascertain his likely costs exposure”, which marks the point at which the first SFC application should be taken out. This is consistent with the authorities, such as the English Court of Appeal decision of Croft Leisure Ltd (in liq) v Gravestock & Owen [1993] BCLC 1273 (“Croft”) and the Ontario Superior Court of Justice decision of Unimac-United Management Corp v Canadian National Railway Co [2015] OJ No 1927 (“Unimac”). These cases all provide that a defendant should only be required to apply for SFC after it is able to make a considered assessment of its likely costs in defending the suit that has been brought against it (see Croft at 1279; and Unimac at [52]).

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In particular, the Ontario Superior Court of Justice held in Unimac that a defendant should apply for SFC promptly after it learns that it has a “reasonable basis” for bringing such an application (at [52]). The court further observed (at [55]) that applications for SFC are not usually brought in Canada until at least the pleadings and productions of documentary evidence are done. This is because it would be difficult for the defendant to estimate the issues and costs of the action prior to that point. On the facts of that case, the defendant had applied for SFC more than two years after the commencement of the action. Yet, the court found that there was no delay in the filing of the application. Similarly, in the High Court decision of Elbow Holdings Pte Ltd v Marina Bay Sands Pte Ltd [2014] SGHC 219, the court held that the fact that the defendant waited 18 months from the commencement of the action to seek SFC did not amount to a significant delay because “the parties ha[d] just completed discovery” (at [15]).

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In the proceedings below, the plaintiffs asserted that despite numerous previous steps in the proceedings, the first defendant only chose to file his application for SFC late in the day, ie, 727 days since the commencement of Suit 229. The learned AR agreed with the plaintiffs for the primary reason that SFC is in practice often sought in stages, so that parties can return to court after an initial SFC application had been granted to ask for more security as the matter progresses and costs estimates change. As such, the learned AR held that the first defendant ought to have made an initial application for SFC by the time general discovery was completed in October 2021. At that stage, enough work would have been done by that time for the first defendant to ascertain his likely costs exposure. Therefore, the learned AR found that the first defendant was guilty of delay in taking out the application for SFC only on 28 February 2023, which was at that time about three months before the trial was slated to begin (see above at [6]). Ultimately, in the learned AR’s view, the first defendant knew from the beginning that the first plaintiff is an impecunious company. He should therefore have taken out an application for SFC at the earliest instance, which would have been October 2021. Importantly, the learned AR’s finding that the first defendant was guilty of delay was made in relation to the entire sum of security that the first defendant sought. In reaching his finding, the learned AR did not specifically consider whether the delay pertaining to the part of the costs which could not have been assessed until later in the proceedings, was different from the delay in respect of the costs which could have been assessed early on in the proceedings.

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It is for this reason that I respectfully disagree with the learned AR’s finding of delay. In my view, in ascertaining whether there is delay in bringing an application for SFC, the court should conduct a separate assessment of whether there was delay in relation to the different types of costs that can only be assessed at different stages of the proceedings. By way of example, if a defendant applies for security for the costs incurred during the pre-trial stage and during trial separately, it cannot be assumed that just because a defendant is guilty of delay in seeking security for pre-trial costs, that it must necessarily mean that he is also guilty of delay in respect of the costs of trial. In this example, the defendant might have only been able to make a considered assessment of the costs of trial at a much later point in time. Indeed, as the Ontario Superior Court of Justice in Unimac suggested (at [55]), a defendant might only have a better picture of the expected costs of the later stages of the proceedings after the case has progressed to a more advanced stage. As such, if the said defendant were to make an application for SFC only in respect of the costs of trial later in the proceedings (and not for the costs of pre-trial work), he may not be in delay. Therefore, in assessing the question of delay, it is inappropriate to make a global finding that there has been delay in respect of every category of costs for which security is sought, unless this is truly borne out by the facts.

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Turning to the facts of this present appeal, I can accept that the first defendant, being legally advised and obviously knowing that the first plaintiff is an impecunious company from the beginning, is guilty of delay for not making earlier applications for SFC. More specifically, I agree with the learned AR that the first defendant would at least be in a position to estimate some costs exposure in October 2021, which was when general discovery was completed. However, his failure to take out an application for SFC at that time cannot mean that he should be faulted for applying for SFC now in respect of the costs that he might only have been able to estimate as the case progressed, as new information emerged so as to change his estimate of his costs exposure. Indeed, this is the very reason why applications for SFC are taken out in stages.

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However, and with respect to the learned AR, I do not think that October 2021 is the point from which to assess whether the first defendant is guilty of delay in bringing his SFC application, ie, SUM 519. This is because SUM 519 is not a homogenous application but is in fact broken up into costs for pre-trial, trial, and post-trial work. In this regard, I accept that the first defendant is not entitled to security for the costs of most of the pre-trial work because there has been a significant delay in seeking security when most of the pre-trial work has already been done, with no good explanation given for the delay. That said, had there been a good explanation for the delay, I might have found that the first defendant is entitled to security for the costs of its pre-trial work. In the end, each case must turn on its own facts. However, while I can accept that October 2021 may be the point from which to measure whether there was delay in the first defendant’s application for security in respect of the costs of pre-trial work, the same cannot be said about his application for security in respect of the costs of trial and post-trial work. Instead, in my view, the reasonable date from which to measure whether the first defendant’s application for security for the costs of trial and post-trial work is August 2022, when the parties were still in the stage of specific discovery.

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Looked at in another way, even if the first defendant was wrong not to have made earlier applications for SFC for pre-trial work, he is not precluded from making an application for SFC in respect of costs for trial and post-trial work once he obtains sufficient information to enable him to do this. I do not think that the plaintiffs, being legally advised, can claim to be surprised by this, especially with the knowledge that the first plaintiff is an impecunious company which is not able to pay to the first defendant any costs orders made in the latter’s favour. Indeed, if the plaintiffs claim to be surprised by the first defendant’s application for SFC once he had information to enable him to estimate his costs exposure for trial and post-trial work, then the plaintiffs (or more accurately, the interested parties), would be guilty of what Chan J had said in Frantonios Marine of using an impecunious plaintiff corporation as a shield to launch a litigation but walking away with no costs consequences should the litigation fail (at [53]).

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As such, measured from August 2022, the most that can be said is that the first defendant had delayed his application for SFC, in respect of costs for trial and post-trial work, by about four to five months until he put in his formal application in February 2023. While this period of delay is not ideal and can potentially still be significant, I find that the first defendant has provided a good explanation for this delay. This is because the first defendant’s then solicitors had discharged themselves on 17 October 2022. In their place, the first defendant’s present solicitors were appointed only on 11 November 2022. The present solicitors then dealt with an outstanding application in HC/SUM 3727/2022, which concluded on 19 January 2023. It was after that that the present solicitors wrote to the plaintiffs on 30 January 2023 requesting for SFC to be provided before making the formal application for the same on 28 February 2023. This, to my mind, is an adequate explanation for the relatively short delay of about five months between August 2022 and February 2023.

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Furthermore, even if there had been an unsubstantiated delay in the present case, I do not think that there is prejudice to the plaintiffs. In this regard, the learned AR held that a defendant’s right to be protected against litigation by an impecunious company is balanced against the plaintiff’s entitlement to know its position in relation to security before it embarks on the litigation (see Christou at [20]). The learned AR further explained that since the first defendant did not seek SFC at an earlier stage despite knowing that the first plaintiff is an insolvent company, which is unlikely to have any assets or means to satisfy costs ordered against it, the SGI Creditors “would have fairly and reasonably assumed that no further expense in the form of SFC was required”. The learned AR then reasoned that from October 2021 (which is the point at which the learned AR regarded that the first defendant ought to have taken out an application for SFC) to until late February 2023 (which is when the application for SFC was filed), the SGI Creditors “would have operated their budget on the basis that the defendants were not asking for SFC and in consequence incurred costs of S$1.1m, a rather significant amount by any measure”. As such, the learned AR held that the first defendant’s application for SFC would have surprised the SGI Creditors and “[put] them in a bind in that they are forced to go beyond whatever budget they initially had in mind or else risk all the hitherto incurred costs being wasted”. This was the prejudice which the learned AR thought that the first defendant’s belated application for SFC could have caused to the plaintiffs.

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With respect, I disagree with the learned AR. First, in a system where the practice is for SFC applications to be taken out in stages, I do not think that the first defendant’s failure to apply for SFC around October 2021, based on the information on his costs exposure that he had at the time, should operate as some kind of estoppel against all future SFC applications. More specifically, it cannot be that the first defendant’s failure to apply for SFC at a time when he could do so in respect of some work can amount to a representation that he would not apply for SFC in respect of all future work when he comes to possess the relevant information on his costs exposure in the future. To conclude otherwise would have a significant impact on applications for SFC. It would mean that, whether the plaintiff is impecunious or not, a defendant would be put under pressure to apply for SFC in respect of some work at the soonest possible instance or run the risk of having its entitlement to SFC for the entire action forfeited. This cannot and should not be how the SFC regime is to operate as it is ultimately aimed at protecting the defendant from litigation costs that it cannot avoid, not to put the defendant on edge to take constant action to protect itself.

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More broadly, the present case also turns on the policy enunciated in ECRC Land and Frantonios Marine that a defendant facing litigation from an impecunious company should generally be protected by an order for SFC. While I have said above that these cases do not mandate that a defendant be so protected in all cases, I think that a defendant should be protected where there are no other strong contrary factors against awarding such protection. In the present case, taking the plaintiffs’ case at their highest, even if the first defendant had unduly delayed his application for SFC in respect of trial and post-trial work, any uncrystallised prejudice occasioned to the plaintiffs cannot overturn the definite prejudice that the first defendant will suffer in the event that he succeeds at trial. The first defendant’s prejudice is definite because there is a very real risk that the first plaintiff, being an insolvent company, is not able to pay costs ordered against it, nor would the second plaintiff, who is a nominal plaintiff, be willing to do so. On balance, therefore, I find that there is no prejudice caused to the plaintiffs even if the first defendant had unduly delayed its application for SFC in respect of trial and post-trial work.

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In summary, as for whether the plaintiffs’ ability to pursue their claim in Suit 229 will be stifled if SFC were granted, I find the overall assessment on the facts of the case to be neutral. First, I do not think that the plaintiffs have an overwhelmingly strong case in their favour. Second, I do not find that the first defendant has brought his application for SFC, at least in respect of the costs of trial and post-trial work, after an unsubstantiated delay. Third, I do not assess the first defendant’s application for SFC to be oppressive.

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For all these reasons, I therefore allow the first defendant’s appeal in part to the extent that I respectfully disagree with the learned AR that the first defendant is not entitled, based on the circumstances of RA 80, to SFC in respect of the costs of trial and post-trial work. I qualify my decision in this way because the first defendant cannot yet put a figure to the quantum of SFC he requires in respect of trial and post-trial work. This is in turn because the plaintiffs’ amendment of its Statement of Claim has now rendered unclear the length of trial and the extent of the corresponding work. The first defendant is therefore at liberty to bring an application for SFC in respect of trial and post-trial work at the appropriate time. That said, my decision should not be read as binding the assistant registrar hearing any subsequent SFC application; as with any application for SFC, the prevailing facts must be taken into account in deciding whether or not to order SFC.

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In closing, I thank the counsel for the parties, Mr Salem Ibrahim, as well as Mr Darren Low, for their helpful submissions. Finally, unless they are able to agree, the parties are to write in with their submissions on costs for the present appeal within 14 days of this decision.