StreetSine Singapore Pte Ltd v Singapore Institute of Surveyors and Valuers and others [2019] SGHCR 01

Costs

Summons No 2968 and 2970 of 2018 are two applications for security for costs taken out by the 23rd Defendant and the 1st to 22nd Defendants (collectively referred in this judgment to as “the Defendants”) respectively against the Plaintiff, StreetSine Singapore Pte Ltd. The 23rd Defendant’s application is for security for its costs up to and including the filing of affidavits of evidence-in-chief in the sum of $70,000. The 1st to 22nd Defendants’ application is for their costs up to the completion of discovery in the sum of $386,750. The applications for security for costs are made pursuant to s 388(1) of the Companies Act (Cap 50, 2006 Rev Ed), which provides:

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In essence, the Defendants’ position is that they are entitled to security for costs as there exists credible evidence to believe that the Plaintiff will be unable to pay the Defendants’ costs. Such credible evidence consists of, amongst other things, the Plaintiff’s financial woes such as its balance sheet insolvency and operating losses as well as loan agreements entered into between the Plaintiff’s parent company, StreetSine Technology Group Pte Ltd (“STG”), and STG’s shareholders for the funding of the present litigation. The Plaintiff opposes the application, inter alia, on the ground that given its liquidity, the Defendants cannot show that there is reason to believe that the Plaintiff will be unable to pay the Defendants’ costs if they are successful in their defence.

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On 28 June 2018, the Defendants filed their respective applications for security for costs. At this time, the applications were not supported by any expert opinion. Both the 1st to 22nd Defendants and the 23rd Defendant relied on the Plaintiff’s financial statements, especially those produced for the year ended 31 August 2017 (“2017 Financial Statements”). The Defendants highlighted these points from the Plaintiff’s financial statements to support their case that security for costs ought to be granted:

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There are two stages in an application for security for costs under s 388(1) of the Companies Act. At the first stage, the Court will determine if it appears by credible testimony that there is reason to believe that the plaintiff would be unable to pay the defendant’s cost if the defendant is successful in its defence. If the first stage is satisfied, the Court will then consider at the second stage whether it should exercise its discretion to order security for costs.

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Generally, once the first stage is satisfied, the Court would grant security for costs unless there are special circumstances which demonstrate that it would be just for security not to be provided (see Frantonios Marine Services Pte Ltd and another v Kay Swee Tuan [2008] 4 SLR(R) 224 (“Frantonios”) at [61]). This is because the legislative and public policy behind s 388 of the Companies Act is to provide “some protection for the community against litigious abuses by artificial persons manipulated by natural persons”, bearing in mind that “[a] man may bring into being as many limited companies as he wishes, with the privilege of limited liability” (per Megarry VC in Pearson v Naydler [1977] 1 WLR 899 at 905, cited in Ho Wing On Christopher v ECRC Land Pte Ltd [2006] 4 SLR(R) 817 at [71]; see also Frantonios at [58]).

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It is not disputed that the legal burden to demonstrate that an order for security for costs should be granted rests on the applicant. In this connection, the applicant is not required to prove on a balance of probabilities that the plaintiff will be unable to pay when ordered to do so (see Jirehouse Capital (an unlimited company) and another v Beller and another [2009] 1 WLR 751 (“Jirehouse”) at [26]). Rather, the test is whether there is, by credible testimony, “reason to believe” that the plaintiff would be unable to do so. As Clarke J observed in IBB Internet Services Ltd and another v Motorola Ltd [2013] IESC 53 (“IBB”) at [5.8], this requires the Court to predict a future uncertain event, which “involves not only a consideration of the relevant [p]laintiff’s current ability to meet an order for costs but also any likely change in that ability brought about by the passage of time and, of course, predicated on the failure of the proceedings”.

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In order to decide whether there is reason for such a belief, the Court will have “to look at the evidence put forward on the application as a whole and form an assessment on the basis of the evidence as a whole as to whether there is reason to believe that the company will not be able to pay costs ordered against it” (see Jirehouse at [34]). The fact that a credible witness puts forward a case on behalf of the applicant of the plaintiff’s inability to pay would not by itself be sufficient; where there is conflicting evidence, the Court must have regard to that as well and reach a conclusion on the “totality of the evidence placed before it, giving such weight to the various matters deposed to as is appropriate in the circumstances” (per Sir Donald Nicholls VC in Re Unisoft Group Ltd (No 2) [1993] BCLC 532 at 534; see also Jirehouse at [34]). In Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union and others (1993) 12 ACSR 1, Lee J expounded on the test in connection with the then Australian equivalent to s 388 of the Companies Act (ie, s 1335 of the Corporations Law) as follows (at 5):

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At the same time, it has been recognised that an applicant for security for costs is not required to provide “anything very conclusive in the way of proof” and can “do no more than to point to the surrounding circumstances” (see Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 at 519). In considering whether credible evidence existed to give reason to believe that the plaintiff would be able to pay the defendant’s costs, courts have considered the following factors:

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If the Court is satisfied that such credible testimony exists, it will then proceed to the second stage, which is to consider whether to exercise its discretion to grant the application for security for costs. At the second stage, the Court would have regard to all the relevant circumstances to decide if it would be just to make the order (see Creative Elegance (M) Sdn Bhd v Puay Kim Seng [1999] 1 SLR(R) 112 at [13]). Such circumstances include, amongst other things, the following matters:

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It is also important to note that in an application for security for costs under s 388(1), the Court will not go into the merits of the case in detail unless the evidence is so plainly, clearly and overwhelmingly in favour of one party (see Frantonios at [49]). All parties accepted that this was not the case here, and none of the parties delved into merits of their respective claim or defence during the arguments on this application before me.

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The main issue which the parties focussed their arguments on in respect of these applications was the issue of whether there is reason to believe that the Plaintiff would be unable to pay the Defendants’ costs if the Defendants were successful in their defence. While arguments pertaining to the second stage were raised, these were made briefly and in a cursory manner.

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In my decision, I therefore deal chiefly with the issue of whether the Defendants were able to demonstrate that there is reason to believe that the Plaintiff would not be able to satisfy their costs when ordered to do so. Before turning to my decision in respect of this, I set out a summary of the parties’ arguments for context.

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Counsel for the 1st to 22nd Defendants, Mr Tng Sheng Rong, made three main points in seeking to demonstrate that there is reason to believe that the Plaintiff would be unable to pay their costs. First, Mr Tng submitted that on an analysis of the Plaintiff’s financial statements, the Plaintiff was both balance sheet and cash flow insolvent. Second, Mr Tng pointed to the fact that the Plaintiff was the beneficiary of a loan between STG and its shareholders. In Mr Tng’s submission, the fact that such loan agreements had to be entered into was telling of the Plaintiff’s inability to pay the Defendants’ costs. Moreover, the Plaintiff was not a party to the loan agreements, and in any case there was no certainty that the term of the loan agreements would be extended. The loan agreements could also be terminated either by STG or STG’s shareholders upon giving 30 days’ written notice, without prior reference or notification to the Plaintiff. All these demonstrated that little weight could be placed on the loan agreements. Finally, Mr Tng noted that the Plaintiff had disclosed matters in its 2017 Financial Statements that constituted a “material uncertainty” as to its ability to continue as a going concern. These matters related to the exact points that the 1st to 22nd Defendants had highlighted. The 1st to 22nd Defendants thus had sufficient cause for concern as to the Plaintiff’s ability to pay their costs.

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Counsel for the 23rd Defendant, Mr Chia Huai Yuan, adopted all of Mr Tng’s arguments. He further submitted that based on the points raised by the Defendants, the evidential burden had shifted to the Plaintiff to adduce evidence to demonstrate that there was reason to believe that it would be able to pay the Defendants’ costs. However, this evidential burden was not discharged. For example, the Plaintiff did not proffer any evidence to support its assertion that the investments in its business were made on a discretionary basis and that it could divert this cash towards other purposes, such as funding these legal proceedings. Further, with respect to the sum of $1.6m in its bank account, it was glaring that the Plaintiff had failed to explain the sources of these funds and this evidence should thus be treated with extreme caution.

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As for the loan agreements between STG and its shareholders in respect of the Plaintiff’s litigation, these were not evidence of the Plaintiff’s impecuniosity. Instead, this was evidence of prudent financial management on the Plaintiff’s part as the Plaintiff could obtain additional funding through the loan agreements without having to bear any cost since no interest was payable on the borrowed amounts.

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Having carefully considered the evidence and arguments, I am not persuaded that there is reason to believe that the Plaintiff would be unable to pay the costs of the Defendants if ordered to do so. I explain the reasons for arriving at this conclusion below.

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It is of note that the condition to be proved before security for costs will be granted under s 388(1) of the Companies Act closely resembles the language of the cash flow test found in s 100(4)(a) of the Bankruptcy Act (which has also been referred to as the liquidity test: see Living the Link at [27]). In both instances, the issue is whether the company in question is able to pay its debts as they fall due. The difference lies in that the assessment carried out for the purposes of s 388(1) of the Companies Act requires the Court to consider the future state of the company (ie, the company’s potential ability or inability to pay costs to the defendant if the defendant succeeds in its defence (see also the comments of Clarke J cited at [14] above)), while the assessment under s 100(4)(a) of the Bankruptcy Act relates to the company’s current financial state at the time of the assessment. It is also of note that the language of s 100(4)(b) of the Bankruptcy Act, viz, that the value of the one’s assets is less than the amount of one’s liabilities, is not the test stipulated by the legislature as far as s 388(1) of the Companies Act is concerned. I therefore agree with Mr Shankar’s submission that the focus in an application under s 388(1) relates to the company’s liquidity, and in particular, its potential ability or inability to satisfy an adverse costs order.

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This is not to say that the balance sheet test is irrelevant in an application under s 388(1). Balance sheet insolvency can certainly be an indication of poor financial health, giving rise to a risk that the company may not be able to satisfy an adverse cost order in the future. However, given the language of s 388(1) of the Companies Act, the fact that a company might be considered insolvent on a strict application of the balance sheet test does not automatically lead to the conclusion that there is reason to believe that the company will not be able to satisfy the defendant’s costs in the future. In a similar vein, Belinda Ang J observed in Chip Thye Enterprises Pte Ltd (in liquidation) v Phay Gi Mo and others [2004] 1 SLR(R) 434 (“Chip Thye Enterprises”) at [19] that a “surplus or deficiency of net assets is indicative but not necessarily determinative in establishing whether or not an entity is able to pay all its debts as and when they become due and payable”. Instead, regard must be given to all the evidence that appears relevant (Chip Thye Enterprises at [20]).

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With the above in mind, I turn to consider the Plaintiff’s financial situation as disclosed from its financial statements and other evidence, focussing in particular on an assessment of the Plaintiff’s liquidity. Insofar as the Plaintiff’s financial statements are concerned, I focus primarily on the 2017 Financial Statements as they are the most probative of the Plaintiff’s current financial circumstances and the Plaintiff’s future ability to satisfy an adverse cost order.

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Mr Shankar submitted that Mr Gronow’s opinion was erroneous for three reasons. First, there was no need for the Plaintiff to reinvest in its business in order to provide services to its existing customers. Like any other company, the Plaintiff invests in the development of its business to grow the business and create new income streams. However, this has no bearing on the Plaintiff’s ability to deliver its existing services to customers. The Plaintiff already has the technologies and assets that are required to deliver its existing services without making further investment (see [8(c)] above). Second, while the Plaintiff had to incur some operating expense to provide its services to its customers, these expenses were a fraction of the revenue the Plaintiff earned from its customers. In this regard, the Plaintiff’s unchallenged evidence was that its operating model allowed it to provide its services to existing customers at very minimal, or negligible, incremental cost. Finally, the Plaintiff need not incur advertising expenses or professional fees to fulfil its obligations to existing customers as these were discretionary expenses to grow the business and were not incurred to maintain its existing services.

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As for the operating expenses which Mr Gronow highlighted, it seemed to me that much of these expenses related to the Plaintiff’s operations in general and not to the billings in advance in particular. The evidence given on behalf of the Plaintiff is that its operating model allows it to provide any services that the customers have subscribed for at very minimal, or negligible, incremental cost. Mr Barakat-Brown has explained that the reason that this is the case is because all that the Plaintiff is required to do for the billings in advance to be recognised as revenue is provide its customers the requisite access to the Plaintiff’s existing software engine or platforms. This evidence also supported by the financial literature which Mr Shankar referred to at the hearing, where the general proposition was made that companies in the technology, services and telecommunications business typically receive upfront payments from customers and have low costs associated with providing those incremental services over the revenue recognition period to customers (see, for example, Ryan Lubniewski, et al, “Beware of disappearing revenue in an acquisition” (April 2016) Journal of Accountancy at pp 28–31).

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In his report, Mr Gronow did not grapple with the nature of either the Plaintiff’s business as a technology company or its operating model. The basis upon which he disagreed with the Plaintiff’s evidence that there was negligible incremental cost involved in the provision of its existing platforms to earn the billings in advance was the significant amount of operating expenses which the Plaintiff incurred in 2017 as reflected in 2017 Financial Statements. However, it bears noting that the operating expenses as reflected in the 2017 Financial Statements were past expenses that had already been incurred in 2017, and even then, these – as Mr Gronow observed – constituted only 64% of the Plaintiff’s revenue in that year. Moreover, while the Plaintiff did incur a significant amount of expenditure in 2017, it does not necessarily follow that the Plaintiff would have to incur the same expenses in the future in order to earn the billings in advance which were reflected on the balance sheet. It must be borne in mind that all the Plaintiff had to do to ensure that the billings in advance would be recognised as revenue over the relevant subscription period would be to provide the customers who had paid the subscription fee access to its existing platforms, and it is clear that the Plaintiff would not have to incur certain expenses, such as advertising fees which is aimed at attracting new customers, to do so. This being the case, there appears to be to be little basis to doubt the Plaintiff’s evidence on affidavit that it will have to incur minimal or negligible incremental cost in order to earn the billings in advance.

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The second largest category of liabilities on the Plaintiff’s balance sheet are sums owed to STG. As may be seen at [32] above, these sums formed 100% of the Plaintiff’s non-current liabilities and 18% of the Plaintiff’s current liabilities in the 2017 Financial Statements. These were interest-free and unsecured loans. In relation to the current liabilities which were repayable on demand, Mr Baker Samuel Cranage, director and co-founder of STG, gave evidence that STG would not recall those monies within the 12 months from 8 August 2018. The Plaintiff thus submitted that these amounts should not be taken into account in considering whether there is reason to believe that the Plaintiff will be unable to pay the Defendants’ costs. In response, the Defendants argued that Mr Cranage’s evidence did not amount to a waiver of the outstanding debt or a guarantee that STG would never call on the loan, and that the only permissible adjustment would be to re-classify these current liabilities as non-current liabilities.

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While it is true that the debts owed by the Plaintiff to STG cannot be written off by virtue of Mr Cranage’s evidence that STG would not recall the sums within 12 months from 8 August 2018, this revealed that the debt owed by the Plaintiff to STG was different in nature from a debt owed to an unrelated and independent creditor. The fact that Mr Cranage was able to give such evidence on behalf of STG and the Plaintiff demonstrated that STG was prepared to assist the Plaintiff financially. It was evident that the relationship between STG and the Plaintiff could not be characterised as one between a creditor and debtor dealing at arms’ length. Apart from Mr Cranage’s evidence, it is also significant that the loaned sums were interest-free. There was thus no cost involved in borrowing these sums from STG and the Plaintiff could arguably even be said to be placed in a better position by being able to borrow these sums without having to pay interest on the same. In a related vein, it is also relevant that the Plaintiff did not appear, as at 31 August 2017, to have obtained any financing from financial institutions. Indeed, the Plaintiff did not appear to have many creditors apart from STG and its ultimate holding company.

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Having regard to the above, the mere fact that the 2017 Financial Statements reflected the Plaintiff as being in a negative total asset and negative current asset position as at 31 August 2017 did not necessarily mean that the Plaintiff was in poor financial health in the sense of either being unable to pay its debts as they fell due or being unable to satisfy a costs order if one was made against it. The Plaintiff’s current assets amounted to $1,483,376 as at 31 August 2017, and although the balance sheet reflected a sum of $3,885,651 as current liabilities, 72% of these related to billings in advance and a further 18% related to the amount owed by the Plaintiff to STG. As the billings in advance were not in the nature of debts, and the Defendants accepted that the amounts owed to STG could be reclassified as non-current liabilities, the Plaintiff effectively had available an amount of current assets of approximately $1.09m in value to satisfy any further debts that would accrue in the 12 months after 31 August 2017 after taking into account the remaining current liabilities which the Plaintiff had to satisfy in that period. In fact, if a cost order been made against the Plaintiff on 31 August 2017, the Plaintiff would theoretically have more than $1m to satisfy that costs order. In the premises, despite the Plaintiff’s negative total asset and negative current asset position reflected in the 2017 Financial Statements, there is little basis to suspect the Plaintiff as being at risk of being the subject of a winding up petition as a result of an unsatisfied debt obligation.

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In my view, there is little reason to doubt Mr Barakat-Brown’s evidence that the Plaintiff’s investments were discretionary and that it could divert cash used for investing to fund other purposes, such as the payment of legal costs. In the first place, there was no evidence that the cash used for investing activities was encumbered in the sense that the funds had been so earmarked and could not be used for other purposes if the Plaintiff chose to do so. Further, Mr Gronow’s opinion that the Plaintiff must continue investing or risk falling behind its competitors was speculative. This is revealed in the tentative language used by Mr Gronow to express his opinion on this issue. In any event, even if it was indeed the case that such diversion of funds from investment activities would negatively impact the Plaintiff’s finances and future growth, it was not clear to me how this would have any relevance to the issue of whether there is reason to believe that the Plaintiff would be unable to pay the Defendants’ costs if ordered to do so. This is because such deterioration, if any, would only occur after the diversion of funds from such investment activities to the payment of legal costs had occurred, by which time the costs orders in favour of the Defendants would already have been satisfied. I thus accept the Plaintiff’s evidence that it would be able to divert money it would otherwise use for investment – which were, historically speaking, substantial sums – towards satisfying any costs orders made against it.

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As Mr Dass has observed in his expert report, there is no necessary relationship between a company’s profitability and liquidity. A profitable company may have low levels of liquidity, for example, if it faces delays in the collection of payment for sales. On the flip side, an unprofitable company may have high levels of liquidity if it has cash at its disposal which it can use to satisfy its debts. In an application under s 388(1), the more pertinent issue is not whether a company is profitable, but whether it is able to generate a positive cash flow from its operations and other activities such that it will be able to satisfy a costs order if required to do so.

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On this specific inquiry, the Plaintiff achieved a positive cash flow in 2017. This position is likely to be sustainable, given the signs that point towards an improvement in the state of the Plaintiff’s business from 2014 until 2017. The Plaintiff has also given evidence that it can divert monies that it uses for investment towards the payment of legal costs, if required. All these militate against any reason to believe that the Plaintiff will be unable to pay the Defendants’ costs if ordered to do so in the future.

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Further, the fact that a “material uncertainty” is identified in a company’s financial statements does not necessarily mean that it has been conclusively demonstrated that there is reason to believe that the company would be unable to pay the defendant’s costs. Regard must be had to the surrounding evidence and the nature of the “material uncertainty” disclosed. In IBB, a similar “emphasis of matter” paragraph had been included by the independent auditor in the company’s financial reports. In that case, the “material uncertainty” concerned the significant losses of €18.4m incurred during the financial year in question as well as accumulated losses of €73.5m since the commencement of the company’s trade. However, the balance sheet showed a positive asset position as at the end of the financial year as a result of the directors securing funding from investors in the form of share capital. The management’s assessment of the company’s ability to continue as a going concern referred to the litigation commenced by the company in the following note to the company’s financial statements:

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The Supreme Court of Ireland held that due to a reference in the above quoted note to a possible inability to discharge its liabilities, the note would have been sufficient for a court to conclude that there was reason to believe that the company would be unable to pay costs, if there was nothing else by way of weighty evidence in the case (at [6.2]). However, there was significant other evidence, including in particular, the substantial value of a broadband spectrum owned by the company. In affirming the trial judge’s decision to dismiss the application for security for costs, Clarke J also observed (at [5.14]):

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In my assessment, the “material uncertainty” identified in the 2017 Financial Statements, being the net loss incurred in 2017 and the Plaintiff’s negative total and current assets position, do not show that there is reason to believe that the Plaintiff will be unable to pay the Defendants’ costs at the conclusion of the action. This is due, amongst other things, to the character of the Plaintiff’s liabilities as reflected on its balance sheet and the evidence of the Plaintiff’s liquidity as seen from its cash flow statement in 2017. This is in line with Note 21, which explains that notwithstanding the apparently “negative conditions”, the Plaintiff could still operate as a going concern as (a) the Plaintiff had a positive operating cash flow; (b) the billings in advance are inherent to the nature of the Plaintiff’s business and the Plaintiff is confident it would be able to earn these sums; and (c) the amount owed to STG would not be recalled within the next 12 months from the date of the financial statements. Moreover, the fact that the Plaintiff continues to operate on a going concern basis despite a “material uncertainty” having been raised in its financial statements in 2016 and 2017 demonstrate that notwithstanding any “material uncertainty” that existed for the purpose of the preparation of the financial statements, such “negative conditions” are not, in actuality, real risks to the Plaintiff’s ability to run and operate is business.

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The final aspect to consider is the financing facilities available to the Plaintiff. As Prakash J noted in Kon Yin Tong at [37], a relevant factor to consider in a liquidity analysis is the “arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts”. In this connection, the Plaintiff has claimed that it has access to additional funds in the form of loan agreements between STG and its shareholders, which it can draw on to pay the Defendants’ costs. As explained above, these loan agreements were entered into between STG and each of its three shareholders pursuant to which STG’s shareholders agreed to provide loan facilities to STG to fund the legal costs incurred by the Plaintiff in connection with this action. These loan agreements were entered into on 11 January 2017 for a term of two years and could be extended by STG and its shareholders for an additional year (ie, until 11 January 2020), which Mr Barakat-Brown had indicated on affidavit that STG and its shareholders were prepared to do. Under the loan agreements, STG is entitled to borrow up to $420,000 and a sum of $100,033.95 was drawn down on between July and August 2017.

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The Defendants submit that the Plaintiff’s reliance on the loan agreements is misplaced. In the main, the Defendants submit that the very fact that such loan facilities were entered into and drawn down on is evidence that the Plaintiff does not have sufficient funding to meet its costs in the action. In making this submission, Mr Tng and Mr Chia referred to and relied heavily on the following passage in Frantonios, where Chan Seng Onn J observed (at [33]):

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Mr Tng also relied on Elbow Holdings where Choo Han Teck J relied on the above passage in Frantonios for the proposition that if the company in question “needs to rely on third parties to keep it in business” this “is an indication that it may not have the financial means” to pay the defendant’s costs if the defendant succeeds in its defence (at [9(c)]).

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In my view, the passage in Frantonios quoted at [69] above does not stand for the general proposition that if a company has available sources of financing from third parties, this would in and of itself satisfy the condition set out in s 388(1) of the Companies Act. Indeed, as Chan J recognised in Frantonios (at [34]), the financing and credit facilities available to a company are relevant considerations in an application under s 388(1). Thus, in order to ascertain if the financing from third parties reveal an inability on the company’s part to pay its debts or legal costs, the other evidence about the company’s financial health and the reasons for the provision of third-party funding must be considered in totality.

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Indeed, the company in Frantonios had been giving excuses and delaying payment, even for relatively small sums of money. In addition, there were numerous claims against the company with potential liability running up to more than $1m, and the company did not have any property in its name. It was a shell company that was “laden with debts and facing claims of significant amounts”. In such a situation, it was no wonder that the condition in s 388(1) was found to have been satisfied since the company, having ceased operations, would be unable to pay its current debts without third-party assistance, much less provide the requisite confidence that it would be able to satisfy any prospective costs orders made against it. Moreover, such third-party assistance came not from enforceable bank loans but appeared to be “non-legally binding offers or avenues of financial assistance … from interested parties” (Frantonios at [34]).

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The companies in Frantonios and Elbow Holdings were thus in a vastly different positions from that of the Plaintiff which operates as a going concern, has an increasing stream of revenue and has, as analysed above, a strong cash position and more than sufficient assets to satisfy its current debts. Critically, there is no evidence that the Plaintiff has been unable to or has failed to pay any debts that have fallen due, or even that it has previously delayed in making such payment. This is in stark contrast not only to the facts of Frantonios and Elbow Holdings, but also to the facts in other cases where security for costs has been ordered (see, for example, the cases cited at [16(d)] above).

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The Defendants submit that the fact that the loan was entered into and drawn down on is indicative of the Plaintiff’s inability to pay costs. There would otherwise be no other reason why STG’s shareholders would have incurred the opportunity cost in disbursing these loans, quantified at the minimum by the interest that could have been earned on those sums, especially since the loan agreements already impose binding obligations on them to advance the monies to STG in accordance with the terms of the agreements. Hence, the reason given by the Plaintiff to explain the drawdown on the loan is absurd and it is far more likely that the reason for the disbursement of the loans was because the Plaintiff needed these monies to make payment of its legal costs in the suit.

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In my view, a variety of different reasons exist for why a company may seek to obtain financial assistance from third parties, and why third parties may agree to extend loans to companies. In the present case, it is easy to see why the Plaintiff may accept the monies from STG’s shareholders under the loan agreements, since there is no cost or risk to the Plaintiff in receiving the benefit of the loan – which is interest-free – from STG’s shareholders. As Mr Shankar submitted, the entry into the loan agreement was a “fantastic deal” for the Plaintiff and showed “prudent financial management” on its part. As for STG’s shareholders, in the absence of other evidence that demonstrates that the Plaintiff is unable to continue as a going concern or pay its legal debts without relying on the support of STG’s shareholders, I see no reason to doubt the evidence that has been given on affidavit concerning their motivation for entering into the loan agreements and disbursing sums thereunder.

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Apart from the above, the Defendants submit that it is unsafe to rely on the loan agreements because the Plaintiff is not a party to the agreements, which may be terminated by STG or its shareholders upon the giving of 30 days’ notice. When the loan agreements are terminated, the loan would be repayable out of the Plaintiff’s funds, thus reducing the pool of funds available to the Plaintiff to make payment of the Defendants’ costs. Further, the agreements are due to expire on 10 January 2019 and there has been no indication from STG’s shareholders as to whether they are agreeable to an extension of the loan agreements.

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In my assessment, the points raised by the Defendants do not detract from the fact that the funds under the loan agreements are an additional financial resource which the Plaintiff can tap on. To the extent that the loan is disbursed, this would place more monies in the hands of the Plaintiff which it can use to satisfy any adverse costs order. As I have explained above, there is no detriment to the Plaintiff if it does so since no interest is payable on the borrowed sums. To the extent that the loan is disbursed and thereafter repaid, this would not reduce the pool of funds available to the Plaintiff to make payment of the Defendants’ costs, since, to begin with, the Plaintiff would not have the benefit of such sums without the loan agreements. While it remains to be seen if the loan agreements will be extended, the evidence given by Mr Barakat-Brown on affidavit is that STG and STG’s shareholders are prepared to do so. For the purposes of the present interlocutory application, I accept that this amounts to sufficient evidence of STG’s and its shareholders’ willingness to extend the loan facilities for a further year. There is thus at least a distinct possibility that the Plaintiff may be able to draw on an additional sum of $319,966.05 until 11 January 2020.

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Based on the above analysis, I am of the view that while the Plaintiff may not be a commercial powerhouse with multimillion dollars in assets, it is nevertheless a company that has at its disposal substantial financial resources to satisfy any adverse costs orders made against it. The onus lies on the Defendants to show that there is reason to believe that the Plaintiff would not be able to pay their costs if they are successful in their defence at the end of the trial, and in this connection, I find that the Defendants have not adduced credible evidence to demonstrate that, given these financial resources at the Plaintiff’s disposal, that there is reason to believe that it would be unable to do so.

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Weighing the various strands of the above analysis, I therefore find on the current evidence before me that the Defendants have not discharged their burden of showing that there is reason to believe that the Plaintiff will be unable to pay the Defendants’ costs if ordered to do so. Given my decision on the first stage, there is no need for me to proceed to consider either the Plaintiff’s argument that the 23rd Defendant had not made out the ingredients of s 388(1) as no expert report was filed on its behalf or the second stage of the application under s 388(1) of the Companies Act.

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In conclusion, the applications are dismissed. This is without prejudice to the filing of any future application for security for costs on the basis of any new and relevant further evidence that may go towards demonstrating that the Plaintiff would be unable to pay the Defendants’ cost if the Defendants are successful in their defence.

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I will hear the parties on costs.