Obtaining Security For Costs: Piercing That Corporate Veil

Security for costs can be viewed in two ways. Either it provides some degree of costs protection to those faced by claims from apparently impecunious companies or it is a device wielded against smaller companies designed to stifle genuine claims. Judge Coulson in the case of William Newman t/a Newman Associates v. Wenden Properties Limited & Anr [2007] EWHC 336 (TCC) was recently faced with this problem when dealing with an application for security for costs against a company with no assets but apparently linked to individuals with sufficient wealth to provide the security sought.

The starting point for application for security for costs can be found in section 726(1) of the Companies Act 1985 which provides that:

"Where, in England and Wales, a limited company is Plaintiff [Claimant] in an action, or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the Defendant's costs if successful in his defence, will require sufficient security to be given for those costs and may stay all proceedings until the security is given."

The defendant company in this case was a special purpose vehicle set up by two individuals, Dr. Iddenten and his wife, for the purpose of purchasing and refurbishing properties to be let out. The claimant brought a claim against the defendant for £23,819.75 in respect of unpaid fees for professional services rendered in connection with the refurbishment of a property in Isleworth, owned not by the defendant but by Dr. Iddenten and his wife. They also owned three other properties.

The defendant brought a counterclaim for professional negligence against the claimant in the sum of approximately £690,000 alleging that the claimant had grossly undervalued the cost of the refurbishment works at the property so that if the defendant had been properly informed of the true cost of the refurbishment works at the time, it would not have proceeded with these works and not borrowed money to fund them. The defendant also alleged that even if it were found that the refurbishment project would have gone ahead, it suffered losses because numerous items of work were carried out as variations, in circumstances where they should have been allowed for at the outset, and/or at a lower cost.

The claimant applied for security cost in respect of the defendant's counterclaim, pursuant to section 726(1) of the Companies...