Third Party Costs – Director of Insolvent Company
(Organic Village) The Court considered the circumstances Limited in which a director and shareholder of an insolvent company may be personally liable for some or all of that company’s costs liabilities incurred in unsuccessful litigation, pursuant to s.51 of the Senior Courts Act 1981. The particular question is whether it is enough to show that the director controlled and funded the company’s conduct of the litigation or whether, in order for a s.51 order to be made, it is also necessary to show either that he or she benefited (or sought to benefit) personally from that litigation, or acted in bad faith or was responsible for impropriety of some kind.
Held: The appeal failed. The absence of either personal benefit to Mr Aytacli, or bad faith/impropriety on his part, meant that the judge was right to conclude that it would be unjust to make a s.51 order.
‘For those who believe that most civil litigation does not end up being about the costs that were incurred in pursuing that same litigation in the first place, look away now.’
The court summarised the jurisdiction: ‘a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).
b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).
c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s.51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).
d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a s.51 order (North West Holdings, Dymocks, Goodwood).
e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a s.51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).
f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).
g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.2
Coulson LJ
[2021] EWCA Civ 1037
Bailii, Judiary
Senior Courts Act 1981 51
England and Wales
Citing:
Appeal from – Goknur Gida Maddeleri Enerji Imalat Ithalat Ihracat Ticaret Ve Sanati AS (Goknur) v Organic Village Ltd QBD 12-Aug-2019
. .
Cited – Aiden Shipping Co Ltd v Interbulk Ltd (The ‘Vimeira’) HL 1986
Wide Application of Costs Against Third Party
A claim had been made against charterers by the ship owners, and in turn by the charterers against their sub-charterers. Notice of motion were issued after arbitration awards were not accepted. When heard, costs awards were made, which were now . .
Cited – Taylor v Pace Developments CA 1991
Lloyd LJ said: ‘There is only one immutable rule in relation to costs, and that is that there are no immutable rules.’
Lloyd LJ baulked at the suggestion that every director who funded and controlled litigation on behalf of an insolvent company . .
Cited – Symphony Group Plc v Hodgson CA 4-May-1993
Nine rules were set out for allowing a costs order against someone who is not a party to the action. Such orders should be exceptional. The normal rule is that witnesses in either civil or criminal proceedings enjoy immunity from any form of civil . .
Cited – Metalloy Supplies Ltd (In Liquidation) v MA (UK) Ltd CA 7-Oct-1996
A costs order against liquidator of company in litigation is only rarely to be given. The court should ask who is the ‘real’ party to the litigation.
Millett LJ said: ‘[An order] may be made in a wide variety of circumstances where the third . .
Cited – Gardiner v FX Music Limited ChD 27-Mar-2000
Geoffrey Vos QC faced an application for an order for costs against a third party. He reminded himself: ‘The court must ask whether, in all the circumstances, it is just to exercise the power under s.51 to make the non-party liable for the costs (or . .
Cited – Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others (No. 2) PC 21-Jul-2004
PC (New Zealand) Costs were sought against a non-party, following an earlier determination by the Board.
Held: Jurisdiction to make such an order was not complete. Where the order sought was against a . .
Cited – Arklow Investments Ltd v Maclean 19-May-2000
(High Court of New Zealand) The court considered the potential personal responsibility of a directors for costs incurred by the company in litigation: ‘Where a person is a major shareholder and dominant director in a company which brings . .
Cited – Secretary of State for Trade and Industry v Blackhouse CA 26-Jan-2001
In Re North West Holdings PLC and Another
A non-party costs order was made against the director, because the defence to the petitions was not conducted in the bona fide belief that it was in the interests of the companies. Instead the director, . .
Cited – Goodwood Recoveries Ltd v Breen CA 19-Apr-2005
A claim against the defendant for money owed to someone else had been bought by the claimant of which Slater, a solicitor, was a director and shareholder. The claim was pursued in the name of the claimant by Slater as its solicitor and principal . .
Cited – Systemcare (UK) Ltd v Services Design Technology Ltd and Another CA 11-May-2011
The claimant having obtained judgment in an action against the defendant company when it was solvent, and the case having become disproportionate through the dishonest actions of the owner of the defendant, the defendant company then being put into . .
Cited – Mars UK Ltd v Teknowledge Ltd PatC 11-Jun-1999
The public policy defence of a right to repair by creation of ‘spare parts’ to a copyright infringement claim depended upon the right being so clear that no right thinking person would quarrel with it. An equitable duty of confidence falls on a . .
Cited – Housemaker Services Ltd and Another v Cole and Another ChD 26-Apr-2017
Appeal from limitation direction, and third party costs order: ‘in order to make it just to order a director to pay the costs of unsuccessful company litigation, it is necessary to show something more. This might be, for example, that the claim is . .
Cited – Threlfall v ECD Insight Ltd and Another CA 29-Oct-2013
. .
Lists of cited by and citing cases may be incomplete.
Costs, Company
Updated: 09 November 2021; Ref: scu.665593