COSTS AGAINST NON-PARTIES: COSTS ORDER NOT MADE AGAINST DIRECTOR

April 30, 2017 · by · in Applications, Civil Procedure, Costs

When is it appropriate to make an order against a director personally? This issue was considered  in Housemaker Services Ltd -v- Cole [2017] EWHC 924 (Ch)  by HHJ Paul Mattews (sitting as a High Court Judge).  The judge declined to make an order. The judgment reviews the case law on the subject. It also shows the importance of considering making an application for security for costs and issuing an early warning about the making of a non-party costs order.

THE CASE

The claimant had sought an order that discounting the limitation period for the 608 days that it had been struck off the register. That application was unsuccessful. The judge held that the claimant company had not succeeded in establishing that the dissolution was the cause of the failure to issue proceedings in time.  The defendants sought an order that the sole director of the company be joined as a the 2nd claimant in order that he pay the costs that the claimant company was ordered to pay the defendants.

THE JUDGMENT

“The parties’ submissions
    1. On behalf of the defendants, it was submitted that the 1st claimant was merely a legal construct for the 2nd claimant’s business, and there was no distinction in practice between the two. The 2nd claimant’s actions caused the company to be dissolved in the 1st place. The 2nd claimant would benefit from any successful claim of the company. The 2nd claimant gave instructions to pursue the proceedings and appears to have funded them. The claim failed. The 1st claimant had no assets and it was highly unlikely that it would be able to satisfy an order for costs. Finally, the 2nd claimant had already shown himself willing to avoid liabilities owed by the 1st claimant.
    2. On behalf of the 2nd claimant, it was submitted that the nonparty costs order would always be exceptional, and even more so where the nonparty could have been joined to the original proceedings. Here it would have been open to the defendants to join the 2nd claimant to those original proceedings.
    3. It was further submitted that the nonparty should be warned at the earliest opportunity of the possibility that the successful party might seek an order for costs against him. Yet the 1st warning of the application to add the 2nd claimant and apply for a nonparty costs order was made only the business day before the hearing.
    4. There was no suggestion that the proceedings were brought in bad faith, for an ulterior motive or improperly. The 2nd claimant caused the proceedings to be brought because he considered that a debt was owed to the 1st claimant. They were brought in good faith and for the benefit of the 1st claimant.
The law
    1. In the course of the submissions, I was referred to a number of decided cases, including Aiden Shipping Co v Interbulk [1986] AC 965, HL, Symphony Group v Hodgson [1994] QB 179, CA, Gardiner v FX Music Ltd, unreported, 27 March 2000, Ch D, Barndeal v Richmond LBC [2005] EWHC 1377 (QB), and Deutsche Bank v Sebastian Holdings Inc [2016] 4 WLR 17, CA. I have read them all. These decisions (and those cited within them) establish a number of relevant propositions, as follows.
Generally
    1. The court has jurisdiction to make an order that a nonparty pay the costs of litigation under section 51 of the Senior Courts Act 1981, and CPR rule 46.2. The court’s jurisdiction is to be exercised on the basis of a judicial discretion. This means that it must be exercised justly. It is therefore very fact specific. But the procedure is summary in nature.
    2. A decision to make a nonparty costs order is exceptional, but this only means that it is outside the ordinary run of cases. In a case where a nonparty funds and controls or benefits from proceedings, it is ordinarily just to make him pay the costs, if his side is unsuccessful, because the nonparty was gaining access to justice for himself, and thus can be regarded as the real party to the litigation.
Company directors
    1. However, the director of a limited company is in a special position. It is not an abuse of the process for a limited company with no assets to bring a claim in good faith. It is always open to a defendant to such a claim to apply for security for costs. The mere fact that a director who controls the company’s litigation also funds the claim is not enough in the ordinary case to justify a nonparty costs order against him if the company’s case fails.
    2. A company is indeed owned by its members. But this does not mean that the shareholder is the “real” party to the claim. In law, the assets of the company (including any claim) belong to the company, and not to the members. Where the proceedings are brought in good faith and for the benefit of the company (rather than for some collateral purpose), the company is indeed the real claimant. If it were otherwise, the principle of the separate liability of the company from its members would be eroded.
    3. Moreover, it is not an unusual thing, let alone wrong, that a director who is a shareholder of a company and who funds the company’s claim will ultimately benefit from it if it is successful. It is simply a consequence of the policies adopted by our company law, allowing businessmen to take some risks in seeking profit without incurring unlimited liability. Subject to certain exceptions, such as the rules on wrongful trading, a director and shareholder can simply walk away from an insolvent company.
    4. A person choosing to deal voluntarily with (or to sue) a limited liability company does so against that legal background. Any potential unfairness caused to a party who is (involuntarily) sued by such a company is remedied by the security for costs jurisdiction.
    5. Accordingly, 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 not made in good faith, or for the benefit of the company, or it might be that the claim has been improperly conducted by the director. So, for example, in both Gardiner v FX Music Ltd and Deutsche Bank v Sebastian Holdings Inc, a director of the unsuccessful corporate party was ordered to pay the costs to the successful party. But in each case the director had given false evidence and fabricated documents.
Discussion
    1. The 2nd claimant argued that it would have been open to the defendants to join the 2nd claimant to the original proceedings. I do not follow this. The underlying claim for the disputed invoices has never been issued. The claim which I heard, and dismissed, was the Part 8 claim for a limitation direction. That concerned only the 1st claimant as a company, as it was the company alone that had been dissolved. I do not see how the 2nd claimant could properly have been a party to that.
    2. In the present case, the defendants appear not to have applied for security for costs. Assuming that the application were successful, either security would have been provided, or the claim would have been stopped. The failure to apply does not preclude a successful application under section 51 of the 1981 Act, but it is a factor to take into account, and I have done so. In the present case it is not of much weight.
    3. The defendants also gave notice of their intended application to the claimants only on Friday, 31 March 2017, when the hearing of the claim was due to begin on the following business day, Monday, 3 April 2017. The lateness of such notice being given is also a factor to take into account. But here it is not very important, as the purpose of giving notice is to avoid injustice to a nonparty who knows nothing about the litigation and cannot defend his interests accordingly.
    4. In the present case, however, the 2nd claimant knew all about the litigation from the beginning and was involved at every stage of it, since he was the sole director and shareholder of the 1st claimant. He instructed the lawyers on behalf of the company and was in a position to take advice on his personal position at any time. I do not know whether he did so, but that is a matter for him.
    5. In my original judgment I found that the 1st claimant had failed to comply with the relevant rules of company law, thus rendering the company liable to the sanction of dissolution, and then this failure was compounded by a failure on the part of the 2nd claimant to remedy the breach. He had failed to ensure that, once he had moved out of the marital home, he would continue to be informed of communications to the company from Companies House. That was his responsibility. But it was negligent on his part, rather than reckless or fraudulent.
    6. Similarly, there was a failure to disclose the 1st claimant’s assets and liabilities properly in the filed accounts. This may have been wrong, but it did not involve impropriety in conducting the proceedings.
Conclusion
  1. Overall, I have concluded that this is not a case where the behaviour of the 2nd claimant in controlling, funding and ultimately hoping to benefit from the claim being made by 1st claimant goes beyond the ordinary case of the director and shareholder of a company pursuing a legal claim. It certainly does not go as far as the case of a claim not being brought in good faith, or for a collateral purpose, or being improperly conducted. Accordingly, I dismiss the application for an order that the 2nd claimant pay the costs ordered to be paid by the 1st claimant to the defendants.”

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