COST BITES 46: NON PARTY COSTS ORDER MADE AGAINST DIRECTOR OF INSOLVENT COMPANY

In  Asprey Capital Ltd v Rediresi Ltd & Anor (Re Non-Party Costs Order) [2023] EWHC 28 (Comm) Patricia Robertson KC (sitting as a Deputy High Court Judge) made a non-party costs order against a director of the defendant company.

THE CASE

The claimant had obtained an order for damages for £2,403,766  against a limited company,  “Asprey” after a nine day trial.  The claimant also obtained an order for costs. Neither the damages or costs were paid and Asprey was wound up.

The claimant then made an application for a non party costs order against one of Asprey’s directors.

THE POWER TO MAKE A NON PARTY COSTS ORDER

The judge set out in detail the factors relating to making a non party costs order.

1. 1. The power to make an NPCO arises under s.51 of the Senior Courts Act 1981, which provides that the costs of all proceedings in the High Court shall be in the discretion of the Court and that it “shall have full power to determine by whom and to what extent the costs are to be paid”.

1. 1. Fundamentally, the question is whether in all the circumstances it would be just to make an NPCO against Mr Gupta. The decided cases have provided helpful guidance as to factors to consider in making that assessment and, also, as to the approach to be taken to this summary procedure.

1. 1. In particular, a number of cases have dealt with situations where, as here, the issue is whether to make an NPCO against the director of an insolvent company in relation to litigation pursued or defended by the company. In such cases, the principle of limited liability would be undermined if a director were to be made personally liable for costs in a situation where, albeit he is controlling and/or funding the litigation, he is nevertheless properly to be regarded as discharging his duty to act in the interests of the company (or, where the company is insolvent, the interests of its creditors) by causing the company to pursue or defend the litigation in question.

1. 1. The relevant guidance has been usefully summarised by the Court of Appeal, after a comprehensive survey of the relevant cases, in Goknur v Aytacli [2021] EWCA Civ 1037 (Lord Justice Coulson, with whom the rest of the Court agreed, at [40]). I have substituted into the citation below the full references for the cases there referred to:

“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 v FX Music Limited (2000) WL 33116500 (27 March 2000, unreported), Dymocks Franchise Systems (NSW) Pty Limited v Todd and others [2004] UKPC 39, [2004] WLR 2807, Threlfall v ECD Insight Limited and Anr. [2015] EWCA Civ 144; [2014] 2 Costs LO 129).

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 Recoveries v Breen [2005] EWCA Civ 414, 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 Developments Ltd [1991] BCLC 406), 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 Plc (In Liquidation (Costs) [2001] EWCA CIV 67). 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 Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613). 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 (UK) Limited v Services Design Technology [2011] EWCA Civ 546).

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 Group plc v Hodgson [1994] QB 179, 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.”

1. 1. Useful as this guidance is, this is, in the end, a highly fact-specific jurisdiction. As Lord Justice Moses has pithily observed, “there is now an abundance of authority on the absence of any need for abundant authority on the principles which should guide a judge as to whether to make a third party order for costs.” (Alan Phillips Associates Ltd v Terence Edward Dowling t/a The Joseph Dowling Partnership & Ors [2007] EWCA Civ 64, at [31].)

1. 1. “Exceptional” simply means “outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense” Dymocks at [25]. In the particular context where the order is sought to be made against the director or shareholder of an insolvent company, there must be some factor that makes it just to make the order, notwithstanding the principle of limited liability. The decided cases offer examples but are not exhaustive of the factors that might be relevant, or the ways in which these might combine in a given case to tip the balance. As the Court of Appeal stated in Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23 at [62]: “…the only immutable principle is that the discretion must be exercised justly.”

1. 1. Funding, by itself, may be consistent with the director pursuing the proceedings for the benefit of the company. Equally, however, the absence of funding will not preclude the making of an order if the proceedings were being run for the personal benefit of the director, rather than in the interests of the company. Impropriety in the conduct of the proceedings, where serious, may justify an order even where the element of personal benefit is lacking. However, it does not follow that some lesser degree of impropriety is irrelevant in a case where there are also other factors in favour of making an order. Ultimately, it is not a matter of operating a “checklist” but an exercise of a broad discretion. Something that would not be sufficient by itself may be the feather that tips the scale when it is viewed cumulatively with other features of the case.

1. 1. Whilst this is a “summary jurisdiction”, it does not follow that it will only be exercised (a) where the Court can deal with the matter shortly and (b) without determining any disputed issues of fact.

1. 1. Whereas the trial judge may be able to deal with a s51 application very swiftly, that may not be as true where (as here) the application has to be dealt with by a judge other than the trial judge. It does not follow, however, that the application must proceed as if it were a mini-trial. The Court can in principle limit the length of the hearing, limit (or indeed not permit) cross examination, limit the parties to the “big points” and, where appropriate, decide the matter on the basis of witness statements alone, so as “to ensure that the application is dealt with as speedily and inexpensively as is consistent with fairness to both sides”: Robertson Research International Limited v ABG Exploration BV and Others at [16] and [40] (13 October 1999, Unreported, Mr Justice Laddie).

1. 1. When deciding whether to make an order in circumstances where some of the relevant facts are disputed, the Court does not approach the matter as if it were an application for summary judgment: Greco Air Inc v Tokoph [2009] EWHC 115 (QB) [45] per Burton J. Rather, the Court must balance considerations of proportionality and justice, bearing in mind that this is a form of satellite litigation which should not be allowed to expand beyond reasonable bounds.

1. 1. In most cases, justice is adequately served by the Court doing the best it can to resolve disputed matters on the documents, which it does on a balance of probability (Centrehigh Ltd v Amen [2013] EWHC 625 (Ch) at [41]-[42]; Greco Air at [45]). Whilst the Court has power to allow cross examination on disputed issues relating to a s51 application where it considers this to be both proportionate and fair, this will be exceptional (Greco Air at [47]). There are also cases where the Court has declined to make an NPCO on the basis that it could not fairly resolve the disputed issues on which the exercise of discretion would turn without more of an enquiry than it was feasible to undertake, in the given case, within the bounds of a summary jurisdiction (see, for example, Deepchand v Sooben [2020] EWCA Civ 1409 at [35] and Barndeal Ltd & Others v The London Borough of Richmond-Upon-Thames [2005] EWHC 1377 (QB) at [18]-[22], cited in Greco Air at [32]).

1. The absence of a warning that a party intended to seek an NPCO, given whilst the litigation was still in progress, is capable of being a relevant factor pointing against making an order, if an earlier warning might have altered the way the non-party conducted themselves in ways relevant to the exercise of discretion. If, however, the non-party is, objectively, “the real party” to the litigation, “the absence of a warning may be of little consequence” Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23 at [32] and [37].

THE JUDGE’S CONCLUSION: A NON-PARTY COSTS ORDER SHOULD BE MADE

The judge carried out a detailed analysis of the litigation and the role of the director in the conduct of the case. She concluded that it was appropriate to make a non-party costs order.

i) Taking all of this in the round, it is clear that Mr Gupta failed in important respects to distinguish the interests of RR from his personal interests and instead equated the two. This manifested itself in various aspects of his management of RR’s business affairs which I have detailed above, most notably in respect of the HSAL Phase 1 payments. I do not need to go into whether there may also have been other such occasions, as Asprey contended. The matters I have addressed in this judgment are sufficient for me to conclude that Mr Gupta ran RR without maintaining at all times a proper regard for its separate corporate identity and interests. It seems likely to me that he did so because he regarded it as being his investment vehicle, to do with as he thought fit.

ii) In seeking to paint a picture of RR as a company whose successful defence of the claim would be of significant benefit to others than himself, whose interests he should be taken to have been protecting in acting as he did, he has placed reliance on a debt supposedly owed to ASB which, I find, is a fiction. Whilst HMRC would (as it happens) potentially have benefited had RR won the action, Mr Gupta could not claim to have had that as an objective at the time, given the chronology. The reality is that Mr Gupta would have been far and away the greatest beneficiary of a successful defence of the claim.

iii) These would be sufficient reasons for holding Mr Gupta to be the real party behind RR’s defence of the claim. However, they are further reinforced by consideration of his conduct. The failure on Mr Gupta’s part to distinguish between his own interests and those of RR also manifested itself in the fact that (although defending Asprey’s claim was in itself a reasonable thing to do in RR’s interests), it is clear from the Judgments that the manner in which Mr Gupta directed that defence was in significant respects unreasonable and, it seems, driven to a significant degree by personal animus towards Mr Downing. That again was not in the interests of RR, when viewed at all objectively.

iv) This is therefore not to be regarded as a case where a director is realistically to be regarded as merely discharging his duty to the company and protecting the interests of its creditors. Rather, Mr Gupta was defending his own interests and it would be unjust to allow him now to hide behind the separate corporate identify of RR, when he has demonstrated a willingness to ignore that separate identity on occasions when it suited him to do so.

v) The fact that the Judge found aspects of his evidence to have been dishonest also weighs in the scale, when considering the justice of making the order sought.

Absence of advance warning not a reason to decline to make an order

No advance warning was given during the course of the litigation that Asprey was contemplating such an application. By the time the case concluded, Mr Gupta was alive to the risk that anyone funding RR’s defence might be exposed to the liability for the Claimant’s costs, since he refers to that in his evidence in support of the application for a stay of the judgment, but he says he was not aware of this at any earlier stage. Be that as it may, I do not in any event see any basis for concluding that earlier notice of a possible s.51 application would have altered the evidence he gave, which was found to be dishonest, or his instructions in respect of settlement, or the basis on which I have found him to be “the real party”. That being so, I do not consider the absence of an earlier warning to be a reason to decline to make the order I otherwise consider to be appropriate.
Conclusions

I am satisfied that in all the circumstances it is just that Mr Gupta should be made personally liable to pay the costs RR was ordered to pay pursuant to the Order of Sir Michael Burton GBE dated 25 October 2021 and I shall therefore make an NPCO requiring this. I invite the parties to seek to agree the terms of the order, including consequential matters.