England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBENI 95/1607/E

Royal Courts of Justice

Strand

London WC2

Monday, 7th October 1996

B e f o r e:

LORD JUSTICE BUTLER-SLOSS

LORD JUSTICE MILLETT

LORD JUSTICE WALLER

- - - - - -

METALLOY SUPPLIES LIMITED (IN LIQUIDATION)

Plaintiff/Appellant

- v -

M A (UK) LIMITED

Defendant/Respondent

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR. T. MOWSCHENSON QC & MR. M. ROLLASON (Instructed by Messrs Hartley Linfoot and Whitlam, Sheffield, S1 2EJ) appeared on behalf of the Appellant

MR. P. IRVIN (Instructed by Messrs Richmonds, Doncaster, DN4 5JH) appeared on behalf of the Respondent

J U D G M E N T

(As approved by the Court )

©Crown Copyright

LORD JUSTICE BUTLER-SLOSS: I will ask Waller LJ to give the first judgment.

LORD JUSTICE WALLER: This is an appeal from His Honour Judge Hutton sitting as a Deputy High Court Judge, who ordered the liquidator of the Plaintiff company to pay certain of the costs of an action personally, allowing in so doing an appeal from an order of District Judge Peters in so far as he had refused to so order.

The Plaintiffs have at all material times been a company in liquidation, the liquidator having been appointed on 11th January 1991. A writ was issued by the Plaintiffs on 2nd March 1993 claiming the remainder of the price of certain goods. Originally judgment was entered in default. An application to set that judgment aside was initially refused by District Judge Lambert on 28th October 1993; but on 14 February 1994 Gage J. allowed an appeal from that order, giving the Defendants leave to Defend and Counterclaim on the basis of alleged deficiencies in the goods on condition that they paid into court £10,000. The Defendants served a Defence and Counterclaim on 30th March 1994 and at the same time indicated in correspondence that they would seek an order for security for costs. A summons seeking security was issued on 14th May 1994 supported by an affidavit which asserted inter alia

1. that costs of £9,000 had already been incurred by the Defendants in setting aside the default judgment;

2. that the total costs including the trial of the Defendant were estimated at £24,000;

3. that it was believed that the liquidator had only £12,500 available.

The affidavit sought an order for security and there was no suggestion in it that a costs order would be sought against the liquidator personally or that he was acting in any way improperly, irresponsibly or unreasonably.

An affidavit was sworn by Jeremy Nuttall, a solicitor acting for the Plaintiff in response dated 7th July 1994. It resisted any order for security. It urged points which went to the merits of the Plaintiff's claim in the action; it suggested that the estimates for costs put forward by the Defendants were excessive; and it exhibited the Plaintiff's latest statement of affairs and stated that the liquidator estimated that, after deduction of relevant fees, funds of approximately £5,000 were currently available. It further asserted that on that basis the action would be stifled by any substantial security order.

There was a further interlocutory skirmish in that on 6th July 1994 the security for costs summons was adjourned by District Judge Smythe who made a costs order against the Defendants which resulted in an appeal on which the Defendants were successful. This resulted in further costs being expended and it was in that context that the Defendants' solicitor wrote a letter of 15th September 1994 to the solicitors acting for the Plaintiff saying (and I summarise).

1. that in the light of the fact that further costs had been incurred since the liquidator said he had £5,000, that sum would be likely to have been exhausted;

2. that such funds as the liquidator had should not be dissipated having regard to the costs orders made in the Defendants' favour;

3. that an order for security was absolutely necessary;

4. that if by chance an order for security was not made, it would be their intention to apply for a costs order against your firm (my emphasis) for the future cost of preparation of the action.

That letter was exhibited to a further affidavit of Rose Egarr supporting the application for security for costs, which came on before District Judge Peters on 21st September 1994. The District Judge in fact dismissed the application for security for costs. According to the note of his judgment he took the view that the letter of 15th September 1994 put the matter too strongly in favour of the Defendants; he took the view that the original transaction between the Plaintiff company and the Defendants was a strange transaction and needed investigation, and that an order for security would stifle the Plaintiff's claim.

His order was however reversed on Appeal when on 24th October 1994 His Honour Judge Harrison Hall ordered security of £10,000 to be paid into court within 28 days, and the action to be stayed meanwhile.

The Plaintiff failed to put up security within 28 days, and on 21st February 1995 the Defendants issued a summons applying to dismiss the action with costs to be paid by the liquidator personally. That summons was supported by a further affidavit from Rose Egarr in which she referred to the letter of 15th September 1994 and to the concerns raised therein in relation to costs, and saying that particularly as the liquidator had via his solicitors had notice of the Defendants' concerns but clearly must have instructed them to proceed, that the liquidator should be personally liable for the cost of the action (without, it should be noticed, any limitation of time).

An affidavit from the liquidator, dated 17th March 1995, stated that in the liquidator's experience the application to render him personally liable was without precedent; he confirmed that the action had been funded by the Plaintiff company's assets; and that the action had not been supported by funds from his firms nor by funds from the creditors secured or unsecured.

The matter came once again before District Judge Peters on 17th March 1995. It was accepted that the action should be dismissed, and the only matter argued was whether a costs order should be made against the liquidator personally. It is clear that the relevant authorities were cited to the District Judge, and he is recorded as recognising that he had jurisdiction to make the order sought, but was of the view, following the guidelines in Symphony Group PLC v Hodgson [1994] QB 179, that he would be breaking new ground if he were to make an order against the liquidator personally, and he said indeed that this approach would be highly exceptional.

The matter then came on appeal to His Honour Judge Hutton sitting as a Deputy High Court Judge and was heard on 19th May 1995. There was clearly extensive argument before him and again full citation of authority. He concluded

1. that the District Judge had formed the view that he would be breaking new ground to order a liquidator to pay costs personally, even if it were otherwise right to make him do so, and that thus the District Judge had exercised his discretion on a wrong basis; 2. that there was jurisdiction to order a liquidator to pay the costs personally;

3. that the liquidator was right to initiate the action but that there came a stage when he should have changed his mind; that stage was identified by the learned Judge in the following words:

"There came a time, as was pointed out to me by Mr. Irvin for the appellant, when it was quite clear that the defendant had an arguable defence to the action brought against him and was counterclaiming and was pursuing vigorously his defence and counterclaim. At that stage it appears that the company in liquidation had insufficient funds to cover the costs of the defendant if the defendant should win and the plaintiff lose.

In those circumstances, I find that it was unreasonable for the liquidator to continue, as he did, to manage this action before subsequently discontinuing and that, for a period he should be ordered to pay the defendants' costs when judgment was finally given in their favour from the time when it became unreasonable for the liquidator to continue. Having heard submissions from Mr. Irvin I place that as 30th March 1994. In the exercise of my discretion, therefore, I order that the liquidator, personally, pay the defendants' costs of the action from and after that date. "

It should be noted:

1. that the first occasion when any notice was given to the liquidator that it would be contended that he might be liable for the costs personally was in February 1995;

2. that the first occasion when any suggestion was made that someone other than the Plaintiff company might be liable to pay costs was in September 1994, and on that occasion the suggestion was that the solicitors would be liable, but for the future costs if the application for security failed .

3. that the only grounds relied on in the affidavit in support of the application for rendering the liquidator personally liable were that the liquidator must have been aware of the concerns expressed by the Defendants' solicitors as to costs and still given instructions to proceed. No impropriety was alleged, and indeed the assertion is hardly an assertion of acting irresponsibly, or unreasonably, or outside the norm for the conduct of litigation by a liquidator on behalf of an insolvent company who would always be aware of the concerns that the opposing party would have as to the difficulty there may be in recovering costs if the opposing party were to be successful in the action.

As Lloyd LJ said in Taylor v Pace Developments [1991] B.C.C. 406 at 408:

"There is only one immutable rule in relation to costs that there are no immutable rules."

But that said, it is clear from the authorities:

1. an order for the payment of costs by a non-party will always be exceptional and the Judge should treat an application with considerable caution (see Balcombe LJ in Symphony v Hodgson [1994] QB 179 at 192H).

2. different considerations apply depending on whether the non-party can be said to be funding the action, or likely to obtain some financial benefit from the result of the action, or whether the non-party simply has some management of the action, but even in the maintaining or financial benefit cases as Lindsley J. said in Eastglen v Grafton (unreported transcript 12 March 1996)

"Taylor v Pace ... illustrates the propositions that the bona fides of the proceedings of the non-party's support for them are an important feature of the s. 51 discretion; that support of unsuccessful proceedings and a likelihood of personal gain by the supporter, whilst factors to be borne in mind were not themselves necessarily lead to liability in the supporter, but that only in exceptional cases will a non-party be liable."

3. the position seems clearer still where the non-party's role is simply having some management of the action. As Balcombe LJ put it in Symphony (supra) at 191 at G such costs are ordered against such a person where he or she "improperly" prosecutes or defends proceedings; and he refers to cases relating to directors of insolvent companies, and points out that in fact in none of those cases was an order actually made.

We were not shown any case where a liquidator had prior to the order of the Judge in this case been ordered as a non-party to pay costs personally as distinct from the case where the liquidator brings the proceedings in his own name as for example Re Wilson Lovett & Sons [1977] 1 All E. R. 274. We were referred to an Australian case: Knight v F.P. Special Assets [1992] 174 C.L.R. 178 where the High Court of Australia was concerned with whether the Supreme Court of Queensland had jurisdiction to order a non-party, in that case receivers, to pay the costs. They held by a majority that the jurisdiction was there. Three of the Judges, Mason C.J., Deane J. and Gaudron J., also approved a principle to the following effect, that in relation to ordering costs where the party to the litigation is a man of straw, against a non-party who has played an active role in the management of the litigation, and where the non-party or someone for whom he acts has an interest "if the interests of justice so requires" a costs order should be made (see pages 193 and 205). But Dawson J., at 204, suggested that the question, whether it was right to make the order in the particular case, had not in fact been argued, but commented that he would have thought that obtaining an order for security for costs would ordinarily be the appropriate remedy. McHugh J., who was against there being jurisdiction at all clearly also thought that the appropriate remedy was to obtain an order for security for costs (see page 217).

I would myself prefer the approach that ordinarily in the case where a Plaintiff is an insolvent company an order for security for costs should be the appropriate remedy.

However there may, in any event, be a distinction between the position of receivers and the position of a liquidator. There is a further passage in the judgment of Lindsley J. in Eastglen (supra) at page 15 which refers to the public interest in liquidators being able to perform their duties. His statement is made in the context of not discouraging creditors from assisting the liquidator, it being a creditor who was the non-party being attacked in that case, but the public interest in relation to liquidators also demands that they should not be exposed to personal liability for costs simply where they act for insolvent companies. Certainly, as it seems to me, the primary remedy of a Defendant facing a company in liquidation should be security for costs, and I can perhaps summarise my view on the authorities so far as the proper approach to the question whether a liquidator should be made personally liable for costs in the following way:

I think (as the Judge decided and as I read the notes the District Judge also decided) that there is jurisdiction to order a liquidator as a non-party to pay the costs personally; but it will only be in exceptional cases that the jurisdiction will be exercised, and impropriety will be a necessary ingredient, particularly having regard to the fact that the normal remedy of obtaining an order for security for costs is available; the caution necessary in all cases where an attempt is being made to render a non-party liable for costs will be the greater in the case of a liquidator having regard to the public policy considerations.

The learned Judge, as I see it, went wrong in the following respects. First, there is no indication that he considered that this was an exceptional case or that he had in mind the need for caution, particularly considering the public policy considerations. Second, he applied a test of "unreasonable" and did not consider whether there had been any impropriety in the conduct of the liquidator. Third, he considered that it was unreasonable to continue litigation when there were insufficient funds to cover the costs of the Defendants if they should win. But the remedy of security for costs, if that can be justified, is available to cover that precise situation. If by chance an application for security fails, then a fortiori, it cannot be unreasonable for a liquidator to continue with an action in which he, bona fide, believes there is some prospect of recovery, whether by trial or settlement prior to trial. Fourthly, the Judge did not appear to take any account of the lack of warning that the liquidator had in relation to the seeking of a costs order against him personally.

Accordingly it seems to me that the Judge exercised his discretion on a wrong basis, and this court is thus entitled to exercise its discretion afresh.

The position of the liquidator in this case appears to me to be very similar to that encountered by liquidators in many cases. The company has what appears to be a debt due for goods sold and delivered. There are not sufficient funds to enable the company to pay the costs of the opposing party if a trial had to be fought and it was lost; indeed there may not be funds to fight a trial at all, if that is necessary. But there are sufficient funds to launch the action, and to put in pleadings, and if no application for security were made or if such an application could be successfully resisted the funds may be sufficient to be able to keep the action going so as to be able to recover some part of the debt by settlement prior to a full trial. Mr. Irvin argued that once the liquidator realised that he had not sufficient funds to pay the Plaintiff's own costs of taking the matter to trial, it was unreasonable or irresponsible of the liquidator to continue with the action. That is not in fact in my view an allegation of impropriety at all in the sense required to lay the foundation for an application against a liquidator to pay costs personally as a non-party; but in any event I do not, for my part, think that it was unreasonable because the liquidator must have hoped in the context of this action where leave to defend had only been given on the basis of a substantial payment in, that if he could keep the action going some recovery might be made. Mr. Irvin suggested that this would be encouraging some sort of blackmail, but it seems to me that that starts from the assumption that the Defendants are really bound to win on the merits and should not be forced to settle because of the impecuniosity of the Plaintiff company. In fact the pressure or blackmail is two-sided in a case of this kind. The Defendants, it may be said by the Plaintiff company, are able by counterclaiming and fighting interlocutory battles to exhaust the resources of the liquidator so that ultimately the Plaintiff company must discontinue. No court can tell where the merits of these respective arguments lie prior to a trial, and to brand one or other as unreasonable or as acting improperly could only be justified if the action or defence were not being conducted bona fide in the sense of being reasonably arguable. One distinction should, in any event, be borne in mind in considering the position of the two sides and who has leverage over whom. Where a Plaintiff company is insolvent the Defendant does have the remedy to apply for security for costs. It is not, however, unreasonable for that Plaintiff to resist that order and leave it to the court to decide whether it is appropriate for the court to make the order in the particular case.

What happened in this case was that the action was commenced and no-one attacks the bona fides of that commencement. No-one has suggested that the liquidator should have appreciated that the action had become a hopeless one on the merits. All that happened was that having successfully resisted an order for security for costs, on appeal the Plaintiff company was ordered to provide security. That in fact forced the liquidator to discontinue. There was nothing exceptional in his conduct; there was nothing improper in his conduct; and no-one in fact warned him that they were going to suggest otherwise. In my view the appeal should be allowed and the order of District Judge Peters restored.

LORD JUSTICE MILLETT: It is not an abuse of the process of the Court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant's costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant's only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered.

The Court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are bought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay his costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do) is it necessarily unreasonable. The defendant may offer to settle; he may not apply for security; and if he does the Court may not order it to be given, particularly if such an order would stifle a meritorious claim.

In the present case the only respects in which the liquidator are alleged to have acted unreasonably is in continuing the proceedings after the date on which the defendant asked for security for costs and in resisting the defendant's application for security. It is submitted that the liquidator ought to have thrown in the towel as soon as the defendant asked for security because (i) he knew that he would be unable to provide any security which might be ordered and (ii) he had insufficient funds in hand to pursue the case to trial if security was not ordered. But the first is a ground on which the Court may properly refuse to order security; while the second made it all the more important to the liquidator to defeat the application and obtain some bargaining power with a view to a settlement. It is obviously risky for a plaintiff to begin proceedings which he cannot afford to finish, but it is not unreasonable, still less improper, for him to do so.

In my judgment the Judge's order in the present case is not only inconsistent with the principles on which non-party orders for costs are made but would invalidate the assumptions on which the jurisdiction to order security for costs against a limited company

is predicated. I agree that the appeal should be allowed.

Order: appeal allowed; judgment of District Judge Peters restored; respondents to pay the costs of the appellants of the hearing before the District Judge, the application for leave to appeal to the Judge and the hearing before the Judge, together with the hearing in the Court of Appeal.