England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr Justice Blackburne)

		Royal Courts of Justice Strand London WC2 Thursday, 9th May 2002

1. LORD JUSTICE CHADWICK: This application is made in proceedings brought by Mr. Malcolm Carr against Bower Cotton, a firm of solicitors. Mr. Carr is himself a solicitor, now in practice in New South Wales.
2. Mr. Carr's claim in these proceedings is for damages and restitution in respect of the sum of US $4m said to have been paid away by the defendants without authority. Of those moneys, it is said that $200,000 was Mr. Carr's own money and that the remaining $3.8m were moneys which he held for five other investors in an investment scheme promoted by two individuals, Mr. Weaver and Mr. Adkins, through a Bahamian company, Kelei Management Consultants Limited. The defendants' role under the scheme was to act as protector or custodian of the investment funds.
3. The proceedings came before Blackburne J for trial at the end of last year. He handed down a written judgment on 19th December 2001. He dismissed the claim. He refused permission to appeal. He ordered that Mr. Carr should pay the defendant's costs, to be subject to a detailed assessment; but he directed an interim payment of £250,000 on account of those costs to be made by 16th January 2002. He ordered payment out of court to the defendants' solicitors of a sum of £90,000 which had been paid in by or on behalf of Mr. Carr as security for the costs of the action. That £90,000, together with interest, was to be paid in part satisfaction of the interim order of £250,000. The amount received by the defendants' solicitors from that source, after taking interest into account, was £95,000 or thereabouts. The balance of £155,000, together with any interest which may have accrued on that sum, has not been paid.
4. Mr. Carr lodged an appellant's notice on 2nd January 2002. He sought permission to appeal in relation to the issue whether the money had been paid away by Bower Cotton without authority. Permission was granted by Arden LJ at a hearing of that application on 8th March 2002. So there is now a pending appeal in this court against Blackburne J's order of 19th December 2001; including, of course, so much of the order as ordered payment of costs and costs on account.
5. The application now before me is by notice dated 26th March 2002. Bower Cotton, as respondents to the appeal, seek an order under CPR 52.9 that the appeal notice be struck out unless, within 21 days of the hearing of this application, Mr. Carr pays or gives satisfactory security for the £155,000 payable under Blackburne J's order of 19th December 2001. CPR 52.9 is in these terms:

"(1) The appeal court may -

(a) strike out the whole or any part of an appeal notice;

(b) set aside permission to appeal in whole or in part;

(c) impose or vary conditions upon which an appeal may be brought.

(2) The court will only exercise its powers under paragraph (1) where there is a compelling reason for doing so.

(3) Where the party was present at the hearing at which permission was given he may not subsequently apply for an order that the court exercise its powers under subparagraphs (1)(b) or (1)(c)."

6. One object of that rule is to deter respondents to appeals for which permission has been granted from seeking to set aside that permission. Experience has shown that, save in exceptional cases, it is nearly always more satisfactory to hear the arguments at the appeal rather than to have an additional round of litigation on the preliminary question whether permission to appeal should have been granted. No doubt that object is one reason for the requirement, in paragraph (2), that the court is not to exercise its powers under paragraph (1) unless there is a compelling reason for doing so. Further, if (unusually) the respondent has been present at the hearing of the application for permission to appeal and has not persuaded the court to impose terms as a condition for granting permission under CPR 52.3, it is intended that he should not have a further opportunity under CPR 52.9.
7. In the present case, the respondents were not present at the hearing before Arden LJ; but, nevertheless, the requirement for a compelling reason at this stage is imposed by rule CPR 52.9 and must be observed.
8. It is said, in the application notice, that there is a compelling reason in this case:

"there is compelling reason to impose the condition sought by the claimant under CPR 52.9(1)(c) and, in default of compliance with that condition, to strike out the appeal under CPR 52.9(1)(a), namely, that claimant has failed to obey an order for the payment of costs when he can afford to do so through others for whose benefit he brought these proceedings and this appeal, and where those others have funded these proceedings, and, it is to be inferred, are funding this appeal; and (2) it would be unnecessary, unjust and a potential waste of costs for the defendant to prepare and file its respondent's notice until the claimant has met or provided security for the existing costs order, alternatively, until after the hearing of this application."

9. The first reference to "claimant" in that statement of reasons is plainly a mistake. The reference should be to the defendants - or, perhaps, to the respondents - and I so read it.
10. That application was supported by a witness statement made by Mr. Nicolas Heaton, a solicitor employed by Messrs Lovells who act for the respondent. The statement is dated 22nd March 2002. Mr Heaton draws attention to information given by Mr. Carr on an earlier application for security for costs made in the course of the proceedings in the High Court; and, in particular, to a joint venture fund management agreement dated 13th May 1998, under which (it is said) Mr. Carr is entitled to an indemnity from his co-investors. The thrust of Mr. Heaton's statement is that, on the assets disclosed by Mr. Carr on that earlier occasion, he did not or does not have assets or means to pay the £155,000 which he has been ordered to pay, nor to fund the appeal; but nor did he have the means to fund the litigation to trial. So, it is said, the inevitable inference is that he must have been funded by others; in particular, by those others who are interested in the $3.8m which makes up the major part of the fund which he seeks to recover.
11. At paragraph 20 of his witness statement Mr. Heaton says this:

"Against this background, if the defendants/ respondents are successful after the appeal, they would be justified in seeking to recover their costs from those who stand behind Mr. Carr under section 51 of the Supreme Court Act 1981. The alternative will be to proceed to enforce against Mr. Carr. On his own evidence, he does not have enough assets of his own with which to pay. The defendants will be dependent on Mr Carr successfully calling on the indemnity for costs that he says that he has from his co-investors, or will have to bankrupt him and then pursue the co-investors."

12. Mr Heaton goes on to say that Mr. Carr has not applied for a stay of execution of the interim costs order.
13. The position as it appeared from that witness statement was that the interim payment order made by Blackburne J is, in practice, virtually unenforceable. Mr. Carr has no assets here. He could be pursued to bankruptcy in Australia; but, on the available evidence, he has insufficient assets of his own to make that a sensible course unless the respondents can rely on recovering in the bankruptcy on the basis of whatever rights of contribution or indemnity Mr. Carr may have against those (other than himself) beneficially interested in the fund of US$ 4m and for whose benefit the claim against Bower Cotton has been pursued.
14. The circumstances in which an order may be made under CPR 52.9 striking out an appeal on the grounds that an order for costs below has not been complied with, or staying an appeal until such an order has been complied with, were considered by this court (Clarke LJ and Wall J) in Hammond Suddard Solicitors v Agrichem International Holdings Limited, Neutral Citation [2001] EWCA Civil 1915, unreported, 18th December 2001. In giving the judgment of the court Clarke LJ identified the point at paragraph 2:

"The application to strike out gives rise to two points of principle. The first is whether it is a permissible exercise of the court's powers, either when granting permission to appeal or subsequently, to make the prosecution of the appeal conditional upon the payment of the judgment debt and costs. The second is, if so, whether it is appropriate to do so in a case where, as here, the appellant might have to obtain the funds to meet the various orders from a third party. There appears to be little authority on these questions, which seem to us as potentially of some considerable practical importance."

15. The court turned to the issue which arises in this case at paragraph 40 of its judgment:

"We turn to the question whether there is a compelling reason for making the appellant either pay the judgment debt or secure it as a condition of permitting it to proceed with the appeal. We have reached the conclusion that the answer to that question is yes. In our judgment, the facts which combine to constitute a compelling reason are the following.

(1) The appellant is an entity against whom it will be difficult to exercise the normal mechanism of enforcement. It is registered in the British Virgin Islands and has no assets in the United Kingdom. There is, accordingly, a very real risk that if the appeal fails, the respondents will be unable to recover the judgment debts and costs as ordered by Silber J. Given the attitude of the appellant to date, including that demonstrated on these applications, it is fanciful to think that the appellant will co-operate in the enforcement process.

(2) The appellant plainly either has the resources or has access to resources which enable it both to instruct solicitors and leading and junior counsel to prosecute its appeal and make an application to the court for a stay of execution and to provide a substantial sum by way of security for costs.

(3) There is no convincing evidence that the appellant does not either have the resources or have access to resources which would enable it to pay the judgment debt and costs as ordered. It has failed to do so. It is, accordingly, in breach of the orders made by Silber J on 12th July 2001.

(4) The discovery which the appellant has provided of its financial affairs is inadequate and gives the court no confidence that it has been shown anything near the truth. Moreover, as stated earlier, it has produced evidence (when it wanted to) that it was a thriving and profitable institution. It has wealthy owners and there is no evidence that, if they were minded to do so, they could not pay the judgment debt, including the outstanding orders for costs.

(5) For the reasons we have already given we are not persuaded that this appeal will be stifled if we make the order sought.

(6) In these circumstances, we find it unacceptable that absent any other orders of the court the appellant is intending to prosecute the appeal (and is willing to put up security for costs in order to do so) whilst at the same time continuing to disobey the orders of the court to pay the judgment debt and costs, as well as seeking to persuade us that it cannot do so."

16. The court in the Agrichem case took the view that those six factors provided a compelling reason to make the orders sought. They reached that conclusion because they thought that there was a real risk that, unless the orders sought were made, the respondents, if the appeal was dismissed, would be deprived of the fruits of their judgment and would be only able to recover whatever sum had been secured by way of costs. It was not just to allow the appellant to proceed with an appeal which was designed not only to reverse the judge's decision that it was liable to the respondent, but also to obtain judgment on its counterclaim for a substantial amount; especially in circumstances in which it appeared that it was willing and able to use resources from others, while being unwilling to seek and obtain resources to discharge the judgment debt.
17. The court reminded itself that the position would be very different if the appellant in that case had been able to produce convincing evidence that the appeal would be stifled if it were required to take the steps sought by the order. The court reminded itself, also, that each case depended on its own facts. It went on, at paragraph 45, to say this:

"We do, however, take the view that the new regime of the CPR, with its emphasis on the timely payment of costs, and the use of costs as a sanction, warrants a robust approach to appellants who fail to obey orders for the payment of a judgment debt and costs when they can afford to pay them either themselves or through others."

18. I start, therefore, from the position that it would not be right to make the order sought by Bower Cotton if I were satisfied that the order would have the effect of stifling the appeal. It is important to keep in mind, first, that this is an appeal for which permission has been granted in this court on grounds that the appeal has a real prospect of success. That is not, of course, to be taken as an indication that the appeal will, or is likely to, succeed. It is no more than a decision that the prospects of success are real as distinct from fanciful. Second, if the appeal does succeed, it is (at the least) likely that the order for costs made in the court below will be set aside in whole or in part. Again, that is not to be taken as an indication that that will necessarily be the outcome of a successful appeal; but experience suggests that it is a likely outcome. So, if the order would have the effect of stifling the appeal, the appellant is denied the opportunity of challenging the costs order which has itself led to that result. It is accepted that that cannot be a proper outcome.
19. What, then, is the material upon which Mr. Clarke relies in order to persuade the court that the order sought, if made, would stifle the appeal because he would not be able to comply with it? That evidence was put in at a very late stage, following a change of solicitors. Mr. Carr has now instructed solicitors (not previously acting for him) who are prepared to accept instructions on the basis of a conditional fee arrangement. That is, itself, of significance; because it removes the factor that the appellant, who contends that he cannot pay an existing debt because of impecuniosity, is nevertheless proposing to pursue an appeal in which he will have to fund his own costs.
20. That is a feature which would throw doubt on the protestations of impecuniosity. It is the feature which Clarke LJ identified in subparagraph (2) of paragraph 40 in the Hammond Suddard case. That feature, although not wholly removed, is removed in part in circumstances where the solicitors acting for the appellant are doing so under a conditional fee arrangement which requires no funding. I say "removes in part" because a conditional fee arrangement with the solicitors does not remove the need to fund counsel who will present the appeal in court.
21. The prospect of obtaining funding from others is set out in a witness statement of Mr. Carr dated 3rd May 2002. At paragraph 11 he says this:

"It is the case that my co-investors, have, at least in part helped to fund this litigation. Mr Heaton complains that I have given no evidence about the assets of my co-investors. The reason for this is that I do not have such information. There is nothing in the Joint Venture Agreement which entitles me to that information. In October 2001 Lovells acting for the Defendant/Respondent appear to have written to all of the investors a letter in the same terms as the example at page 26 of MCD4. I have heard orally from a number of the investors that following receipt of that letter they are reluctant to contribute further and to give any information about their current assets as a result of having received that letter. One of the investors Polnibs PTY Limited wrote to me on 3rd May [that is to say, on the date of the witness statement] to confirm their position on this subject. I have told each investor of the judgment and the terms of the costs order. However I am told that they do not now believe they must indemnify me. They believe that the Defendants will pursue them directly for the costs. They await such pursuit and will take advice on it when it comes. On 29th January 2002 there was a meeting of the investors at which I proposed a resolution (notice page 27 of MDC4) that all funds owing in respect of my own legal costs and the costs order be forwarded within the next 28 days. There was a dispute at the meeting so the resolution was never passed. Since that date no further funds have been paid to me. My accountant, Martyn Betts has at my request been telephoning the investors on a daily basis seeking contributions but with no success."

22. The letter of October 2001, to which reference is made in that paragraph, is a letter from Lovells of 17th October 2001 to one of the investors, Adkins Enterprises Inc. Lovells wrote that they believed that the action being pursued by Mr. Carr was being funded, at least in part, by other parties. They asked for information as to whether the addressee had in any way funded the proceedings; and they indicated an intention to reserve the right to seek an order pursuant to section 51 of the Supreme Court Act 1981 against any party who had supported those proceedings. That letter was sent before or in the course of the trial in the High Court. It does not seem to have the effect of causing any immediate withdrawal of support. It seems only now that the investors have been so shaken by the suggestion that a claim against them under section 51 of the 1981 Act might be made that they are disinclined to provide further funding.
23. Mr. Carr has produced a letter of 3rd May 2002, faxed from Polnibs Proprietary Limited in New South Wales, in these terms:

"Dear Malcolm,

I am sorry we have not been able to provide funds as readily as you require for the case in England.

One of the factors that plays on our minds is the letter that Lovell's sent us on 17th October 2001.

We are very concerned that we are sitting targets for Lovell's and we are considering meeting with other solicitors to see what we can do to protect ourselves if they decide to come after us.

That's not to say we haven't got confidence in you, but we need independent advice on where we stand."

24. There are three significant features about that letter. The first is that it is plainly self-serving; in that it cannot be simply a coincidence that it arrived by fax on the day that Mr Carr made his witness statement - that is to say, three or four days before this application was due to be heard. Second, if Lovells' letter had been playing on the minds of Polnibs, it had been doing so for a period from October 2001 to May 2002 without apparently having produced any reaction. Third, there is no reference in that letter to the meeting which Mr. Carr has said occurred at the end of January - when a resolution for funding was not passed. Had there been such a meeting one Polnibs might have been expected to refer to it; to say: "You will remember that we had a meeting at the end of January and decided that there should be no further funding." There is not a hint of that in the letter of 3rd May.
25. The evidence of the meeting upon which Mr. Carr relies is, itself, scanty. He has produced a document headed "Joint Venture Agreement meeting of Investors on 29th January 2002" which he has signed. That document gives no indication of who was present or of what was discussed at a meeting on 29 January 2002; and no indication what decision was taken or why. The document that he has produced is in form an agenda; it is not a report of the meeting.
26. The position, therefore, is that Mr Carr's assertion that the persons beneficially interested in $3.8m, and for whose benefit these proceedings and the appeal may be thought primarily to be pursued, will not contribute to the appeal process is almost wholly unsupported. In deciding whether that is a safe basis upon which to proceed, it is, in my view, relevant to have in mind the impression that Mr. Carr made on Blackburne J in the course of the lengthy trial at which he gave evidence. The judge said this as to Mr. Carr's evidence:

"I found his account of events, where uncorroborated, to be unreliable to a quite significant degree. Time and again he was forced to accept that he had been mistaken about this or that event. Very often, a careful reading of the relevant documents - of which there are not many - should have indicated to Mr Carr that his account of events simply could not be correct. He was given at times to self-contradiction. Frequently he would say something at one minute only to retract it or alter it a little later. From time to time he would make assertions which could be seen by reference to the documents to be quite obviously wrong. Some of his evidence seems to me to be little more than invention. It was also apparent that much of his account of events, presented as recollection, turned out on examination to be based upon attempts to reconstruct what he thinks must have happened."

27. At paragraph 114 of that judgment the judge expressed grave doubts as to the authenticity of diary entries, produced as contemporary or near contemporary records by Mr. Carr, of the meetings to which they relate. The judge said:

"My doubts about their authenticity are increased by the fact that they were only produced very shortly before the start of this trial and then only after an order had been made for disclosure of the diary. It is, to say the least odd, that the diary, containing these apparently pertinent entries, was not produced at a much earlier stage."

28. Those are remarks made by a judge in relation to a solicitor whose evidence he had heard over an extended period. In addressing the question whether this court should be satisfied by uncorroborated statements in the witness statement of 3rd May - itself produced at the last minute - the court must, in my view, take those observations into account.
29. But my concern as to the weight which should be placed on Mr Carr's uncorroborated statements does not stop there. The attitude of the co-investors, as presented by Mr. Carr in his witness statement, is wholly illogical. It appears to be common ground that the co-investors did make contributions, to the extent of at least £50,000, towards the costs and the security for costs of the High Court proceedings. They were, at that stage prepared, to fund a claim for the $4m. It is because of that funding that they are potential targets for an order under section 51 of the 1981 Act. If they are liable for costs under that section, it is because of what has happened in the past. Continued funding of the appeal is unlikely to make any difference; save perhaps in relation to the costs of the appeal. The warning letter from Lovells could not sensibly have led them to take the view that further funding will expose them to a risk in relation to past costs to which they are not already exposed. Past events have led to a situation in which they have not recovered the $4m and are exposed to a potential claim for substantial costs under section 51 of the 1981 Act. Permission to appeal has been granted. An appeal is likely to be relatively inexpensive in comparison with the costs so far incurred and the amount at stake in the proceedings. Nevertheless, they have, so Mr. Carr asserts, decided not to take the obvious course of attempting to overturn the order which has been made below; so relieving themselves from the existing potential liability under section 51 and recovering the $3.8m which they have lost. Seen as an assessment of commercial risk, the decision to withhold further funding is simply inexplicable. No attempt to explain it is made. There is no evidence of any discussion or debate. There is no evidence whether the potential investors have been informed of the considerations which they might be expected to take into account; nor why they have reached the conclusions which they did. Nor is there anything to indicate whether those investors - for whose benefit Mr. Carr has pursued the proceedings below - have any basis for asserting that they are not obliged to indemnify him in relation to the costs of those proceedings; whether or not they can be pursued by the defendants for costs.
30. A further feature which causes me to reach the conclusion that I cannot rely upon Mr. Carr's assertion in paragraph 11 that no further funding will be forthcoming is the way in which funding of the proceedings below has been provided. £140,000 (that is A $400,000) is said to have been borrowed from a Miss Waks upon the security of Mr. Carr's office property at Suite 1, 768 Prices Highway, Sutherland, New South Wales. The mortgage which is said to secure that sum includes a paragraph in these terms:

"Twentiethly - This mortgage is given in support of an agreement between the Mortgagor and Mortgagee dated 15th October 2001 (the agreement). In the event that the Mortgagor is successful in the claim referred to in the agreement then no interest is payable hereunder so long as the mortgagor complies with the terms of the agreement."

31. The agreement of 15th October 2001 has not been produced; but, at first sight, the paragraph which I have just read is explicable only if that agreement includes some provision for the mortgagee to share in the fruits of the litigation. A provision that, if the litigation is successful, interest will not be paid on the loan, suggests strongly that (if the litigation is successful) there will be other fruits which will accrue to the lender. Further, the evidence suggests that Miss Waks was prepared to lend A$390,000 on a property of which the value some two years earlier was only A$125,000. That arrangement can hardly be regarded as commercial. There is, therefore, a strong inference, in my view, that that funding arrangement through Miss Waks is intended to conceal funding by persons who were interested in the proceeds of the litigation. There is no explanation as to why Miss Waks should be interested in providing funds on what is, apparently, inadequate security.
32. In those circumstances, I reject the suggestion that this is a case in which the making of the order sought would stifle this litigation. In my view, the evidence suggests that it is more likely that, if the order were made, those who stand to gain from a successful appeal to an extent of $3.8m would, if they thought the appeal had any real chance of success, be prepared to fund it by meeting the order.
33. But that is not of itself a sufficient reason to make an order under CPR 52.9. What is required is a compelling reason. If the order were likely to stifle the action that would be a compelling reason not to make it. But the fact that it may not stifle the action is not of itself a compelling reason to make it. What is a compelling reason is the feature identified by Clarke LJ in the Hammond Suddard case.
34. If this appeal is to go ahead for the benefit of the other investors, it will do so in circumstances in which the respondents (if successful) will have no real prospect, either of recovering their costs of the appeal or of recovering the costs which have already been awarded in their favour by Blackburne J. The investors would be pursuing an appeal, through Mr. Carr, in circumstances in which they were in breach of an order that they should pay interim costs of £155,000. In circumstances in which there are no other practical means of enforcing Blackburne J's order, that is a situation which the court should not encourage. If those other investors are to have the benefit of an appeal, then they should accept responsibility for the costs below which have already been ordered against Mr Carr.
35. The fact that they are seeking to repudiate that obligation is, as it seems to me, a compelling reason for refusing to allow the appeal to proceed for their benefit.
36. I propose to make the following order. The appeal is to be stayed unless, within 21 days, either (i) the appellant applies to amend his notice of appeal so as to restrict the relief claimed to the $200,000 in which he is personally interested and expressly abandons any appeal on behalf of the remaining $3.8m of which he claims to be a trustee; or, if that is not done, (ii) security for the payment of the £155,000 of costs ordered by Blackburne J is to be provided or those costs are to be paid. If those conditions are not met, then the appellant's notice is to be struck out.
37. The purpose behind that order is this. It is to afford Mr. Carr the opportunity of pursuing his own claim on an appeal in circumstances in which he himself has no assets to pay the order for costs made below - so that if he were an individual litigant the appeal would be stifled by the order; but to ensure that the appeal is not brought for the benefit of the other investors in circumstances in which they seek to repudiate their obligations as beneficiaries to indemnify Mr. Carr as trustee.
38. I should add that the evidence put in on 3rd May is accompanied by an application made by Mr. Carr for a stay of the order for costs made against him on 19th December 2001. I can see no basis for making such an order and I dismiss that application.
Order: Counsel to provide agreed minute of order.