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
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Hon Mr Justice Moore-Bick
[2004] EWHC 127 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th July 2006

Lord Justice Longmore:

1. This is an appeal from an order of Moore-Bick LJ who ordered that Mr German Efromovich be added as a party to proceedings brought by Petromec Inc and that he was to be jointly and severally liable to the successful applicants whom I will call Petrobras and Brasoil for costs which Petromec had been ordered to pay to Petrobras and Brasoil in those proceedings.
2. The proceedings arose out of a complex series of contractual relationships in relation to the purchase, upgrading and subsequent total loss of a semi-submersible oil production platform originally called the SPIRIT OF COLUMBUS and later renamed P36. Anyone interested in the disputes between the parties can read about them in two judgments of Moore-Bick J (as he then was) and the judgment of this court in [2005] EWCA Civ 291. For present purposes it is sufficient to say that the judge drew a distinction between the Petrobras/Brasoil interests on the one hand and what he called "the Maritima interests" on the other hand. Maritima Petroleo e Engenharia Ltda ("Maritima") had a long and successful history of trading with Petrobras. It was owned as to 60% by Mr Efromovich and 40% by a company called Synergy Group Corporation and, by Mr Efromovich, it orchestrated the complex contractual structure relating to the purchase of the vessel by a company called Petro-Deep Inc and its upgrade by Petromec. The proceedings resulted in substantial orders for costs against Petromec Inc which have never been discharged.
3. The judge found that Mr Efromovich controlled the proceedings brought by Petromec, funded those proceedings and would have benefited from them if they had been successful. He therefore thought it right that Mr Efromovich should pay the successful parties their costs, to be assessed, of defending themselves against the unsuccessful claims.
4. Following the loss of the platform P36, Petromec received $147 million. After some debts were paid most of the money was paid to Petromec's parent, Petromec Holdings Ltd apart from a sum of $2 million. Petromec Holdings Ltd was incorporated in the Bahamas on 5th November 1997. No shareholders are disclosed on the Bahamian register nor have they been disclosed to this court, but one of its directors was Timothy Simon Howarth who provided a witness statement on behalf of a company called Devonshire Holdings Ltd ("Devonshire") in opposition to the application that that company should be required to pay the costs of the proceedings. The $2 million to which I have referred was used to fund the proceedings, but had been exhausted by October 2003. Thereafter money was lent, pursuant to two separate loan agreements, to Petromec to continue the litigation by Devonshire which was originally established to purchase the indebtedness of the parent company of the original owner of the platform. Devonshire was managed by an entity called Hamilton Trustees Ltd, incorporated in Guernsey, which held its interest in Devonshire as a trustee of Synergy Trust, a discretionary trust established by Mr German Efromovich and his brother Jose. This trust must obviously have a close relationship with Synergy Group Corporation which, it will be recalled, owned the 40% share of Maritima which was not personally owned by Mr Efromovich. The judge said he was satisfied that Mr Efromovich was a beneficiary of the Synergy Trust. When the loan was not repaid, Devonshire made further agreements, whereby Petromec Holdings got a further shareholding in Petromec, its own subsidiary. As the judge said, it was difficult to see how Petromec Holdings could have benefited from that arrangement.
5. In the light of this and other evidence the judge reached his conclusions. Having said (para. 33) that Mr Efromovich exercised complete control over all the litigation between Petromec and Petrobras, he said:-

"37. . . . . I am satisfied, first that Mr Efromovich controlled Maritima which he used as his primary business vehicle for undertaking offshore engineering projects; second, that it was his practice to make use of one or more single purpose companies to carry out each individual project; third, that the single purpose companies were not themselves formally brought into the Maritima group by using Maritima as the holding company, but were owned by one or more unidentified persons, although they were all controlled by Mr Efromovich; and fourth, that the funds generated by those projects were not retained by the single purpose companies or by Maritima.

38. Mr Howarth's statement shows that the beneficial interest in one of the companies incorporated at the behest of Mr Efromovich for the purpose of implementing the P36 project, Devonshire, was ultimately held by the discretionary beneficiaries of a trust established by Mr Efromovich and his brother. Mr Howarth has obviously chosen his words with some care and does not say who the beneficiaries of that trust are, but the circumstances point to the conclusion that they are likely to include Mr Efromovich and his brother and perhaps other members of their families. If that were not the case, I think the overwhelming likelihood is that either Mr Howarth or Mr Efromovich would have made that clear. Although Mr Howarth says in his statement that Devonshire is managed by Hamilton Trustees, he does not say anything to indicate that it actively carries on business, even as an investment vehicle.

39. As I have said, the minority shareholding in Maritima is owned by Synergy Group Corporation and in view of the similarity of names it would be a surprising coincidence if that company were not related to the Synergy Trust. However, the inference does not rest on coincidence alone because there is some positive evidence, in the form of press material exhibited to the seventh witness statement of Mr Williams made on behalf of Petrobras in connection with an earlier application, that Mr Efromovich controls Synergy Group Corporation. In those circumstances I think it is more likely than not that Synergy Trust is the beneficial owner of the minority shareholding in Maritima and that by that route Mr Efromovich has a further interest in the company.

40. There is no direct evidence of who owns the shares in Petromec Holdings or of the ultimate destination of the funds distributed by Petromec to Petromec Holdings in July 2001. Nor is there any direct evidence of the source of the funds which Devonshire made available to Petromec Holdings under the two loan agreements or of the source of the funds used by Petromec Holdings to repay the loan and to make available the additional £1 million to finance the litigation. However, it is interesting to note that Hamilton Management Services signed the loan agreements between Devonshire and Petromec on behalf of both companies, in each case as a director. This evidence, together with the evidence that Mr Howarth is a director of both Petromec and Petromec Holdings, lends some support to the conclusion that Petromec Holdings is beneficially owned by the Synergy Trust. In the light of all the evidence I have no doubt that, whatever their precise provenance, the funds all came from sources under the control of Mr Efromovich and were made available at his direction."

6. The judge then concluded in paragraph 41 that the funds made available to Petromec to fund the litigation were beneficially owned by the Synergy Trust and could in a practical sense be said to have been made available at the request of Mr Efromovich to meet his personal and business requirements. The third ground of appeal (but more sensibly treated as the first) is that there was no evidence to support this conclusion. As the judge observed this submission would be more attractive:-

"were it not for the fact that the person best placed to inform the court about the nature of Mr Efromovich's role in the litigation, the source of the funds used to finance it and the nature and extent of his interest in the companies in question is undoubtedly Mr Efromovich himself. However, he has chosen not to say anything about these matters beyond what he has already said in other contexts and for other purposes. Although the thrust of the submissions [of Petrobras' counsel] was clear from the witness statements of Mr Williams served in support of these applications, and although he has chosen to be represented by solicitors and counsel, Mr Efromovich has not attempted to meet the arguments against him by providing the relevant information, all of which lies peculiarly within his own knowledge."

The position remains the same to-day save in one respect. It has been made clear in subsequent proceedings by Mr Efromovich himself that he and his brother and his family are indeed the beneficiaries of the Synergy Trust. This has emerged in the yet further proceedings brought by Petromec alleging deceit on the part of Petrobras. Mr Efromovich inevitably had to give evidence in those proceedings in which he stated in terms that he, his brother and his family were the beneficiaries of the Synergy Trust. In these circumstances we have decided to admit that further evidence; it shows that the judge was unassailably correct in his factual conclusions to find that Mr Efromovich was indeed a beneficiary of the Synergy Trust.

7. Despite Mr Neish's submission for Mr Efromovich I am satisfied that the judge was correct first to hold that Mr Efromovich controlled the proceedings from the Maritima/Petromec point of view, secondly that, because of his beneficial ownership of Synergy Trust and Synergy Group Corporation funds for those proceedings were made available out of sums available to Mr Efromovich and thirdly that any recovery from the proceedings would benefit Mr Efromovich. In those circumstances it is a short (and correct) further step to hold, if it is necessary to hold, that Mr Efromovich has funded the proceedings.
8. Mr Neish secondly submitted that it was a pre-requisite for the exercise of the court's jurisdiction under section 51 of the Supreme Court Act 1981 and the relevant rule of court that Mr Efromovich should have himself funded the litigation. Even if it was correct to say that Mr Efromovich funded the litigation after October 2003 by reason of the loans made by Devonshire, he had not funded the litigation before that date. For this purpose Mr Neish took us through the various authorities in support of his proposition that in the absence of impropriety (which was not here alleged), there had to be actual funding. Here, before October 2003, there was, he said, no such funding since Petromec used the $2 million paid to it out of the total sum of $147 million paid in respect of the Total Loss Claim.
9. This is a hopeless contention. The sum of $2 million was only left in Petromec because its holding company Petromec Holdings Ltd, which was itself controlled by Synergy Group Corporation chose to leave it there instead of taking it out along with the other $145 million or so representing the Total Loss Payment. It was thus the owner of Synergy Group Corporation who decided to use the $2 million to fund the start of the litigation, in other words Mr Efromovich.
10. In these circumstances it is not necessary to discuss the authorities at any length. I would only observe that, although funding took place in most of the reported cases, it is not, in my view, essential, in the sense of being a jurisdictional pre-requisite to the exercise of the court's discretion. If the evidence is that a respondent (whether director or shareholder or controller of a relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction. Whether such jurisdiction should be exercised is, of course, another matter entirely and the extent to which a respondent has, in fact, funded any proceedings may be very relevant to the exercise of discretion. In the present case, however, the judge rightly drew no distinction between the pre- and post-October 2003 proceedings because the reality was that Mr Efromovich was funding them throughout.
11. There is a danger that the exercise of the jurisdiction to order a non-party to proceedings to pay the cost of those proceedings becomes over-complicated by reference to authority. On the present appeal Mr Neish mounted an elaborate argument to the effect that proof of funding was necessary and that, to the extent that this court had decided that it was not in Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414 it was inconsistent with Dymocks Franchise Systems v Todd [2004] UKPC 39, [2004] 1 WLR 2807 and should not be followed. Since the judge decided, rightly, that Mr Efromovich did in fact fund the proceedings, this argument was misplaced and it is temping to ignore it since any view I express on it will be obiter. But the matter may well arise in other cases and I would therefore wish to record my respectful view that paragraph 59 of the judgment of Rix LJ in Goodwood (by which we are, in any event, bound) correctly states the law in the following terms:-

". . . . the law has moved a considerable distance in refining the early approach of Lloyd LJ in Taylor v Pace Developments. Where a non-party director can be described as the "real party", seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances."

For the avoidance of doubt, it may be necessary to add that this principle is not confined to "directors". In the present case Mr Efromovich has chosen not to tell the court who the directors of Petromec are; that does not, of course, mean that the jurisdiction does not apply to him since it is evident that he is its effective controller.

12. It is true that in paragraph 29 of Dymocks where Lord Brown of Eaton-under-Heywood summarised the effect of the authorities he uses the words:-

"where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails."

But to read the words "and funds" as imposing some requirement without the presence of which the discretion should not be exercised is to treat the words of Lord Brown as if they are a statute which they most emphatically are not. No question arose about the existence of funding in that case and the decision cannot be treated as a decision on the need for its existence.

13. The third and final ground of appeal is that the judge failed to take into account the fact Petrobras were entitled and did obtain an order for security for costs. It is said that should have inhibited the judge from making an order that Mr Efromovich was personally liable.
14. This puts the matter much too high. The ability to obtain an order for security for costs and the existence of any security put up as a result of such order are matters which a judge has to take into consideration. Moore-Bick LJ had those factors clearly in mind, see paras. 5, 6, 15 and 43 of his judgment. The security that was put up (after opposition) by the Petromec/Maritima interests turned out not to be enough to satisfy Petrobras' claim for costs. No doubt if more substantial security had been ordered, the current application would not have been necessary. But the fact that in the course of the proceedings a judge (Andrew Smith J in this case) ordered security which, in the event, has turned out to be inadequate should not be any reason for declining to exercise jurisdiction in an otherwise appropriate case. As the judge said in paragraph 43 "it is no more unjust to make the backers of an insolvent company liable for the costs . . . . than it is to require them to provide security for costs on its behalf".
15. Once again Mr Neish sought to over-analyse the authorities in support of his submission. This part of his submission had two strands. The first strand was that Dymocks v Todd in the Privy Council did not purport to be a statement of English law but only of New Zealand law and that the concept utilised by Lord Brown of the real party to the litigation "was inconsistent with decisions of the Court of Appeal of England and Wales by which we were bound", in particular Metalloy Supplies Ltd. v. MA (UK) Ltd [1997] 1 WLR 1613 which had decided that the jurisdiction ought not to be exercised against directors or controllers of insolvent companies, since the remedy of security for costs was available. The second strand of the submission, again relying on the Metalloy case, was that it would be an unacceptable breach of the principle of corporate personality to make a director or controller of an insolvent company liable for the costs because in such circumstances the director or controller was acting for the benefit of the company in attempting to obtain judgment against those owing money to the company.
16. There was, in my judgment, no substance in these submissions. As Lord Brown was at pains to observe, the concept of the real party to the litigation is entirely consistent with the English authorities. In his summary of the principles governing the exercise of the relevant discretion set out in paragraph 25 of the advice of the Judicial Committee, he relied on both English and Commonwealth authorities and the advice is, in my respectful view, to be taken as a statement of English law just as much as of New Zealand law. He did not need to refer to the availability of orders for security for costs from an insolvent company since in the case before him, the respondents were being asked to pay the costs of suing a defendant not of being sued by a claimant company. Inevitably a judge will, in the case of an insolvent company bear in mind the fact that security for costs is an available remedy. No doubt if security could have been applied for but was not, and there is no explanation for that failure, that will weigh against the application. But where, as here, an application has been made and security has been ordered, but has proved insufficient, that is different. As I have said the judge had these factors well in mind. The fact that he did not treat that as decisive against the application cannot be criticised and certainly affords no ground for any interference by this court.
17. The second strand of the submission fails on the facts. Mr Efromovich himself said in his third witness statement in the proceedings filed in support of an application for a stay of execution of the judgment against Petromec:

"Petromec has been dormant with the exception of pursuing claims."

In these circumstances it is evident that the claim was for the benefit of those interested in Petromec. No doubt a court will be hesitant in a normal case to award costs against a liquidator (the relevant person in Metalloy) or a director if, to use Millett LJ's words in that case at 1620C, proceedings are brought "for the benefit of the company" and "the company is the real plaintiff". For the reasons I have sought to give, this case is very different.

18. Conclusion

Previous decisions of this court have rightly emphasised that the jurisdiction to order that costs be paid by a non-party must be exercised with caution but the circumstances of this case were, for the reasons which the judge gave, particularly compelling. Mr Neish's sustained attack on the exercise of the judge's discretion, in my judgment, fails. I would dismiss this appeal.

Lord Justice Laws:

19. I agree that this appeal should be dismissed for the reasons given by my Lord, Longmore LJ. I would wish to emphasise my agreement with his statement at paragraph 11 that the exercise of this jurisdiction becomes over-complicated by reference to authority. Indeed I think it has become overburdened. Section 51 confers a discretion not confined by specific limitations. While the learning is, with respect, important in indicating the kind of considerations upon which the court will focus, it must not be treated as a rule-book.

Lord Justice Ward:

20. I agree with both judgments delivered by my Lords.