England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE GUILDFORD COUNTY COURT
HIS HONOUR JUDGE REID QC
LOWER COURT No: 5GL02234

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/05/2011

Mr Justice Lewison:

1. Systemcare (UK) Ltd ("Systemcare") brought a claim in the county court against its customer Services Design Technology Ltd ("SDT") for £1,856 relating to six monthly bills for telephone line rentals, calls and services for the telecommunications system it had supplied. The claim followed SDT's cancellation of a direct debit. It should have been a simple one. SDT was a company of which Mr Sharif was the managing director and 90 per cent shareholder. HH Judge Reid QC described him as "the moving spirit" of SDT. The remaining 10 per cent was owned by his wife. Mr Sharif signed a statement of truth appended to a defence and counterclaim dated 12 August 2005. The defence and counterclaim was not prepared by lawyers; and was the work of Mr Sharif himself. SDT disputed the claim on the grounds of fraudulent misrepresentation, lack of functionality and negligence. In consequence the case was allocated to the multi-track and proceeded to trial. It was also necessary for experts to be instructed and called. SDT's main witness of fact was Mr Sharif himself. It was he who had negotiated the deal with Systemcare; and therefore he who gave evidence about what it was and what had been said to him to induce SDT to enter into it. The judge rejected his evidence wholesale. He said that Mr Sharif was not in general reliable (§ 6). He was unable to accept Mr Sharif's allegation that there had been trickery or skulduggery in inducing him to sign the agreement (§ 25). He rejected Mr Sharif's account of the installation process (§§ 34, 35). He found that a fax bearing the date of 6 January 2005 which Mr Sharif had exhibited to his second witness statement was never sent (§ 40). Although he does not say so in terms, it is implicit in his findings that Mr Sharif concocted that document after the event. Mr Sharif produced further faxes which the judge likewise concluded had never been sent (§ 40). He found that when Mr Sharif cancelled SDT's direct debit in favour of Systemcare the reason he gave for having done so "was false" (§ 45). In the result the judge found that none of SDT's complaints were made out; and he dismissed the counterclaim. In his second judgment which forms the subject of this appeal he said that Mr Sharif's explanation of his actions was false; that "in evidence [he] chose to give a false explanation as to why he acted as he did"; and that if "he [had] not acted in this dishonest fashion" the claim would not have been made (§ 24). In the judgment under appeal he described the loss alleged in the counterclaim as "at best fanciful" (§ 25). His overall conclusion in that judgment was that Systemcare were "locked into litigation without merit and without justification by [SDT] acting through Mr Sharif" (§ 29).
2. The trial of the underlying claim took place on 16 and 17 August 2007. The judge gave judgment on 2 November 2007. He entered judgment for Systemcare for £2,199.26 (inclusive of interest). He dismissed SDT's counterclaim. He ordered SDT to pay Systemcare's costs on the standard basis until 20 July 2007; and thereafter on the indemnity basis. He ordered an interim payment of £20,000. But the judge was plainly concerned about the level of costs that Systemcare had incurred because his order said:

"In making the detailed assessment the District Judge shall have particular regard to (1) the principle of proportionality (2) the excessively voluminous nature of the trial bundles and (3) the duplicated claim for counsel's brief fee …"

3. According to SDT's most recent accounts available during the pendency of the case it had net current assets of over £1 million; and a surplus of £334,000 of assets over liabilities. However, less than three weeks after the judgment, on 21 November 2007 Mr Armstrong of Turpin Baker Armstrong, insolvency practitioners who had been instructed by Mr Sharif, wrote to Systemcare to say that SDT was insolvent. It had also changed its name. In January 2008 Systemcare served its bill of costs in order to begin the process of assessment. SDT did not raise any points of objection. That was not surprising because SDT went into liquidation almost immediately afterwards; and there was no prospect of any dividend for unsecured creditors. Thus on 23 January 2008 Systemcare applied for a default costs certificate, which was issued on 30 January 2008. That certificate quantified the costs at £49,364.29. Although the certificate created a liability on the part of SDT to pay that amount, no assessment of costs had actually taken place. Apart from Systemcare, SDT's main creditors were Mr Sharif and his wife; and another company called Webb Estate Property Services Ltd (WEPS), which Mr Sharif also controlled. Mr and Mrs Sharif were owed £84,000-odd and WEPS were owed just under £75,000.
4. On 5 August 2009 Systemcare applied to join Mr Sharif as a party to the action for the purpose of seeking a non-party costs order against him under section 51 of the Senior Courts Act 1981. Why there was such a long delay is unexplained. In his witness statement supporting the application Mr Bennett, Systemcare's solicitor, said that there had been no satisfactory explanation of what had happened to SDT's assets so as to transform net assets of over £1 million into an insolvent liquidation in which the liquidator had said that there was no prospect of any dividend for unsecured creditors. What he seemed to be suggesting was that there had been some degree of asset stripping during the course of the litigation. He said:

"… having regard to how the claim was instigated by Mr Sharif reversing direct debits of [SDT] to [Systemcare] and by then making a baseless and large counterclaim against [Systemcare] … Mr Sharif should be personally liable for the costs of the action of [Systemcare] as ordered by this court."

5. In support of the application for joinder Mr Fullerton, counsel for Systemcare, prepared a skeleton argument. He submitted that:

".. based upon the judgment, it is clear that [Mr Sharif] was the real party interested in the outcome of litigation, was responsible for causing the instigation of proceedings, that the counterclaim was brought in bad faith or for an ulterior purpose and that other conduct, referred to in the judgment, makes it just and reasonable for such an order."

6. In his skeleton argument in opposition Mr Falkowski, counsel for Mr Sharif, referred to Symphony Group plc v Hodgson [1994] QB 179 in which Balcombe LJ had summarised under a number of categories the cases in which the court had made non-party costs orders. He complained that Systemcare had not identified the category of case into which its application fell. On 4 March 2010 HH Judge Reid QC ordered Mr Sharif to be joined. He also gave directions for further evidence. No doubt this was done partly to meet the complaint made by counsel for Mr Sharif.
7. Mr Bennett made another witness statement on 31 March 2010. He in turn complained that Systemcare had not been given adequate information. He said that it was Systemcare's case that:

"… proper disclosure of the affairs of [SDT] will show that it had the ability to pay costs Orders and that its voluntary liquidation was a decision by Mr Sharif to avoid payment to [Systemcare] of the monies and costs due under Court Orders."

8. Thus Systemcare's case was put on the additional basis that SDT was solvent during the pendency of the proceedings, and that Mr Sharif had engineered the liquidation. Mr Sharif filed his own evidence on 6 May 2010. Among the points that he made were the following:

i) He prepared the initial defence and counterclaim in good faith on behalf of SDT, believing that it was in the interests of the company to bring the case, and that it would result in an order for compensation in its favour. He believed that SDT would win. He believed that SDT was well able to fund the costs of the litigation. But because he did not expect SDT to lose, he did "not spare much thought" to the risk that it might incur a substantial costs liability (§ 9).

ii) During most of the period of litigation SDT seemed to him to be "in healthy financial shape and able to fund the costs as required" (§ 10).

iii) SDT's finances declined in 2006 and deteriorated more sharply in the first half of 2007 (§ 15).

iv) In August and September 2007 he procured inputs of funds for SDT from WEPS. These inputs amounted to some £33,000 (§ 16). When judgment was given Mr Sharif procured a further £22,000 from WEPS with a view to meeting the costs liability, but was advised that that payment might be a preference (§ 19).

9. Mr Sharif's case was also supported by SDT's accountant Mr Martin and by Mr Armstrong, both of whom made witness statements also dated 6 May 2010. Mr Martin said that SDT was not insolvent and continued to pay its debts as they fell due during the autumn of 2007. He said that SDT became insolvent as a result of the judgment and its costs consequences. Mr Armstrong also said that SDT could pay its debts as they fell due. He was able to say this because the debts owed to WEPS (£75,000) and Mr and Mrs Sharif themselves (£84,000) were payable on demand; and no demand had been made. Thus Mr Armstrong dealt only with SDT's solvency on a cashflow basis. He did not address the question whether SDT was insolvent on a balance sheet basis; and he was not asked to do so.
10. Systemcare made an application for further disclosure against Mr Sharif. But Mr Sharif said that he had handed all relevant documents to the liquidator. Although Mr Armstrong had made a witness statement in support of Mr Sharif, he refused to give disclosure. No formal application was made against him at that time. The judge declined to make any further order and listed the application for hearing. No one applied to cross-examine Mr Sharif.
11. Further skeleton arguments were filed by both parties. For Systemcare Mr Fullerton relied on the skeleton argument prepared on the application for joinder. In his supplemental skeleton argument he analysed certain payments made by Mr Sharif either directly or indirectly via WEPS. He pointed out that a number of payments had been made into SDT's account between August and December 2007. However, only one of those (for £5,990) was made before the trial. He pointed out that Mr Sharif had made payments to SDT after the trial for the purpose of mounting an appeal. The overall submission that he made was that SDT's bank account disclosed substantial fresh injections of capital "subsequent to the trial and a fresh injection of capital of £22,000 on 12^th November 2007 subsequent to the judgment for the admitted purpose of funding litigation." (§ 22). He asserted that:

"On the evidence, the company was clearly solvent in May 2007 and capable of paying the Order of Costs under the Default Costs Certificate … The judgment on the claim together with interest on 2^nd November 2007 in the sum of £2,199.26 was not a sum that caused the company to become insolvent."

12. In his judgment the judge said (§ 22):

"In my judgment there is some force in the complaint that the case put against Mr Sharif was not formulated clearly, but in the end he can have been under no illusion that what was being asserted was that he was running a counterclaim in the full knowledge that if it failed there was no prospect of [SDT] being able to pay the costs awarded against it."

13. He went on to hold that:

i) The case was brought about by Mr Sharif's actions. It was his dishonesty that caused the litigation (§ 24).

ii) The counterclaim rested on Mr Sharif's own discredited evidence of fact. The loss alleged was "at best fanciful" (§ 25).

iii) Systemcare had no realistic opportunity to apply for security for costs (§ 26).

iv) The liquidator's view that SDT was not insolvent at the date of the judgment was flawed; not least because he had discounted SDT's main creditors who could have demanded repayment at any time. There was no realistic prospect that Systemcare would receive anything if a substantial order for costs were made against SDT (§ 27)

14. Having made these findings, he directed himself as follows (§ 28):

"The discretion to award costs against non-parties may be exercised in a variety of circumstances, such as whether the third party is considered to be the real party interested in the outcome of the litigation; or, 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 that makes it just and reasonable to make an order."

15. It will be noted that in this self-direction there is no mention either of insolvency or of funding of the proceedings.
16. Having given himself that self-direction he then applied it. The relevant factors in the judge's judgment were:

i) Systemcare was locked into litigation without merit and without justification by SDT acting through Mr Sharif (§ 29). It was put to great expense by the manner in which Mr Sharif chose to act (§ 30).

ii) The entirety of the costs of the litigation would not have been incurred but for Mr Sharif both by cancelling the direct debit and by supporting SDT by giving evidence that could not be accepted (§ 31).

iii) Mr Sharif would have been the beneficiary of the litigation, subject to his wife's minority share (§ 31).

iv) For all practical purposes the litigation was funded by Mr Sharif, in that it was kept afloat by injections of cash from his other interests (§ 31).

17. Taking those factors together it was a case in which the proper exercise of judicial discretion was to order Mr Sharif to pay the costs of the action "which have now been assessed at £49,364.29" (§ 32).
18. Aikens LJ granted Mr Sharif permission to appeal.
19. Section 51 of the Senior Courts Act 1981 provides:

"(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

(a) the civil division of the Court of Appeal;

(b) the High Court; and

(c) any county court,

shall be in the discretion of the court.

…

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid."

20. The width of this discretion has been stressed more than once. Appeals should be rare; and this court should not interfere with the discretion of the trial judge unless he plainly erred: Alan Phillips Associates Ltd v Dowling [2007] EWCA Civ 64, [2007] BLR 151 § 31 (Moses LJ).
21. This court has also said that an application for costs against a non-party should not be over-complicated by reference to authority: Petromec Inc v Petroleo Brasileiro SA Petrobras [2006] EWCA Civ 1038, [2007] 2 Costs LR 212 § 11 (Longmore LJ); § 19 (Laws LJ). However, there is now a considerable body of learning on the topic; and I fear that, despite those warnings, it is necessary to refer to some of it. The first general guidance on the principles to be applied was given by this court in Symphony Group plc v Hodgson [1994] QB 179, where Balcombe LJ grouped the then decided cases into a number of categories. These included:

i) Where a person has some management of the action, e.g. a director of an insolvent company who causes the company improperly to prosecute or defend proceedings;

ii) Where a person has maintained or financed the action;

iii) Where the person has caused the action;

iv) Where the person is a party to a closely related action which has been heard at the same time but not consolidated;

v) Group litigation where one or two actions are selected as test actions.

22. He added that these categories were "neither rigid nor closed".
23. A non-party costs order should not be made where the relevant costs would have been incurred anyway without the involvement of the non-party: Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 19, [2004] 1 WLR 2807 §§ 18-20; Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 1 WLR 2723 § 74; Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358 § 61.
24. Further general guidance was given by the Privy Council in Dymocks. The three most important principles articulated by Lord Brown in Dymocks are that:

i) Although costs orders against non-parties are to be regarded as "exceptional", exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order (§ 25 (1)).

ii) Where the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs (§ 25 (3)).

iii) Generally speaking, 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. However, that is not to say that orders will invariably be made in such cases; particularly where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests (§ 29).

25. Lord Brown also said (§ 33):

"The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order."

26. As with Balcombe LJ's classification, these principles are guidance not rules. As Longmore LJ said in Petromec (§ 12) Lord Brown's words are emphatically not a statute. The ultimate question is whether it is just to make the order. It is wrong to treat the reported cases as providing a comprehensive check list of factors which must be present in every case before the discretion can be exercised in a particular case. What may be sufficient to justify the exercise of the discretion in one case should not be treated as a necessary factor for the exercise of the discretion in a different case: Secretary of State for Trade and Industry v Aurum Marketing Ltd [2000] EWCA Civ 224, [2002] BCC 31 (Mummery LJ).
27. Lord Brown's third principle refers to the case of a non-party who funds the proceedings. However, this is not a pre-condition to the jurisdiction to make a non-party costs order. Again Longmore LJ explained the position in Petromec (§ 10):

"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."

28. In the present case there is no question but that Mr Sharif has effectively controlled the proceedings and has sought to derive potential benefit from them. Jurisdiction is thus established.
29. In Mettalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 Millett LJ said:

"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." (Emphasis added)

30. I have emphasised the fourth sentence of this quotation for two reasons. The first is that this sentence was omitted from the quotation of this judgment by Rix LJ in Goodwood. It seems that the judge was not referred to Metalloy itself but only to Rix LJ's citation from it, because that sentence is also omitted from the judge's citation in paragraph 15 of his judgment. The second reason is that the emphasised sentence is precisely the self-direction that the judge gave himself in paragraph 28 of his judgment.
31. As indicated by Millett LJ in Metalloy the countervailing principle in play is the principle of corporate limited liability. But as Millett LJ also indicated that principle can be outflanked if the director against whom a non-party costs order is sought is guilty of some bad faith or impropriety. In Goodwood Rix LJ emphasised (§ 50) that impropriety without bad faith is sufficient to outflank the principle.
32. In Goodwood Rix LJ summarised his conclusion as follows (§ 59):

"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. It may also be noted that in Lord Brown's comments at para 33 of his opinion "the pursuit of speculative litigation" is put into the same category as "impropriety"."

33. It is to be noted that controlling on the one hand and funding on the other are separated by "and/or". Thus it is not the case that both elements need to be present. This is exactly what Longmore LJ had said in Petromec. Likewise it is notable that Rix LJ does not refer to insolvency of the party itself during the pendency of the litigation; although plainly if the party against whom costs have been ordered is in a position to pay them there will seldom be any need for a non-party costs order.
34. In considering the question of funding, it is worth considering what the concept involves. Again, the Petromec case is instructive. Following the loss of an oil rig Petromec received a payout of $147 million. It paid over all but $2 million to its parent company which was ultimately controlled by Mr Efromovich. That $2 million was used to fund litigation which ultimately failed. In considering whether to make a non-party costs order against Mr Efromovich one of the arguments raised on his behalf was that he should not be liable for any costs before the $2 million had been exhausted. Longmore LJ said:

"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."

35. Thus the action of Mr Efromovich in leaving money in Petromec which he could have taken out, even though he was not the source of the money, counted as funding the proceedings. The fact that the money belonged to other companies rather than to Mr Efromovich personally did not matter.
36. Mr Falkowski has advanced a number of criticisms of the judge's judgment. First, he says that the judge decided against Mr Sharif on a case that was never made. For Systemcare it was argued that SDT's entry into liquidation was a decision by Mr Sharif for the purpose of avoiding payment of the judgment debt. For SDT it was argued that SDT was not insolvent until judgment was given against it. Thus it was common ground that SDT was solvent during the pendency of the proceedings. Accordingly the judge was wrong to find implicitly that SDT was insolvent during the course of the litigation. Nor was it asserted that Mr Sharif was running a counterclaim in the full knowledge that if it failed SDT would not be able to pay the costs.
37. Our system remains an adversarial one. It is for the litigants themselves (especially when professionally represented) to place before the courts the points that they wish to argue. I can well see that the case against Mr Sharif to which the judge referred in paragraph 22 of his judgment was one that could have been advanced on the evidence; and if it had been it might have prevailed. But the fact is that it was not. On the contrary Systemcare's case was that SDT was solvent at least up to May 2007 and probably until judgment. Mr Fullerton was unable to point to any part of the written submissions in which it was asserted that Mr Sharif knew that if SDT lost the case it would be unable to pay costs. It might have been submitted that Mr Sharif ought to have known that (or that he deliberately turned a blind eye to that possibility); but it was not. In my judgment, therefore, the way in which the judge framed the case against Mr Sharif in that paragraph was erroneous.
38. However, two questions still remain. The first is whether the judge in fact decided the case on the basis articulated in paragraph 22 of his judgment. In my judgment what the judge said in paragraph 22 of his judgment was not the basis on which he decided the case. He decided the case on the basis of the self-direction he gave himself in paragraph 28. In other words he was concentrating on the questions:

i) Whether Mr Sharif was the real party interested in the outcome of the litigation;

ii) Whether Mr Sharif was responsible for bringing the proceedings;

iii) Whether the proceedings had been brought in bad faith; and

iv) Whether there was some other conduct that made it just and reasonable to make an order.

39. It will be recalled that in the skeleton argument submitted on behalf of Systemcare on the application for joinder it had been asserted that:

"[Mr Sharif] was the real party interested in the outcome of litigation, was responsible for causing the instigation of proceedings, that the counterclaim was brought in bad faith or for an ulterior purpose and that other conduct, referred to in the judgment, makes it just and reasonable for such an order."

40. In the supplemental skeleton argument produced for the eventual hearing Mr Fullerton expressly cross-referred to that skeleton argument; and said that he continued to rely on it. Thus this way of putting the case was one that was open to Systemcare; and it was therefore permissible for the judge to have decided the application on that basis. Paragraph 28 of the judge's judgment is, in effect, a paraphrase of that way of putting the case.
41. The second question is whether any procedural irregularity caused injustice to Mr Sharif. Since this way of putting the case was one that was open to Systemcare; and was in my judgment the basis on which the judge actually decided the application, the procedural irregularity was not one which, in my view, caused injustice to Mr Sharif. I would reject this ground of appeal.
42. Mr Falkowski's second criticism was that the judge was wrong in failing to consider at what point SDT became insolvent. Section 51 gives the court power to decide the extent to which a non-party should pay costs. Thus the judge should have decided the precise point at which SDT became insolvent, because it was only from that point on that Mr Sharif should be liable for costs.
43. In the first place, as I have said, I do not consider that SDT's insolvency was the ground on which the judge decided the case. In addition what he actually said on the question of SDT's financial position was that there was no realistic prospect of SDT being able to pay a substantial costs order if it lost. So he did not say that SDT was insolvent beforehand. Moreover a non-party costs order may be justified even if the party is not insolvent during the pendency of the proceedings. Of the various categories formulated by Balcombe LJ in Symphony, only one refers to insolvency; and then only as an example. Nor is lack of funding by Mr Sharif an absolute bar to a non-party costs order. The quotations from Petromec and Goodwood show that. In the present case the evidence of Mr Martin and Mr Armstrong was that the company could pay its debts as they fell due until judgment in the action was given against it because the on-demand loans due to Mr Sharif and to WEPS had not been demanded. Their money had been left in SDT. As Petromec shows, this kind of financial support can amount to funding. Accordingly in my judgment the judge was entitled to find that "for all practical purposes" Mr Sharif had funded the litigation; and that SDT was "kept afloat" by injections of cash from his other interests.
44. Mr Falkowski next says that the judge wrongly exercised his discretion because he gave no weight, or insufficient weight to the fact that Mr Sharif was not warned at the time that he might be personally liable for costs. It is clear on the authorities that the lack of a warning is a relevant, although not a decisive, factor: Dymocks § 31. Its principal relevance is to the question whether the non-party would have behaved any differently if a warning had been given. In this case Mr Falkowski says that if Mr Sharif had received that warning he might have appealed against the original judgment. It is to be noted particularly that it is not alleged that SDT (or Mr Sharif) would have conducted the original case any differently. I put this to Mr Falkowski during the course of argument; and he expressly disclaimed any such suggestion. So I ask myself: was there any prejudice that Mr Sharif suffered by not having appealed? The judge's judgment turned entirely on questions of fact. They in turn depended on the veracity of Mr Sharif's evidence, which the judge roundly rejected. In my judgment there would have been no prospect of a successful appeal. The alleged prejudice is illusory. I would reject this ground of appeal also.
45. Mr Falkowski next says that the judge gave no weight or insufficient weight to the possibility that the application was motivated by Systemcare's resentment at its inability to obtain an effective order for costs. This argument derives from the observations of Balcombe LJ in Symphony Group plc v Hodgson. What Balcombe LJ said was this:

"The judge should be alert to the possibility that an application against a non-party is motivated by resentment of an inability to obtain an effective order for costs against a legally aided litigant. The courts are well aware of the financial difficulties faced by parties who are facing legally aided litigants at first instance, where the opportunity of a claim against the Legal Aid Board under section 18 of the Legal Aid Act 1988 is very limited. Nevertheless the Civil Legal Aid (General) Regulations 1989 (S.I. 1989 No. 339/89) , and in particular regulations 67, 69, and 70 , lay down conditions designed to ensure that there is no abuse of legal aid by a legally assisted person and these are designed to protect the other party to the litigation as well as the Legal Aid Fund. The court will be very reluctant to infer that solicitors to a legally aided party have failed to discharge their duties under the regulations - see Orchard v. South Eastern Electricity Board [1987] Q.B. 565 - and in my judgment this principle extends to a reluctance to infer that any maintenance by a non-party has occurred."

46. These observations were all made in the context of legally aided litigants, where restrictions in the legal regime itself means that successful litigants cannot, as a matter of law, obtain effective costs orders against unsuccessful legally aided litigants. Moreover, the particular mischief that Balcombe LJ warned against was seeking costs against a party's legal representatives. These observations cannot, in my judgment, be elevated into a general principle that the applicant for a non-party costs order must not be resentful that the party itself cannot honour or has failed to honour a costs order. In this case the judge found that resentment on the part of Systemcare was fully justified because it was put to great expense by "the manner in which Mr Sharif chose to act."
47. Lastly Mr Falkowski said that the judge had not explained why he thought that the case was exceptional. The first answer to this point is that the judge (§ 10) referred to Balcombe LJ's statement in Symphony that the making of a non-party costs order "will always be exceptional" and also (§ 12) to Lord Brown's statement in Dymocks to the same effect. It is most unlikely that he overlooked these two clear self-directions in the course of a 13 page judgment. The second answer is that an award of costs against a non-party is an exercise in judicial discretion. It does not require box ticking or ritual incantations. The third answer is that this court held in Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 that a finding that the case is exceptional is not a precondition to the exercise of the jurisdiction. Morritt LJ put it thus (§ 21):

"I would also comment that there appears to me to be a danger of treating the requirement that the circumstances are "exceptional" as being part of the statute to be applied. It is not. … In none of the cases to which I have referred have "exceptional circumstances" been elevated into a precondition to the exercise of the power; nor should they be."

48. Looking at the case in the round, it had the following features. SDT was controlled by Mr Sharif. He was the owner of 90 per cent of its share capital. He and WEPS were its largest creditors. They left their money in SDT until its eventual collapse. The dispute was triggered by Mr Sharif's actions and his dishonest explanation for his actions. He personally drafted SDT's defence and counterclaim. The counterclaim claimed a loss that the judge described as "at best fanciful". At best it was speculative litigation; at worst it was a trumped up counterclaim. The sole witness of fact on the question of liability was Mr Sharif himself. His evidence was entirely disbelieved. He supported SDT's case with bogus documents. The judge characterised the counterclaim as "without merit and without justification". In my judgment these factors, taken cumulatively, justified the judge's decision to make a non-party costs order against Mr Sharif. I do not consider that such error as he made in characterising one of the ways in which he thought the case against Mr Sharif was put entitles this court to interfere with his exercise of a statutory discretion. I would dismiss the appeal against the judge's decision to make a non-party costs order against Mr Sharif.
49. The final point on the appeal concerns the judge's quantification of the amount that Mr Sharif was ordered to pay. The judge said that the proper exercise of judicial discretion was "to order that Mr Sharif personally pays the costs of the action which have now been assessed at £49,364.29." This was a surprising conclusion for three reasons. First, the costs had not been assessed. They were the subject of a default costs certificate. Thus the judge's own concerns about the level of costs had never been examined judicially. Second, the default costs certificate was issued long before Mr Sharif was joined as a party to the action. So he was given no opportunity to challenge the level of costs himself. Third, the amount in the default costs certificate was greater than the amount of costs that Systemcare itself was asking for. Systemcare had suggested that the appropriate amount was some £27,600-odd plus the costs of the application itself.
50. In my judgment the judge was wrong to quantify the costs in the way that he did. Fairness to Mr Sharif dictates that he should have the opportunity to have Systemcare's costs judicially assessed, especially in the light of the judge's own concerns about the level of those costs. I would therefore set aside that part of the judge's order; and order that Mr Sharif should pay the Systemcare's costs of the action on the standard basis until 20 July 2007 and thereafter on the indemnity basis, to be the subject of detailed assessment if not agreed. To that extent only, I would allow the appeal.
51. When the judge gave judgment on the application for a non-party costs order he ordered Mr Sharif to pay half the costs of that application. Mr Fullerton sought to argue that the judge had been wrong in principle to depart from the general rule that the unsuccessful party should pay the successful party's costs. However, we did not have any transcript of the judge's judgment on this question; nor did we have a proper note of it. The only clue to the judge's thinking was a mention of "state trial" in Systemcare's solicitor's attendance note. It seems, therefore, that as with the underlying claim the judge's concern was proportionality. Without knowing the judge's reasoning process it is impossible to say that he erred in principle. I would dismiss the cross-appeal.
52. Finally I should mention that Systemcare made an application for third party disclosure against Mr Armstrong, SDT's liquidator. Mr Fullerton did not pursue it. It must therefore also be dismissed.

Lord Justice Lloyd

53. I agree that the appeal should be dismissed, except for the substitution of an order that Mr Sharif pay the Claimant's costs of the action to be assessed if not agreed, as proposed by Lewison J, and that the cross-appeal should also be dismissed.
54. For the Appellant, Mr Falkowski presented an apparently powerful argument to the effect that the judge had decided the case on a misunderstanding as to the basis on which it had been argued, and that his reasons for making the order against the Appellant could not stand. It is odd that the judge should have used the words he did in his paragraph 22, quoted at paragraph 12 above, since it is clear that the Claimant's case was argued on a different footing, namely that the Defendant had been solvent at least until May 2007, and probably until after judgment, having been put into liquidation in order to frustrate the Claimant's claim.
55. It would have been a fair comment that the case could well have been run on the basis that the Appellant pursued the litigation in the knowledge that if it failed there was no prospect of the Defendant being able to pay any costs awarded against it, or at least reckless as to that prospect. But that is not how the Claimant did argue the case, and it is right to respect that forensic decision.
56. The significance of the reference to May 2007 appears from the procedural history of the case. As mentioned by my Lord, the Defendant initiated the Defence and Counterclaim without the assistance of lawyers, the Appellant being responsible for the initial documents. However, before long he caused the Defendant to instruct solicitors. That led to the amount of the counterclaim being increased from about £15,000 to about £48,002.42. The case was originally due to come to trial in September 2006. That date was vacated on the court's own initiative, for reasons that are now unknown, possibly based on a misunderstanding or a mistake. There was an attempt to restore the trial date but this proved to be impossible, and the trial was refixed for May 2007. That hearing date became abortive in circumstances that were not fully explored below. The Appellant contended that the Defendant had been let down at a very late stage before the hearing date by its then solicitors, leaving him in a position in which he tried to represent the Defendant himself. The judge before whom the trial was due to proceed refused to allow the Appellant to act as the Defendant's representative, no doubt for good reason given the nature of the issues. That led to the second adjournment and the eventual trial dates of 16 and 17 August 2007. It was part of the Appellant's case that the Defendant would have had no difficulty in dealing with the adverse costs order if the case had come on for trial in September 2006. At that time the company was still trading successfully, although at a reduced rate as compared with 2005. The delay to the proceedings led to a position in which the Defendant had to bear the burden of its own trial costs, together with the unfortunate liability to the Claimant for abortive costs in July 2007, and the eventual liability for the costs of the proceedings following the judgment in November 2007, at a time when its business was less and less successful, and it was accordingly in need of further financial support. So the references to May 2007 are to the trial date as it would have been but for the Defendant parting company with its original solicitors.
57. As mentioned by Lewison J, the only specific identified injections of funds started shortly before the eventual trial date, with a payment of almost £6,000. All the remaining such payments mentioned in the evidence came after the hearing. For the Claimant Mr Fullerton placed some emphasis on the fact that even after judgment Mr Sharif caused his other company, WEPS, to put the Defendant in funds to the tune of some £22,000, which would have enabled it to pay the judgment debt and the amount ordered by the judge by way of an interim payment of costs, due by mid November, and that his avowed reason for this was to enable the company to pursue the litigation by way of an appeal. It was at that stage that the advice of an insolvency practitioner prevented the payment, since the Defendant was by then plainly insolvent and to pay the debt would have risked being a wrongful preference. I would not accept Mr Fullerton's argument that this payment was of any relevance to the application under section 51. Although it shows that the Appellant wished to pursue the fight, it also showed that he accepted the liability to the Claimant and was not then seeking to evade it.
58. Apart from the payment of almost £6,000 just before the trial, the identified payments to the Defendant by Mr Sharif or by WEPS in 2007 are of no real relevance to the case under section 51. Among them were payments amounting to more than £55,000 out of the Defendant's eventual indebtedness of £74,000 to WEPS. However, even without regard to those payments, it is reasonably clear that the Defendant had for some time been dependent on funds provided by the Appellant directly or indirectly, which could no doubt have been demanded but had not been, and were not demanded before the insolvency arose. The fact that these debts were not demanded (and, indeed, that increased funding was provided by WEPS and others) made it proper for the liquidator to conclude that, until judgment after the trial, the Defendant had been solvent, in the sense of being able to pay its debts as they fell due. However, on an objective view of the case, it must have been clear in 2007 that, if the Defendant lost the case and was ordered to pay the Claimant's costs, it would be unable to pay those liabilities without substantial further support from outside. Whether further funds would have been provided remained to be seen, though at least WEPS did put the Defendant in funds with a view to paying the judgment debt and the interim costs.
59. One point to which Mr Fullerton attached importance, as the judge had, was that the Defendant did not simply cancel its direct debit mandate for the future, but it procured the reversal of six payments which had already been made under the direct debit mandate, by false allegations on the part of the Appellant that the documentation was not correct. I agree that this is a discreditable and improper aspect of the Appellant's behaviour which is relevant to the application, on which the Claimant was justify in relying, as was the judge as he did at paragraph 24.
60. I agree with Lewison J that the exercise of the jurisdiction under section 51 does not depend on showing that the party to the litigation was insolvent during the course of the proceedings. In practice, unless the party is insolvent by the time of attempts to enforce, the question will rarely arise. It is not sufficient, of course, to show that insolvency has supervened. There must be a good deal more to the conduct of the party sought to be made liable.
61. If the party to the proceedings which cannot or does not pay its liability for costs is a company, it is also important not to allow its director or directors to be made liable too readily. Lord Justice Millett's words in Metalloy Supplies Ltd v MA (UK) Ltd quoted by Lewison J at paragraph 29 above are important in this respect, as are his words of caution at the outset of his judgment, immediately before the passage quoted:

"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."

62. Lord Justice Lloyd (as Lord Lloyd of Berwick then was) said this about making a director liable, in Taylor v Pace Developments [1991] BCC 406 at page 409:

"The controlling director of a one-man company is inevitably the person who causes the costs to be incurred, in one sense, by causing the company to defend the proceedings. But it could not be right that in every such case he should be made personally liable for the costs, even if he knows that the company will not be able to meet the plaintiff's costs, should the company prove unsuccessful. That would be far too great an inroad on the principle of limited liability. I do not say that there may not be cases where a director may not properly be liable for costs. Thus he might be made liable if the company's defence is not bona fide, as, for example, where the company has been advised that there is no defence, and the proceedings are defended out of spite, or for the sole purpose of causing the plaintiffs to incur irrecoverable costs. No doubt there will be other cases. But such cases must necessarily be rare. In the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs."

63. In agreement with Lewison J, it seems to me that the present case is one in which a judge could properly decide to make the Appellant liable under section 51, because it is not merely a question of the Appellant having acted in a proper manner in his capacity as a director of the Defendant. The judge identified several relevant matters in his paragraph 28, quoted at paragraph 14 above. I agree that those are all relevant and, on the facts, they are sufficient to make the judge's decision a proper exercise of his discretion under the section. They were relied on by the Claimant before the judge, it was proper for him to base his decision on them, and I agree with what Lewison J says at paragraph 48 above in considering that the judge's decision was justifiable and justified for those reasons.
64. This jurisdiction risks becoming over-elaborate in its exercise, with too much reference to authority, over-literal reliance on descriptive reasoning in previous cases as if it laid down a formal classification of possible cases under the section, too many incidental applications, and too many appeals. It seems to me that this is an instance of all of these. I do not altogether criticise Counsel for their references to authority before the judge or before us, but I do deprecate the tendency to treat what judges said in previous cases as if they had defined the scope of the jurisdiction in any rigorous way. I can understand why Mr Falkowski sought to tie Mr Fullerton down in his presentation of the case below, but in fact all the necessary ingredients of the case were there from the start of the section 51 application.
65. I would criticise the application by the Claimant for discovery to be made by the Appellant which was made to the judge below in support of the application and, even more so, the application made to this court for discovery against the liquidator. If a section 51 application cannot be made on the documents already available it should not normally be made at all. The making of applications of that kind may be all of a piece with the judge's critical attitude to the Claimant's claim for costs below at the trial, and his disallowance of half of the Claimant's costs of the section 51 application.
66. It seems to me that the Claimant's delay in proceeding under section 51, and its failure to warn the Appellant earlier of the prospect of such an application, is open to criticism, as well, but I agree with Lewison J that it can have caused no prejudice to the Appellant, not least because an appeal would have been hopeless, and because there is no realistic basis for suggesting that he would have acted in any different way had he been given notice promptly, say, after the Defendant went into liquidation.
67. For the reasons given above, and for those given by him, I agree with Lewison J as to the appropriate disposal of the appeal and the cross-appeal.

Lord Justice Ward

68. Although I was impressed by Mr Falkowski's cogent arguments, the reasons given by Lewison J. for rejecting the appellant's case, supplemented as they are by the judgment of Lloyd L.J., are compelling and in agreement with my Lords I too would dismiss the appeal subject to the variation of the judge's order to give the appellant the opportunity to challenge the amount of the costs on assessment. The cross-appeal should also be dismissed.