England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(MR JUSTICE NORRIS)

		Royal Courts of Justice Strand, London, WC2A 2LL
		2 October 2013

Lord Justice Vos:

1. This is an appeal brought by Mr Innes Berntsen and Mr Christopher Richardson, the only two members of Coniston Hotel (Kent) LLP (in liquidation) ("the LLP"). The respondents are Mr Matthew Tait and Ms Sarah Rayment, who are the former administrators of the LLP.
2. The appellants appeal against the decision of Norris J on 1 February 2012 by which he ordered them to pay 85 per cent of the respondents' costs of an application that the respondents made to strike out the appellants' claims and for summary judgment in respect of them, and he ordered the appellants to make an interim payment of £45,000, and stayed the proceedings until that payment was made.
3. McCombe LJ granted permission to appeal on one ground only. I shall return to that ground, having dealt briefly with the chronological background.

Chronological Background

4. On 22 June 2010 the respondents were appointed as joint administrators of the LLP.
5. On 1 August 2011 the appellants issued insolvency proceedings to remove the respondents as administrators of the LLP under paragraphs 74, 75 and 78 of Schedule B1 to the Insolvency Act 1986 ("Schedule B1").
6. On 12 December 2011 I made an order winding up the LLP and I ordered that the respondents should be discharged from liability as joint administrators under paragraph 98 of Schedule B1, such discharge to take effect 28 days after they had submitted and filed their final progress report, save in respect of any application made under paragraphs 74 and 75 of Schedule B1. I adjourned the question of whether the respondents should pay the costs of the administration to a hearing before the Registrar which had been fixed for 9 February 2012.
7. On 9 February 2012 the appellants were ordered to particularise the paragraphs of schedule B1 that they relied upon and the heads of relief that they claimed thereunder.
8. On 14 March 2012 the appellants filed Points of Claim, as they had been directed to do.
9. On 15 May 2012 the respondents' solicitors wrote to the appellants in relation to their ongoing requests for further information of the appellants' Points of Claim. The letter concluded by warning the appellants that the respondents had already incurred costs of some £320,735 and would be likely to incur costs of a further £660,000 if the claim were pursued to trial.
10. On 4 July 2012 the respondents issued their application to strike out the Points of Claim and/or for summary judgment.
11. On 13 August 2012 Mr Richardson's statement in response to the strike-out application contended that the respondents' application had caused "devastating loss to [the appellants]" (paragraph 47) and that the appellants and their families had been "devastated by the impact of what has happened to us" and had been caused huge financial loss (paragraph 48).
12. On 1 February 2013 Norris J ordered in summary that:

(1) all complaints made by the appellants in respect of the respondents' allegedly wrongful acts before they were appointed as administrators should be struck out;

(2) all allegations of fraud against the respondents should be struck out;

(3) the appellants should substantially amend and particularise their Points of Claim; and

(4) the appellants should pay 85 per cent of the respondents' costs and an interim payment of £45,000 by 4.00 pm on 3 May 2013, and that if that sum were not so paid, then the proceedings should be stayed pending such payment or further application.

13. In his careful judgment, Norris J held that the appellants' Points of Claim did not meet the standards to be expected in insolvency proceedings, but that it would be disproportionate and unjust to strike out the entire claim if "by pruning and definition it can be put in a form that the respondents can address" (paragraph 61).
14. Norris J held also that that was particularly so where the appellants would be deprived of their claim under paragraph 74 of schedule B1 if the claim were dismissed, since the LLP was no longer in administration. In addition, Norris J concluded that the present proceedings should be confined to the appellants' claims as creditors or members of the LLP under paragraphs 74 and 75 of Schedule B1 (paragraph 66) and that the application succeeded but not to its full extent (paragraph 73). Norris J said specifically at paragraph 72, as is relied upon by Mr Ogunbiyi, counsel for the appellants before us, as follows:

"Notwithstanding the present state of the evidence I do not think that this case can be dismissed as entirely fanciful."

15. Later, on 1 February 2013, Norris J gave judgment on the question of costs in which he held that the respondents had been the successful party on the application and that the appellants should pay 85 per cent of the respondent's costs of and occasioned by the strike-out application. He dealt after still further argument with the question of an interim payment as follows, which had been sought by Mr Justin Fenwick QC, counsel who then appeared for the respondents and has also appeared before us. The judge said this:

"I propose to make an interim order as to costs. In doing that I am guided by the factors indicated in the decision in Mars UK Ltd v Teknowledge Ltd [1999] 2 Costs LR 44 and Dyson v Hoover [2003] EWHC 624 (Ch). I propose to make an interim award of £45,000 being slightly less than half of the sum shown on the schedule of costs."

16. In the course of the argument before that judgment was delivered, Norris J had said this:

"I know they [the appellants] feel very strongly about this and there are all sorts of complaints that they want to make. But, in a sense, it is your job as counsel to focus their minds on the ones which stand a real chance of proof: those which will not entail enormous expenditure to prove and will at the end of the day bring home some real benefit to them. I am sure you will do your job. It is a heavy responsibility to bear in a case like this with people who do not have any money and who have been ruined by what has happened. Nor should one ever overlook the possibility that agreement at perhaps a much more modest level than people have aspirations for may, at the end of the day, be the best way out." (emphasis added)

17. On 24 April 2013 McCombe LJ granted, as I have said, permission to appeal only in relation to the challenge to the interim payment because, as he said:

"It may have been wrong to order impecunious litigants to make such a payment when the judge found that some of their claims survived the attempt to strike out and remain to be litigated. An interim costs order might stifle those claims."

18. The appellants filed statements of their assets and liabilities, showing them both to have a significant excess of liabilities over assets.

The Grounds of Appeal

19. Mr Ogunbiyi, counsel for the appellants, will forgive me if I summarise the essential points from the appellants' Grounds of Appeal and his skeleton arguments briefly as follows:

(1) The requirement for an interim payment is inconsistent with the overriding objective of CPR Part 1 when read together with the court's discretion on awards of costs that flows from CPR Part 44.

(2) The appellants are impecunious and have been rendered impecunious as a result of the actions of the respondents, and the interim order would frustrate or stifle a genuine claim.

The Respondents' Contentions

20. In answer to these points Mr Fenwick made the following main submissions in his written contentions which were reflected in his Respondents' Notice of 8 May 2013:

(1) The Court of Appeal will only interfere with the exercise of the first instance judge's discretion on costs if he has erred in principle or failed to balance the appropriate factors (Adamson v. Halifax plc [2003] 1 WLR 60 per Sir Murray Stewart-Smith at paragraph 16 and SCT Finance v. Bolton [2002] EWCA Civ 56 per Wilson J at paragraph 2).

(2) A party who has been awarded costs should receive those costs as soon as possible (Mars UK supra per Jacob J at pages 46-47; and Cummings v. Blakemore [2010] 1 WLR 983 per Elias LJ at paragraph 23).

(3). There was no evidence adduced at the hearing to support the contention that the appellants were impecunious, and such evidence was required before it could be concluded that the claim would be stifled (Al-Koronky v. Time-Life Entertainments Group Ltd [2005] EWHC 1688 (QB) per Eady J at paragraph 31). Moreover, this point was not made to the judge and cannot therefore be relied upon on appeal.

(4) The judge took account of all relevant factors and principles and made no error.

The Issues

21. Against this background the primary questions for the court seem in my judgment to be as follows:

(1) whether it is open to the appellants to raise the argument that the interim costs order would stifle a genuine appeal;

(2) if so, whether it is a relevant factor in determining whether to award an interim payment on account of costs that making such an order may frustrate or stifle a genuine claim;

(3) if so, whether evidence of impecuniosity was required (and if required provided) and whether it was sufficiently made out that the costs order would stifle a genuine claim.

(4) if so, whether the judge erred in principle in failing to take these matters into account and if so what order ought to have been made.

22. Before dealing with these four issues, I should set out the relevant provisions of the Civil Procedure Rules.

The CPR

23. Part 1 of the CPR provided as follows when the judge dealt with his case. I will add the changes made by the Jackson Reforms since that time in square brackets.

"1.1(1) These Rules are the new procedural code with the overriding objective of enabling the court to deal with cases justly [and at proportionate cost].

(2) Dealing with the case justly [and at proportionate cost] includes so far as is practicable --

(a) ensuring that the parties are on an equal footing;

(b) saving expense;

(c) dealing with the case in ways which are proportionate –

(i) to the amount of money involved;

(ii) to the importance of the case;

(iii) to the complexity of the issues; and

(iv) to the financial position of the party

(d) in showing that it is dealt with expeditiously and fairly;

(e) allotting to it an appropriate share of the court's resources while taking in to account the need to allot resources to other cases; [and

(f) enforcing compliance with rules, practice directions and orders]."

24. Part 44.3 of the CPR at the time of the hearing before the judge provided as follows:

"(1) The court has discretion as to –

(a) whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

(2) If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order.

…

(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including –

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and

(c) any admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply.

(5) The conduct of the parties includes –

(a) conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol;

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c) the manner in which a party has pursued or defended its case or a particular allegation or issue; and

(d) whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.

(6) The orders which the court may make under this rule include an order that a party must pay –

(a) a proportion of another party's costs;

(b) a stated amount in respect of another party's costs;

(c) costs from or until a certain date only;

(d) costs incurred before proceedings have begun;

(e) costs relating to particular steps taken in the proceedings;

(f) costs relating only to a distinct part of the proceedings; and

(g) interest on costs from or until a certain date, including a date before judgment.

(7) Before the court considers making an order under paragraph (6)(f), it will consider whether it is practicable to make an order under paragraph (6)(a) or (c) instead.

(8) Where the court has ordered a party to pay costs, it may order an amount to be paid on account before the costs are assessed".

25. Part 44.2(8) of the CPR, which was previously Part 44.3(8), has now been amended to read as follows:

"(8) Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs unless there is good reason not to do so."

26. It will be observed that the new Part 44.2(8) makes it clear that in the ordinary way an interim payment will be ordered. This case is, however, to be decided under the old Part 44.3(8) that was in force when Norris J heard the application for an interim payment order in this case.

Issue 1: Is it open to the appellants to raise the argument that the interim costs order would stifle a genuine appeal?

27. This appeal is an attack on the judge's exercise of discretion. It is clear from Part 44.3(8) that the discretion is at large. This is confirmed by Jacob J's dictum in Mars UK supra where he said that in exercising the discretion to order an interim payment on account of costs "the court must take into account all the circumstances of the particular case".
28. The submission of impecuniosity was made to the judge and has been made to us. Its only relevance before the judge can have been to suggest that the appellants' impecuniosity would prejudice them in the pursuit of the claim, since they could not afford to raise the costs ordered, and under the order made their claim would therefore be stayed until they could. In the circumstances, I do not regard the suggestion that the order might stifle a genuine claim as anything more than an extrapolation from the original submission made to the judge. It is certainly, in my judgment, open to the appellants to raise it, as McCombe J acknowledged.

Issue 2: Is impecuniosity a relevant factor in determining whether to award an interim payment on account of costs that making such an order may frustrate or stifle a genuine claim?

29. As I have already mentioned above, it is clear from both the wording of the relevant version of Part 44.3(8) and Jacob J's dictum in Mars UK supra that the discretion as to whether to order an interim payment is at large. There is, therefore, no doubt whatever that it is open to the court to take into account as one of many relevant factors that an order might or would stifle the claim.

Issue 3: Is evidence of impecuniosity required and if so was it provided and was it sufficiently established that the costs order would stifle a genuine claim?

30. There was in this case some exiguous evidence of impecuniosity in the language of Mr Richardson's statement referred to above. As I have already recited, the judge acknowledged it in the course of argument. I accept, however, that there was no detail provided of the devastating losses caused to the appellants and their family. It might be thought that where there were creditors for many millions of pounds (about which the judge was aware) such a position would be obvious. It is true also that no detailed asset statement was provided to the judge. Perhaps more importantly, no evidence was provided as to how the litigation was being funded on the appellants' behalf.
31. Mr Ogunbiyi has told the court this morning that the litigation has been funded by family and friends, bearing in mind the appellants' bleak assets and liability statements that have been produced since the hearing before the judge. But there was no evidence before the judge of how any future funding of the litigation would occur or, indeed, whether the persons funding the litigation other than the appellants themselves would be able to meet any interim order made as to the respondents' costs.
32. That said, it does not seem to me that there can be any principle that dictates that an argument as to impecuniosity or stifling cannot be advanced without specific evidence supporting it. It will be a matter of degree. In some cases it will be obvious from other circumstances that one party would be ruined by a costs order; in others it will not. In this case it was certainly not obvious from the material before the judge that the appellants would not, by some means, in fact be able to satisfy the interim costs order he made. Indeed, he deliberately allowed a lengthy period for payment without any submission being made that that time was insufficient.
33. In my judgment, the judge was entitled to take into account that the events that were the subject of the claim were said to have severely damaged the appellants financially and that the appellants might well find it difficult to satisfy the order.
34. Mr Ogunbiyi has submitted in oral argument this morning that the judge failed to give adequate weight to the knowledge that the appellants had no money. In my judgment, however, the point is that the judge had no evidence of their assets or of how they were funding the litigation or that they could not pay any costs order or that the proceedings would be stifled. Indeed, it is to be pointed out that no direct submission was made to him to the effect that the proceedings would be stifled if the costs order he proposed in argument were to be made.

Issue 4: Did the judge err in principle in failing to take these matters into account? And, if so, what order ought to have been made?

35. This, then, is the crucial issue for the court. The judge gave very brief reasons for his decision, but the transcript of the argument to which we have been extensively directed shows that he must have had CPR Part 44.3 generally, the overriding objective, and the numerous relevant factors, well in mind. He was certainly well aware of the financial pressures upon the appellants since he said as much in argument and allowed them three months to pay. Moreover, there was considerable discussion about the appropriate period for payment before the judge. Ward LJ reminded us at paragraph 35 in Camertown Timber Merchants Ltd v. Sidhu [2011] EWCA Civ 1041 of Lord Hoffmann's instructive dictum in Piglowska v. Piglowski [1999] 1 WLR 1360 at 1372 to the effect that in relation to an unreserved judgment reasons "should be read on the assumption that, unless he has demonstrated to the contrary, the judge knew how he should perform his functions and which matters he should take into account" and that "An appellate court should resist the temptation to subvert the principle that they should not substitute their discretion for that of the judge by a narrow textual analysis which enables them to claim that he misdirected himself".
36. I have no reason to suppose that Norris J misdirected himself as to the proper factors to take into account in exercising his discretion as to whether to order an interim payment of costs in this case of £45,000 within three months.
37. In the course of argument the court suggested that the part of the order that might have been argued truly to stifle the claim was the stay. It should be observed, however, that the stay was only granted "pending such payment or further application". It is normal to order a stay where security for costs is granted and, in that situation, the costs concerned are generally future costs; so it is hard to see how it could be regarded as inappropriate in a suitable case to grant a stay where an order concerns the payment of costs that have already been incurred. Moreover, in a case of this kind there is likely to be little practical difference between granting a stay and not granting a stay. It is true that if a stay had not been granted some steps might have been taken in the litigation before the respondents enforced their order for payment, but thereafter if, for example, bankruptcy ensued, the pursuit of the litigation would be taken out of the appellants' hands and their trustees would not be likely to pursue the litigation without adequate funding. This aspect was not the focus of the appeal, and I think it better to leave any more detailed comments to a case in which it is.
38. For the reasons that I have sought to give, I would dismiss this appeal

Lady Justice Sharp:

39. For the reasons given by Vos LJ, I too would dismiss this appeal.

Lord Justice Moore-Bick:

40. I agree.