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
Mr Justice Arnold
[2017] EWHC 389 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		06/09/2018

Lord Justice Floyd:

Introduction

1. On 1 July 2015 Arnold J handed down judgment in this copyright action which the respondents (together "SATV") had brought against two companies, WPMC Limited ("WPMC") and Iambic Media Limited ("Iambic"). The proceedings had begun on 2 May 2012 alleging actual or threatened infringement of US and UK copyrights by WPMC and Iambic, in particular by exhibiting a documentary ("the Documentary") in the US in mid-May 2012. The commencement of the action was accompanied by an application for urgent interim relief which was resolved by undertakings embodied in a consent order of David Richards J (as he then was) dated 15 May 2012. The claim against Iambic was stayed at an early stage in consequence of its winding up, but was defended by WPMC on three grounds. These were, firstly, that WPMC had been granted a licence under the relevant copyrights; secondly, that SATV were estopped from enforcing those copyrights under the doctrine of proprietary estoppel; and, thirdly, that the use of the Documentary of which complaint was made in the US constituted "fair use" under US copyright laws.
2. Each of WPMC's defences was rejected by Arnold J after a trial. A hearing was held on 15 July 2015 at which the making of consequential orders was debated. Arnold J gave WPMC permission to appeal on the proprietary estoppel issue, but not in relation to the other two defences. He ordered WPMC to pay SATV's costs. These costs were to be assessed on the standard basis, but on the indemnity basis from 26 July 2014 because of a Part 36 offer which had been rejected by WPMC. The rejection of the Part 36 offer also motivated the judge to order WPMC to pay interest on those costs from 26 July 2014 at the rate of 8% above base rate. Arnold J further ordered WPMC to make an interim payment of £375,000 on account of those costs, although SATV's total claim for costs was much more than that amount. SATV promptly served a petition seeking the winding-up of WPMC, but on 5 August 2015 a meeting of creditors took place at which it was resolved that WPMC be voluntarily wound up and a liquidator appointed. No appellant's notice was served by WPMC.
3. This outcome was satisfactory for SATV in so far as it prevented WPMC from authorising the exhibition of the Documentary as it had threatened to do, but unsatisfactory in so far as it left them having to prove in WPMC's winding up for their very substantial costs of prosecuting the action. The outcome would not, however, have come as a surprise to SATV. Quite apart from any investigations which they themselves might have conducted into their litigation opponent, SATV's solicitors, Forbes Anderson Free ("FAF"), had been told in an email from WPMC on 9 August 2014 that "WPMC has no assets to speak of". Later, on 20 April 2015, FAF themselves wrote to WPMC stating:

"We are not convinced that WPMC will be able to meet any such costs order (although we anticipate that our clients would be entitled to execute upon WPMC's interest in the Documentary").

4. Just over a year after judgment had been handed down, on 7 July 2016, SATV wrote to Mr David Bailey, the director and majority shareholder of WPMC, intimating for the first time that they intended to seek an order against him under section 51(3) of the Senior Courts Act 1981 that he pay most of the costs of SATV's claim against WPMC and Iambic. An application to that effect was made on 3 August 2016. Mr Bailey resisted the making of the non-party costs order ("NPCO") on the basis that it would be unjust to make him pay the costs of the action. Amongst the reasons which he gave was that he had not been warned at any stage up to 7 July 2016 that this was a step which SATV intended to take in the event that they succeeded in the action.
5. In a further judgment handed down on 3 March 2017, after a hearing, Arnold J made the NPCO sought by SATV, requiring Mr Bailey to pay SATV's costs from 4 January 2013, the date from which he assumed control of WPMC. In a yet further judgment handed down on 10 March 2017, Arnold J awarded SATV interest on those costs at a rate of 3% above base rate. We were informed that the costs which SATV are now seeking to recover from Mr Bailey exceed £600,000.
6. On 28 June 2017 I granted Mr Bailey permission to appeal against the NPCO. On 4 October 2017 I granted SATV permission to cross-appeal out of time on the rate of interest on costs awarded by the judge, in the light of a subsequent decision of this court relating to interest after a Part 36 offer, OMV Petrom SA v Glencore International AG [2017] EWCA Civ 195; [2017] 1 WLR 3465.
7. On the appeals, Mr Bailey was represented by Mr Benjamin Williams QC and SATV by Mr Ian Mill QC and Mr Andrew Scott.

The facts in more detail

8. The central topic of the Documentary is a concert given by The Beatles at the Coliseum in Washington DC on 11 February 1964 at which they performed 12 of their songs. A video was made of the concert and, many years later, in 2009, Iambic obtained a copy of a video and set about making the Documentary which was entitled The Beatles: The Lost Concert. Subsequently the rights to the videotape were transferred to WPMC. On 14 February 2012 WPMC and Iambic entered into an agreement with Ace Arts LLC ("Ace") under which Ace was granted a licence to exploit the Documentary in the US, in particular via Screenvision Exhibition Inc ("Screenvision").
9. The first respondent owns the worldwide copyrights in eight of the songs performed by the Beatles at the concert, and the second respondent is its UK exclusive licensee. In April 2012 SATV learned of the promotion of the Documentary and subsequently commenced these proceedings.
10. Iambic and WPMC were both English companies, and prior to September 2012 both were owned and controlled by Christopher Hunt. Mr Hunt, Iambic and a solicitor, Mr Henry, had been involved as defendants in the unsuccessful defence of separate proceedings, which led to the winding up of Iambic in September 2012 and, by January 2013, to Mr Hunt's bankruptcy.
11. Mr Hunt had got to know Mr Bailey in 2011 through Mr Henry. Mr Bailey was described by the judge as a "private venture capitalist of considerable experience". Mr Bailey and a group of fellow investors had invested over £2.2 million in a project to produce, film and record a tribute concert to Michael Jackson, but they lost their investment when the corporate vehicle Global Live Events LLC ("GLE") went into administration in November 2011.
12. In December 2012 Mr Hunt approached Mr Bailey and suggested that Mr Bailey acquire WPMC as a way of recouping some of the money he and his fellow investors had lost in the GLE project. Mr Hunt explained that WPMC owned valuable assets, namely the rights to the Documentary and its agreement with Ace. Mr Hunt further explained that Ace had arranged for the Documentary to be screened in cinemas across the US in mid-2012, and that WPMC stood to receive a percentage of any revenue. Mr Hunt told Mr Bailey that SATV had issued proceedings earlier in 2012 and WPMC had been obliged to accept an injunction which prevented the Documentary from being shown, and that this had prevented the intended release.
13. Mr Hunt explained that Ace was planning to bring proceedings against SATV in the US to establish its entitlement to exploit the documentary there. Ace considered that the documentary could lawfully be shown in the US, and had obtained the services of a US lawyer who had agreed to take on the case on a no win, no fee basis as he was sufficiently confident in the claim. The proceedings against WPMC in the UK were, according to Mr Hunt, "effectively dormant".
14. On 4 January 2013 Mr Bailey was appointed sole director of WPMC. On the same day WPMC's share capital was increased to 1,000 ordinary shares of £1 each, 999 of which were allotted to Mr Bailey in return for his payment of WPMC's debts. WPMC was not trading at that stage. WPMC owed £1,800 to Universal Music in respect of royalties for one of the songs in the Documentary and had issued a statutory demand which WPMC did not have sufficient funds to pay. Mr Bailey agreed to pay off that debt in return for the shares which were allotted to him.
15. Mr Bailey learned soon after these events that the proceedings brought by SATV were not at an end. On 12 April 2013 FAF wrote to Mr Bailey in his capacity as a director of WPMC asking for a permanent undertaking not to exploit the documentary and making it clear that, in the absence of an undertaking, they intended to pursue the claim to trial. Mr Bailey did not reply until 28 October 2013, when he said that an undertaking would not be offered. Thereafter until 18 May 2015 the proceedings were defended by WPMC by Mr Bailey acting in person on their behalf.
16. At around this time Mr Bailey was told by Mr Hunt that WPMC had obtained an opinion from a Professor Peter Jaszi that exploitation of the Documentary in the US would not be an infringement of SATV's copyright because the video of the concert was in the public domain, or because such exploitation would be protected as fair use. Professor Jaszi, who prepared a report for and gave evidence (by videolink) at the trial of the action, was Professor of Law at the Washington College of Law, American University, Washington DC and Director of the Glushko-Samuelson Intellectual Property Law Clinic. He was also an attorney and a Trustee of the Copyright Society of the USA and a member of the Editorial Board of its Journal.
17. On 29 May 2014 Mr Bailey made an offer on behalf of WPMC to settle the proceedings on the basis that the order of David Richards J be made permanent. WPMC said in their offer letter that they did not have the means to exploit the Documentary, but the judge rejected that explanation so far as it related to the US market, on the basis of his findings, and Mr Bailey's evidence, that WPMC had put in place arrangements to exploit the Documentary there.
18. In June 2014 Mr Bailey arranged for an agreement to be entered into between WPMC and his company David Bailey Enterprises Ltd ("DBE") under which DBE would be remunerated at the rate of £1000 a day up to a maximum of £50,000 in the period to 31 May 2015 for his time and effort in defending the claim. In addition, it was resolved by WPMC that any sums provided by Mr Bailey to WPMC, or payments made on behalf of WPMC, would be treated as secured loans and thus have priority over other creditors. An agreement was also put in place with Mr Hunt, at the same time, whereby Mr Hunt was to be remunerated at the rate of £25,000 per annum for assisting WPMC to defend the claim if WPMC received any income following the US litigation.
19. On 4 July 2014 SATV made a Part 36 offer to settle their claim on the basis of a permanent undertaking in the terms of the order of David Richards J and certain acknowledgments. On 22 July 2014 Mr Bailey rejected this offer on WPMC's behalf. This offer formed the basis of the judge's decision to order SATV's costs to be assessed on the indemnity basis, because the judgment which SATV ultimately obtained was at least as advantageous as the Part 36 offer.
20. In the course of the correspondence between the parties in the summer of 2014, Mr Bailey wrote the email from which I have quoted in paragraph 3 above, explaining that WPMC has no assets to speak of, in the context of questioning SATV's motives in pursuing the claim. He considered, at this time, whether he should put WPMC into liquidation, but decided against taking that course given that it was possible that he would "profit from a favourable outcome in the US court case" which at that time he expected would come to trial in November of that year. In the event, the US case did not come to trial in November. It was adjourned to enable the parties to pursue alternative dispute resolution.
21. On 20 April 2015 FAF made a second Part 36 offer, which Mr Bailey also rejected on behalf of WPMC. This is the letter in which FAF made clear that they were aware of the risk that WPMC would not be able to pay the costs in the terms which I have also quoted in paragraph 3 above. The same letter referred to the fact that the trial was fixed for June 2015. The receipt of the letter prompted Mr Bailey to approach solicitors, Messrs McFaddens. Mr Bailey told McFaddens that he was considering placing WPMC into liquidation. McFaddens recommended first taking advice from specialist copyright counsel as to the prospects of successfully defending SATV's claim. It was envisaged that if the advice was favourable, McFaddens and counsel would enter into a conditional fee agreement ("CFA"). The opinion of Mr Alastair Wilson QC was obtained to the effect that WPMC had a good defence on the basis of the collateral licence and estoppel. Accordingly Mr Wilson QC and McFaddens agreed to act on a no-win, no-fee CFA.
22. Before the CFA could be finalised, WPMC applied to adjourn the trial. For the hearing of the application before Newey J on 20 May 2015 McFaddens instructed Mr Wilson QC. Mr Bailey paid WPMC's solicitors' and counsel's fees for this hearing. Newey J (as he then was) refused the application to adjourn and ordered WPMC to pay the costs assessed at £7,000.
23. The CFA was signed on 16 June 2015, after the commencement of the trial, but it took effect from 21 May 2015. The CFA dealt with after the event ("ATE") insurance, which was not taken out, in clause 10:

"10.1 Before entering into this agreement, McFaddens discussed with the client the possibility of taking out after the event insurance to cover the client's liability for the opponent's costs and disbursements and/or to cover the client's liability for McFaddens' fees, success fee and disbursements. McFaddens does not have any interest in any such policies which we have discussed.

10.2 If the client wins the claim, the client is no longer entitled to seek recovery of the insurance premium from the opponent."

24. Also on 16 June 2015, WPMC entered into two assignments by way of security. A first security assignment between WPMC and McFaddens and Mr Wilson QC assigned to them WPMC's interest in the Documentary and in all proceeds from or pursuant to the proceedings by way of security for their conditional fees. The second security assignment between WPMC and DBE assigned to DBE WPMC's reversionary interest in the Documentary and in all proceeds from or pursuant to the proceedings by way of security for sums advanced to WPMC by DBE. Mr Mill QC for SATV appeared to suggest before us that the second security assignment was an outright assignment to DBE. Mr Williams disputed this. Given that it is an assignment by way of security (as was the first assignment) it seems unlikely that this would be so, and in paragraph 78 of his witness statement Mr Bailey states that, once sums owed to DBE were paid, the residue belonged to WPMC and it was entitled to demand a re-assignment.

Legal principles

25. Section 51 of the Senior Courts Act 1981 provides:

"51.— Costs in civil division of Court of Appeal, High Court and county courts"

(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) . . .

(b) the High 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."

26. Since the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965; [1986] 2 WLR 1051, it has been clear that "by whom" in sub-rule (3) includes non-parties, so that the section gives to the court jurisdiction to make orders for costs against persons other than the parties to the proceedings.
27. In the years which followed Aiden Shipping, a large number of decisions at first instance and on appeal have considered how the discretion conferred by section 51(3) to order a non-party to pay the costs of the proceedings should be exercised, and have identified a variety of factors which may, depending on the facts, have a material influence on the ultimate decision. Thus in a very well-known passage in Symphony v Hodgson [1994] QB 179, at 192-193, Balcombe LJ, with whom Staughton and Waite LJJ agreed, identified a number of "material considerations", which were not intended to amount to an exhaustive list. One of these was that the party seeking such an order should:

"warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him".

28. Ten years later, after many intervening cases in this jurisdiction and elsewhere in the common law world, Lord Brown of Eaton-under-Heywood, giving the opinion of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004] UKPC 39; [2004] 1 WLR 2807, summarised the main principles in the following way:

"A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows:

1) 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. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against.

2) Generally speaking the discretion will not be exercised against "pure funders", described in paragraph 40 of Hamilton v Al Fayed as "those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course". In their case the court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

3) Where, however, 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. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation, a concept repeatedly invoked throughout the jurisprudence - see, for example, the judgments of the High Court of Australia in Knight and Millett LJ's judgment in Metalloy Supplies Ltd (in liquidation) v MA (UK) Ltd [1997] 1 WLR 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in TGA Chapman Ltd v Christopher [1998] 1 WLR 12 as "the defendants in all but name". Nor, indeed, is it necessary that the non-party be "the only real party" to the litigation in the sense explained in Knight, provided that he is "a real party in ... very important and critical respects" - see Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, referred to in Kebaro at pp 32-3, 35 and 37. Some reflection of this concept of "the real party" is to be found in CPR 25.13 (1) (f) which allows a security for costs order to be made where "the claimant is acting as a nominal claimant".

29. Lord Brown then went on to describe what he regarded as "perhaps the most difficult cases" namely "those in which non-parties fund receivers or liquidators (or, indeed, insolvent companies generally) in litigation designed to advance the funder's own financial interests." After a review of some further authorities Lord Brown said this at [29]:

"In the light of these authorities their Lordships would hold that, 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. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, 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."

30. In Dymocks the non-party ("Associated") relied on the failure to warn of the intention to make the costs application against it. Of this, Lord Brown said at [31]:

"The authorities establish, however, that this [i.e. failure to warn] is no more than a material consideration in the case … and their Lordships are unable to see how an earlier warning could have made any difference to the course of the proceedings here. It is not suggested that Associated would have acted differently in the event of an earlier warning. Nor could they sensibly have been made a party to the litigation at any earlier stage. There is some force, moreover, in Dymocks' submission that, until the appeal hearings were completed, they were unclear whether or not Associated would stand behind the Todds so as to avoid their bankruptcy."

31. Associated also contended that there was no impropriety involved in their promotion of the appeal, and that they had received encouraging advice from leading counsel. This was also of no avail, see paragraph [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."

32. I should also refer to the decision of this court in Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23; [2016] 4 WLR 17. At paragraph [62], Moore-Bick LJ, giving the judgment of the court, warned against over-complicating this area with authority. The opinion of the Privy Council in Dymocks was an authoritative statement of the modern law. He added at [62]:

"We think it important to emphasise that the only immutable principle is that the discretion must be exercised justly".

33. At paragraph [32] Moore-Bick LJ had said this about the need to warn:

"The importance of a warning will vary from case to case and may depend on the extent to which it would have affected the course of the proceedings: see per Lord Brown [in Dymocks] at paragraph 31. If the third party against whom an order for costs is sought is the real party to the litigation, the absence of a warning may be of little consequence."

34. The procedure for deciding whether to make a NPCO has been described as a summary one: e.g. Deutsche Bank at [21]. The justification for adopting a summary procedure to make a non-party liable for what may be very substantial sums of money incurred by one of the parties in prosecuting or defending an action to which he is not a party is that, if he is the "real party", he will have had a full opportunity in the course of the action to contest the facts on the basis of which the order for costs is sought. The judge will also have had the opportunity in many cases to form a view of the reliability of the non-party who has given evidence in the proceedings, when he seeks to assert in opposition to the costs order that he would have acted differently if he had received a warning. That will not always be the case, however, as the discussion in Deutsche Bank at [33] to [35] shows. Considerable caution needs to be exercised, in a summary procedure, in rejecting material evidence of a non-party who has not given evidence at the trial, or had his credibility significantly dented. The imposition of a substantial liability for costs by summary procedure in those circumstances risks injustice.
35. There is evidence in the authorities that such caution has indeed been exercised. In Systemcare (UK) Ltd v Services Design Technology Limited [201] EWCA Civ 546; [2011] 4 Costs LR 666, although lack of a warning was relied on, the non-party disclaimed any suggestion that he would have acted differently, but suggested that he could have appealed. Lewison J (sitting as a judge of this court) pointed out that the judge's judgment had turned on questions of fact which in turn depended on the veracity of evidence which had been given by the non-party. There was no prospect of a successful appeal and accordingly no prejudice. In the same case Lloyd LJ at [66] expressed himself in the following terms:

"It seems to me that the claimant's delay in proceeding under s.51 and its failure to warn the appellant 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."

36. In Dymocks itself Lord Brown recorded that it was not suggested that Associated would have acted differently in the event of an earlier warning. In Deutsche Bank the failure to warn was dismissed on the basis that the judge had been "entirely satisfied that a warning at an earlier stage would have made no difference to the conduct of the proceedings". The judge had held that it did not lie in the non-party's mouth to say that his evidence would have been different or that he would have conducted the case in a different way. Moore-Bick LJ went on to point out that the judge was "of course, uniquely well placed to understand the way in which the case had been conducted on behalf of Sebastian and to assess [the non-party], both as a litigant and a witness".
37. I consider that where there is credible evidence that a party would have acted differently if he had been warned then that evidence should be given weight in the overall assessment. The weight to be given to it is of course a matter for the judge.
38. Finally, it is of course well settled that, in considering an appeal against an exercise of discretion as to costs, the appellate court's power to intervene is constrained:

"Before the court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale." (Roache v News Group Newspapers Ltd [1998] EMLR 161 per Stuart-Smith J. at p. 172; cited with approval in AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR, 1507 per Lord Woolf MR at p. 1523).

The judgment of Arnold J

39. The judge first considered four factors relied on by SATV as justifying a costs order against Mr Bailey. These were (in the order in which he dealt with them): (a) the insolvency of WPMC throughout its defence of the proceedings; (b) Mr Bailey's control of WPMC; (c) his funding of the defence; (d) the fact that he stood to gain personally from WPMC's defence of SATV's claims.
40. As to the state of WPMC's accounts, these showed, in each of the years ending on 31 May in 2012, 2013 and 2014, small deficits on a balance sheet basis. For the following year, ending 31 May 2015, such an account would have shown a deficiency of approximately £1.9 million made up of four debts, namely the remuneration payable to DBE, a debt payable to Mr Hunt, the costs payable to SATV and a debt of £1.1 million payable to a company called Firefly Film Sales Limited ("Firefly"). Firefly had paid WPMC an advance against royalties of £1.1 million, but the judge took from the director's report prepared for the creditors meeting on 5 August 2015 that WPMC did not regard itself as liable to re-pay that sum. That conclusion is challenged by Mr Bailey on this appeal, but it remains the case that throughout the period in question WPMC was running a balance sheet deficit.
41. There was no dispute that Mr Bailey was in a position, as director and shareholder, to control WPMC's defence of SATV's claim. As to funding, Mr Bailey had paid sums totalling £15,388 in total to cover such matters as the fees of McFaddens and counsel for the hearing before Newey J; the fees of WPMC's expert witness, Prof Jaszi, and the associated video-conferencing costs; trial transcription and translation costs. He also paid McFaddens the sum of £7,000 ordered by Newey J, but this money never reached SATV as a result of the winding up of WPMC. The judge also held that Mr Bailey "supported" the defence by providing his own time. DBE had lodged a proof of debt in WPMC's liquidation which included a sum of £79,400 in respect of Mr Bailey's services. Finally, as to benefit, the judge held that it was clear that Mr Bailey defended the claim with a view to his own benefit, as well as for the benefit of his fellow investors in GLE. This was because he hoped that success in the litigation would lead to WPMC generating money from the Documentary. No other stakeholders stood to benefit. Accordingly Mr Bailey was the "real party to the claim".
42. The judge then turned to the factors relied on by Mr Bailey. These were (a) WPMC's prospects of success; (b) WPMC's attempts to settle, (c) SATV's motives for pursuing the claim and (d) SATV's failure to warn him that they might seek an order prior to July 2016. The judge held that relative prospects of success were "of little assistance to Mr Bailey" because it was not necessary to show that Mr Bailey acted improperly in maintaining WPMC's defence. The second factor, attempts to settle, was immaterial. As to the third, the judge rejected any suggestion of improper motive on the part of SATV, but found:

"What can fairly be said is that SATV pursued their claim in circumstances where they either knew or should have appreciated that WPMC would be unlikely to be able to pay their costs and where its only apparent asset was its rights in the Documentary."

43. As to the absence of warning, Mr Bailey had said in his evidence that if he had been warned prior to trial that he might face a NPCO he would either have put WPMC into liquidation or accepted one of SATV's settlement offers. Further he said that if he had been warned after the trial he would have tried to raise funds to enable the appeal for which permission had been granted to be pursued. He relied on the fact that Mr Wilson QC was prepared to act on the appeal under a CFA. By 7 July 2016, when the warning was given, WPMC was long out of time for filing an appellant's notice.
44. The judge concluded that there was no explanation of why SATV did not warn Mr Bailey. He noted Mr Bailey's evidence as to how he would have acted if a warning had been given, and accepted that his evidence had been given honestly. He went on to point out that the evidence had been given "with 20/20 hindsight", and that he "did not accept that it necessarily reflects how Mr Bailey would actually have acted without the benefit of hindsight".
45. Accordingly, and despite Mr Bailey's evidence to the contrary, the judge went on to hold that a warning would not have made any difference. At [66] and [67] of his judgment he said this:

"66. I am not convinced that, if SATV had warned Mr Bailey that they might seek a costs order against him, Mr Bailey would have acted any differently. Mr Bailey's actions were motivated by the prospect of recouping some of the money he and his fellow investors in GLE had lost, by the advice he had received as to WPMC's prospects of success and by the fact that McFaddens and Mr Wilson QC were prepared to act under a CFA. None of those factors would have been changed by a warning from SATV. Mr Bailey says that the fact that he did not fund WPMC's defence of the claim beyond the limited extent set out above demonstrates that he was not willing to hazard his own money on the matter, but I do not accept that Mr Bailey would have seen the matter in that light at the time, given the factors I have mentioned.

67. As for the position after 1 July 2015, I do not consider that Mr Bailey would have acted differently then either. Although Mr Wilson QC has given evidence that he would have acted on any appeal under a CFA, there is no equivalent evidence from McFaddens. Moreover, although Mr Bailey recognises that he would have had to pay at least the interim costs ordered, what he fails to recognise is that he would also have had to provide security for SATV's costs of the appeal. I am not persuaded that Mr Bailey would have done so. Furthermore, I am not persuaded that an appeal would have succeeded. I granted permission on the basis that an appeal had a real prospect of success, but that does not mean that it was likely to succeed."

46. The final conclusion of the judge was that the factors relied upon by SATV pointed to the conclusion that it would be just to require Mr Bailey to pay SATV's costs from 4 January 2013 and "none of the factors relied upon by Mr Bailey support the opposite conclusion". He continued:

"I conclude that this is an exceptional case in the sense explained in Dymocks: Mr Bailey was the real party since he controlled and partly funded the defence of WPMC's claim with a view to his own benefit, and therefore it is right that he should pay the costs which SATV incurred as a result."

The grounds of appeal

47. The grounds of appeal which relate to the NPCO can be summarised as follows:

1. In order to make a NPCO it was necessary to show that Mr Bailey was acting otherwise than in the interests of the company. The mere fact that WPMC's interests and Mr Bailey's were aligned was insufficient: their interests must diverge.

2. The judge was wrong to hold that Firefly was not a creditor of the company, so the proceedings were being defended in the interests of a creditor of the company.

3. Mr Bailey's funding of the action was de minimis as compared to the SATV's overall costs in excess of £633,000. The judge failed to apply the principle in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655; [2005] 1 WLR 3055.

4. The judge was wrong in principle and in the weighting of his discretion in his approach to the absence of warning. It was enough if Mr Bailey demonstrated that he had lost reasonable opportunities to take steps to protect his position, e.g by settling the proceedings, putting the company into liquidation or appealing.

Ground 1

48. Mr Williams contends on this ground of appeal that, before a NPCO can be made, it must be shown that the interests of Mr Bailey and the company diverge. That principle does not find a clear expression in any of the authorities. The effect of the test put forward in Dymocks at paragraph 29 is that "generally speaking" if the non-party promotes and funds the defence of proceedings by an insolvent company solely or substantially for his own benefit, then he should be liable for the costs of the proceedings if his defence fails. That will not always be the case however, as Lord Brown went on to explain in the same paragraph. Where the non-party is a director 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", the position may be different.
49. The rationale for the general rule can be seen in Lord Brown's citation with approval of a passage from the decision of Fisher J in the High Court of New Zealand in Arklow Investments v MacLean (unreported , 19 May 2000) at [26]:

"…the overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail."

50. The rationale for the exception is to be found in the judgment of Millett LJ in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 at page 1620, cited by Lord Brown at [28]:

"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 brought bona fide and for the benefit of the company, the company is the real plaintiff."

51. In many cases it will be clear whether the case falls within the general rule or the exception, but in others the task of deciding on which side of the not very precise dividing line will be more challenging.
52. Mr Williams submitted that in the present case Mr Bailey acted in WPMC's interests. There was nothing done by Mr Bailey which was not in the interests of the company, its creditors and shareholders. WPMC had been accused, wrongly in the company's view, of infringement of copyright. The defence of the proceedings was in the interests of all those interested in the company, as it would enable the company to exploit the Documentary. The fact that in WPMC's case the interests of the shareholders were concentrated in one person rather than dispersed should make no difference.
53. Mr Williams went on to submit that if NPCOs were available in cases where the interests of the company and its shareholders were aligned, a number of unprincipled consequences would follow. Firstly it would collapse the principle of separate corporate personality. Secondly, it would collapse the principle that NPCOs were to be treated as exceptional. Thirdly it would collapse the principle that there must be a causative link between the actions of the non-party and the costs which the applicant is unable to recover. Fourthly, outcomes would be different depending on how diffuse or concentrated the shareholding was.
54. The judge rejected this argument and so do I. It is not necessary to identify a divergence of interest. The imposition of such a jurisdictional threshold would distort rather than apply the guidance in Dymocks. I do not think any of the unprincipled consequences which are said to follow from the failure to adopt the divergence test stand up to analysis.
55. Firstly, as regards corporate personality, it is wrong to regard the imposition of a non-party costs order as piercing the corporate veil. In Threlfall v ECD Insight and another [2013] EWCA Civ 1444; [2014] 2 Costs LO 129, Lewison LJ said at [13]:

"If a non-party costs order is made against a company director, it is quite wrong to characterise it as piercing the corporate veil; or to say that the company and the director are one and the same. As [counsel] has demonstrated, the separate personality of a corporation, even a single-member corporation, is deeply embedded in our law. But its purpose is to deal with legal rights and obligations. By contrast, the exercise of discretion to make a non-party costs order leaves rights and obligations where they are. The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines the proposition that the non-party has no substantive liability in respect of the cause of action in question."

56. Mr Williams seeks to side-step the effect of this passage by submitting that Lewison LJ was not seeking to disturb the effect of previous authorities such as Metalloy. That may be so, and I would accept that in evaluating whether a claim is solely or substantially for a non-party's financial benefit, real benefit to the company is a material consideration. It remains the fact, however, that the imposition of a NPCO does not collapse the principle of corporate personality. That is perhaps best illustrated in the present case by the fact that the judge did not make Mr Bailey liable for all WPMC's costs, or order interest on the same basis.
57. Secondly, failure to adopt a requirement for divergence of interests would not cut across the principle that NPCO's are to be regarded as exceptional. Such orders are exceptional only in the sense that they are outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense: Dymocks at [25]. It may be, therefore, that in a case where the non-party has been funding a claim or defence of an insolvent company, reliance on the requirement that the case be exceptional is unlikely to avail the non-party.
58. Thirdly, I do not accept that failure to adopt a divergence requirement would cut across the need for a causative link. Mr Williams submits that, if the director would be duty-bound to prosecute or defend the proceedings in the interests of the company in any event, then there would be no causative link from the funding. But if the facts are that the proceedings would not have been pursued or defended but for the intervention of the non-party, because the company would not have had the means to do so, the necessary causative link will be present. The question is whether the opposite party has to bear costs when otherwise he would not have done: see per Hamblen LJ in Turvill v Bird and others [2016] EWCA Civ 703 at [28].
59. The fourth unprincipled conclusion said to follow without a requirement for divergence of interests was that different outcomes would follow depending on how diffuse or concentrated was the shareholding. I think this objection loses sight of the overall requirement that the imposition of a NPCO must be just in all the circumstances. Thus it may well not be just to impose an NPCO where a director is pursuing or defending proceedings in the interests of a group of shareholders all holding minority interests, but just to do so when it is in his interests alone.
60. I am therefore not persuaded that a requirement for divergence of interests is justified by authority, or is a necessary principle to put in place to avoid unjust outcomes.

Ground 2

61. Mr Williams submits that WPMC had a substantial creditor in the form of Firefly which also stood to benefit from the successful defence of the proceedings.
62. Firefly was a company of which Mr Hunt was a director. Firefly's role in the proceedings was described by the judge at [44] of his 1 July 2015 judgment:

"On 18 July 2010 CMC, Iambic and WPMC entered into a novation agreement which provided that WPMC stepped into the shoes of Iambic with respect to the agreement dated 6 July 2009 save that it was agreed that the costs of music copyright clearances should be paid out of gross receipts before division of net profits. On 21 July 2010 WPMC entered into an agreement with Firefly Film Sales Ltd ("Firefly") under which WPMC appointed Firefly as its agent to exploit the rights in the Documentary in those territories which did not require the clearance of performers' rights in return for a commission of £66,000 to be recouped from gross receipts together with an advance of £1.1 million. On the same date Firefly entered into a similar agreement with Iambic which provided for the payment of commission of 30% on gross receipts. Mr Hunt explained that these agreements were part of the mechanism by which the making of the Documentary was financed pursuant to the Enterprise Investment Scheme by a company Octopus Investments. The precise manner in which this mechanism operated (or at least was supposed to operate) is somewhat obscure, but this probably does not matter for present purposes."

63. At paragraph 27 of his witness statement Mr Bailey states that Firefly was to receive commission from sales achieved by Iambic, and at paragraph 84 that there were no other creditors of WPMC beyond counsel's and McFaddens' fees, his salary and the director's loans to Mr Hunt. Nevertheless, WPMC's balance sheets for each of the years from 2012 included the £1.1m as a debt, albeit offset in the balance sheet by a similar sum for "stocks" (presumably representing the value of the Documentary), leaving a very small deficit overall. The estimated statement of affairs at 5 August 2105 continued to show the liability to Firefly of £1.1m, but the report for the creditors' meeting on that day said:

"In April 2012 ... Firefly purported to terminate its agreement with [Iambic] as a result of which WPMC terminated its agreement with Firefly citing a repudiatory breach by Firefly and (in the alternative) giving notice pursuant to the Commercial Agents Regulations. Firefly did not accept the WPMC termination but no further action was taken by either side and WPMC regarded the agreement as determined."

64. Mr Bailey does not mention the dispute with Firefly in his evidence. On the other hand SATV relied on the balance sheets to show that WPMC was balance sheet insolvent from the commencement of proceedings in 2012, which would not have been so if the company was not indebted to Firefly.
65. The judge dealt with Firefly at paragraph 48 of his judgment under appeal:

"Mr Bailey does not mention the dispute with Firefly in his evidence on this application. Taking the statement in the director's report at face value, however, it appears that, although WPMC had received £1.1 million from Firefly by way of an advance, WPMC did not regard itself as liable to re-pay that sum and Firefly had made no attempt to recover it since April 2012."

66. For my part, I do not consider it surprising that Firefly made no attempt to recover its £1.1 million from a company which had no liquidity, and whose only asset was the subject of a disputed claim to copyright infringement. WPMC's purported termination of the agreement was not accepted, and so it remained plausible that Firefly would claim repayment of its advance in the event that WPMC realised value from the Documentary. Consistently with that, WPMC had continued to show a liability to Firefly in its balance sheets. Likewise, it does not follow from the fact that Firefly were to receive a commission on sales that they would not seek repayment if WPMC were to achieve value from the Documentary by some other means following success in the litigation.
67. I therefore disagree with the judge that the liability to Firefly can be disregarded for the purposes of assessing whether Mr Bailey was the sole stakeholder in the defence of the proceedings.

Ground 3

68. In Arkin v Borchard Lines Ltd (supra) this court held that where a professional funder, in circumstances where the funding left the claimant as the party primarily interested in the result of the litigation and the party in control of it, finances part of a claimant's costs of litigation, the funder should be potentially liable for the costs of the opposing party, but only to the extent of the funding provided: see per Lord Phillips at paragraphs 41-42.
69. Mr Williams argued that the funding provided by Mr Bailey was de minimis, the company having achieved access to justice through the CFA. That funding could not justify a costs order which exceeds the amount of Mr Bailey's funding provided by such a large multiplier.
70. I think the policy considerations which lie behind professional funding of litigation in Arkin explain why it is necessary to have a proportionality rule of the kind devised there. Thus, as Lord Phillips explained at [40], the rule was directed at cases where the funder left the claimant as the party primarily interested in the result of the litigation and as the party in control of the its conduct. That is to be contrasted with the type of case where the funder is the "real party" to the litigation and "not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes": per Lord Brown in Dymocks at [23].
71. It follows that, if the judge was correct to treat Mr Bailey as the, or a real party, I see no independent basis for the extension of the Arkin approach to the type of case with which we are concerned.

Ground 4

72. Mr Williams, who placed this ground very much at the forefront of his appeal, submitted that the present case was clearly one where a warning would have had a significant effect on the way in which Mr Bailey would have caused the company to defend the proceedings. Mr Bailey had invested only some £1,800 in WPMC. His written evidence had been in the clearest possible terms. Having reviewed the history of the proceedings, he said:

"67. Had the Claimants put me on notice during the proceedings that they might seek a third party costs order making me personally liable for their costs, I would have viewed things very differently. I had not been prepared to commit any of my personal funds to these proceedings (as can be seen from the fact that I would not advance the funds for WPMC to be represented by lawyers, and so, until a very late stage handled the case myself). I would therefore have taken the threat of being made personally liable for the Claimants' costs very seriously indeed. I would very likely put WPMC into liquidation or, notwithstanding my concerns set out above, have accepted one of the claimants' offers of settlement.

68. Moreover, in the very unlikely event that I had continued to defend the litigation in the face of the threat of a personal costs order against me, I would also have seriously considered finding the money to pay the interim costs order following trial so the appeal could be pursued, as I have been advised that the appeal had a reasonable prospect of succeeding. However, it was not until a year after trial that the Claimants ever intimated any intention to seek a third party costs order against me. I thereby lost the opportunity of mitigating my exposure to costs by raising funds for an appeal."

73. At paragraph 91 he concluded:

"Despite knowing that WPMC has no assets, at no stage prior to July 2016, did the Claimants alert me to any potential liability to their costs which I believe are completely disproportionate to any benefit which might have been obtained from the litigation. If they had done so during the proceedings, it would have had a very significant impact on my views on settlement and whether to put WPMC into liquidation rather than to go to trial even once McFadden's and Mr Wilson had agreed to act for the company on Conditional Fee Agreements."

74. Mr Williams attacks the judge's conclusions at paragraphs 66 and 67 of the judgment with vigour. Given that the judge was considering a counterfactual scenario in which SATV had given notice, as they should have done, of the possibility that they would apply for a NPCO, it was unreasonable to expect Mr Bailey to provide evidence to "convince" the court that he would have acted in the way he said he would. The judge should instead have considered whether there was a realistic basis for suggesting that he would have acted in a different way. He relied on Systemcare (UK) Ltd v Services Design Technology Ltd and Sharif (cited above), and in particular on the way in which Lloyd LJ had expressed himself at [66].
75. Mr Williams says that in the present case there is the clearest possible basis for suggesting that Mr Bailey would have acted differently if he had been warned. He had not been prepared to put up money to pay for lawyers for WPMC, and had only instructed lawyers when a full "no win, no fee" CFA was available which meant that WPMC did not require funding for its costs. Why, he asks forensically, would he have taken that approach if he was prepared to become liable for SATV's costs?
76. Mr Williams also relied on the loss of opportunity to take out ATE insurance. The company had been given advice on ATE insurance but had failed to take it out. The judge had inferred that this was because the premium would not be recoverable from SATV even if WPMC successfully defended the claim. Mr Williams submitted that this was the wrong inference to draw. If WPMC had won the claim, SATVwere good for the costs and so ATE insurance would not have been necessary. If WPMC had lost the claim, then, working on the assumption that WPMC was worthless, ATE insurance would also have been unnecessary. The only party to benefit from ATE insurance would be SATV. If, on the other hand, SATV had warned that it intended to seek an order for costs against Mr Bailey, the insurance would have served a useful purpose, namely to protect the shareholders of WPMC from exposure to a costs order.
77. Accordingly, Mr Williams submitted that the judge had been wrong to conclude that the potential liability for costs would not have been an important factor in considering in 2014 and 2015 whether and how to continue with the defence of the proceedings. Mr Bailey was an experienced entrepreneur who had invested very little money in the project: the judge had no basis for concluding that he would not have regarded the possibility of an adverse costs order as a very significant downside.
78. So far as the loss of the opportunity to appeal is concerned, Mr Williams submitted that the judge had apparently accepted at this point that Mr Bailey would have been reluctant to part with his own money. That supported his submission in relation to the period up to trial, that Mr Bailey would have been reluctant to invest his own money, and not have been prepared to countenance an adverse costs order against him personally. Moreover the judge had again required too much by way of proof in suggesting that it was necessary to show the appeal would have succeeded.
79. Mr Mill submitted that the judge had arrived at the right conclusion and given adequate reasons for doing so. In his written submissions he submitted that the judge had found in the present case that there was no realistic basis for concluding that Mr Bailey would have acted differently. Neither the suggestion that WPMC would have been put into liquidation nor the decision not to acquire ATE insurance, nor the pursuit of the appeal were realistic possibilities. In his oral submissions he contended that the correct approach was to ask "would he have behaved differently", and possibilities were not sufficient. As to whether Mr Bailey could have avoided that which has now befallen him by pursuing the appeal for which Arnold J gave permission, Mr Mill pointed out that permission had only been given in relation to one ground, proprietary estoppel, a ground which had only been raised late by permission of Newey J, and which had unpromising prospects of success.
80. The absence of warning is a factor whose relevance will vary from case to case. In the present case, however, because the judge has made a finding that Mr Bailey would not have acted any differently if a warning had been given, he has given it no weight at all. Thus, at [68] he says that none of the factors relied upon by Mr Bailey supported the conclusion that it would be unjust to make the order.
81. I think the judge did fall into error in concluding that this was a case where no weight could be given to the fact that Mr Bailey was not warned in deciding whether it was just to make a NPCO. In doing so he left out of account a feature which he should have considered, namely the prospect that Mr Bailey would have conducted the defence of the case differently if a warning had been given.
82. My reasons for coming to that conclusion are as follows. Firstly, as I have explained, this was a case where caution was necessary in making summary findings of fact relevant to the making of the NPCO. Mr Bailey had not been a witness in the action, and the judge had had no opportunity to assess his credibility. Secondly, there was no reason to doubt Mr Bailey's honesty in giving the evidence as to how he would have behaved in the event of a warning. It was, after all, his behaviour which was in issue, and he could be said to be uniquely placed to assess how he would have behaved. The fact that evidence is given with hindsight, as it often is, does not necessarily mean that it is not reliable. Mr Bailey had given evidence in the clearest possible terms as to how he would have behaved if he had known that he was running the risk of a NPCO. No request had been made to challenge this evidence by applying to cross-examine him. Thirdly, the reasons given by the judge for coming to the conclusion that the warning would not have caused Mr Bailey to act differently were inferential ones, namely that Mr Bailey was motivated by recouping money for his fellow GLE investors, by the advice he had received from his lawyers and by the fact that they were prepared to act on a CFA. Those factors do not mandate a conclusion that Mr Bailey would have acted in the same way if he had known that he would face a costs bill for several hundreds of thousands of pounds. It is one thing to help out fellow investors if there is no appreciable downside, quite another if it is to going to result in a large costs liability if the defence is unsuccessful. No one suggests that the chances of success given to WPMC were such that the downside would not have been considered in the event of a warning. The motivation provided by the fact that Mr Wilson and McFaddens were prepared to act on a CFA might have insulated Mr Bailey from funding WPMC's costs, but Mr Bailey would have been advised that it could have no impact on his liability for SATV's costs.
83. It is true, in a literal sense, that none of the factors which the judge relied on would have changed if a warning had been given. The motive to assist the fellow investors, the advice given by the lawyers and the CFA would have still been in place. However they would have required a radical review if the prospect of a NPCO had been brought to Mr Bailey's attention. He was an experienced entrepreneur, used to assessing risk against reward. The judge was not entitled, in my judgment, to reject Mr Bailey's evidence as to how he would have behaved in the event of a warning.
84. I also consider that it is fair to take into account the fact that Mr Bailey could have protected his position by ATE insurance. The judge rejected this point because there was no evidence that Mr Bailey asked for or was given advice about the remedies which were open to SATV if no ATE cover was obtained and WPMC lost. However, it was obvious that Mr Bailey and SATV were operating on the assumption that any costs order made against WPMC would not be met. It is not clear to me therefore what should have prompted Mr Bailey to ask for such advice. However, if he had been warned that a NPCO was being sought against him, there was every reason for him to ask for and obtain appropriate advice as to how he might protect himself against such an order.

Discussion and conclusion

85. I have concluded that the judge left out of account features of the case which were relevant to the question he had to decide. I must therefore exercise the discretion afresh. I would accept that Mr Bailey provided limited funding for the litigation, and was responsible for keeping it alive, hoping ultimately to derive personal benefit. I nevertheless take into account that defending the proceedings for copyright infringement enabled the company to protect the Documentary for future exploitation, and the proceedings were thus in a very real sense in the interests of the company. The proceedings were also in the interests of Firefly, who would expect to be repaid their debt, in one way or another, out of any proceeds of exploitation. Whilst a neutral factor, I would observe that no criticism whatever could be, or was, made of Mr Bailey's conduct in defending the proceedings on the basis of the legal advice he had received.
86. Thus far I would regard matters as fairly evenly balanced. It might be said that Mr Bailey, standing as he did to benefit from the outcome, was "a real party" if not the only one. However the absence of any form of warning is, in my judgment, fatal to the application for the NPCO. It is plain, as the judge indeed held, that SATV knew or should have appreciated that WPMC would not be able to pay their costs in the event that the claim succeeded, and they knew that WPMC, and Mr Bailey with whom they dealt directly, were operating on the same assumption. In those circumstances the failure to warn until a year after final judgment is given strikes me as manifestly unfair to Mr Bailey. It would be unjust because Mr Bailey was deprived of realistic opportunities to settle the litigation or to protect himself against the adverse effects of a NPCO, or to abandon the defence of the litigation at a much earlier stage.
87. I would therefore allow the appeal and set aside the NPCO. In these circumstances the cross-appeal does not arise.

Lord Justice Kitchin:

88. I agree.