England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/12/2005

The Hon. Mr. Justice Evans-Lombe :

1. On the 15^th July 2005 I gave judgment in these proceedings dismissing the claim. On the 27^th July I ordered that the Claimant pay 4/5ths of the Defendant's costs on the standard basis. I now have an application by the Defendant that Mr Christopher Dickens a director and shareholder and loan creditor of BES pay those costs under sub-section (3) of section 51 of the Supreme Court Act 1981 pursuant to the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965. For the purpose of this application I ordered the joinder of Mr Dickens as second claimant under CPR 48.2. I will hereafter refer to the first claimant company as "BES" and the second claimant as "Mr Dickens".
2. When the trial started there were two main issues in the case, the first, whether the defendant had been negligent and, the second, on the assumption that negligence was proved, whether such negligence had occasioned any damage to BES. At the outset of the trial negligence was admitted and the trial then proceeded on the issue of whether BES was ever entitled to recover R&D tax relief as alleged or at all. In the result I found that, notwithstanding that the Inland Revenue ultimately accepted and made payments in respect of alleged expenditure by BES on R&D, it was not established from the evidence that BES' claim for such relief was justified either in whole or part.
3. The background facts of the case are set out between paragraphs 7 and 15 of my judgment. It seems to me that for the purposes of this application the following are material facts:-

1) The proceedings were commenced in March 2004. By that time, in December 2001 BES had been "mothballed", an adjective used throughout the trial to describe the state into which BES was put at that time when all its staff were paid off, its premises and equipment disposed of and its outside creditors paid leaving only its loan creditors unpaid. Of its three directors, Mr Evans, on whose creative ability the success of BES seems entirely to have depended, had severed his personal relationship with Ms Berry and returned to his family and other employment apparently for good, Ms Berry had also left for alternative employment and only Mr Dickens remained available to take decisions with relation to BES' affairs.

2) BES remained possessed of certain intellectual property namely a number of computer games and programs, which BES had developed prior to its mothballing, most of which were not in any final state to be put on the market. Attempts were made in subsequent years to exploit this intellectual property but by March 2004 no significant income had been realised as a result of those attempts and it seems from Mr Dickens' evidence on this application that, although attempts are continuing, still nothing significant has resulted.

3) Between paragraphs 113 and 116 of my judgment I set out my view of the prospects of reviving BES

"113 I am quite unconvinced that BES would have been able, in the prevailing market conditions at the end of 2001 and extending on to 2003, to have realised sufficient net revenue to cover the costs of maintaining itself even in the partially mothballed state which has been suggested. "

114 It seems to me to follow from this conclusion, and notwithstanding the evidence of Mr Joshi and Mr Webb, that there was no real prospect in December 2001 for the raising of fresh capital, either from its existing shareholders or from outside investors, to carry BES forward until the market for its products recovered. The fact is that the general market for information technology products had not recovered even by 2004.

115 I have already pointed to the accepted view that BES' position in the market depended on the services of Mr Evans. By the end of 2001 his relationship with Miss Berry, which seems to have been the basis for launching BES originally, was over. The cause of that break up was not explored in the evidence and it does not follow that it would not have happened had BES continued in semi-mothballed form. I doubt whether BES was an investment prospect in the absence of Mr Evans. Be that as it may, BES' attempts to raise further capital in late 2001, but at a time when it still had its full staff, failed.

116 The present position of BES is that it is insolvent in the sense that its in-house loan creditors have not been paid and there is no prospect of them being paid. But it has no outside creditors who might wish to enforce payment of their debts. Theoretically therefore it could still be revived if it had assets, such as intellectual property rights capable of exploitation, which would make it worthwhile to revive. It is, however, apparent that such is not the case."

4) The claim for R&D relief which BES ultimately made was prepared by a Mr Price but submitted under Mr Dickens signature. In the course of my judgment I found that the preparation of that claim by Mr Price was "entirely inappropriate" (paragraph 53) and that the claims themselves were "grossly exaggerated" (paragraph 99(1)).

5) Mr Dickens holds 25 of the 85 issued shares of BES he is also BES' largest loan creditor. In Mr Pilling's skeleton argument it is submitted that his outstanding loans to BES amount to approximately £156,000. There is no evidence from Mr Dickens of the precise amount of his loans but no attempt was made to challenge that figure. Ms Berry is a loan creditor for approximately £76,000 and a Mr Novikov, who was one of the original investors in BES, is a loan creditor for £56,000. As at March 2004 BES did not appear to have any currently realisable assets and accordingly was insolvent and not able to pay any future order for costs against it. It cannot pay the order for costs which I have made.

6) At paragraph 12 of his most recent witness statement dated 5^th October 2005 Mr Dickens says, "it is true that the litigation was funded mostly through loans from companies in which I have an interest. It is also true that if I had not done this then there would have been no litigation and no chance of either proving the failings and negligence of S&W, repaying any of the long term creditors or ever resurrecting the Company."

7) It seems clear that, before proceedings were launched, BES obtained no expert advice as to whether any of the work that it was undertaking on the development of its products would actually meet the test prescribed by the relevant legislation and so constitute R&D in respect of which tax relief was available.

4. The following paragraphs appear in the written submissions of Mr Pilling for the purposes of this application.

"21. Mr. Dickens, and Mr. Dickens alone, has been in control of the litigation. According to Companies House, the directors of the Claimant are still Mr. Dickens, Ms Berry and Mr. Evans. However, it is clear beyond sensible doubt that, since early 2001, the only director playing any role in relation to the Claimant's management or business has been Mr. Dickens.

22 Mr. Evans quickly departed to work for Flextech and then returned to America. The Court is aware that the Claimant was unable to contact him during the trial to persuade him to give evidence. Ms Berry departed in early 2001 and has pursued an academic career. There is no evidence that Mr. Evans or M Berry subsequently had any real involvement with the Claimant's business. There is no evidence that any director was involved in formulating the claims for R&D tax credits which were submitted to the Revenue. Mr. Dickens was the only director involved in asserting a claim against the Defendant in the first instance (Mr. Dickens' letters to the Defendant not even being copied to the other directors). Mr. Dickens himself confirms that he authorised the Claimant to issue these proceedings, and there is no suggestion that he did so in consultation with any other director (see paragraph 50 of his first witness statement [Tab 19)). It must follow, also, that he was the director who had general control over the proceedings, and made any necessary strategic decisions. It was clear, when Mr. Dickens was in Court during the trial, that he was giving instructions to the Claimant's solicitors and counsel. It is also clear from the Claimant's solicitors' correspondence that they have been taking their instructions from Mr. Dickens (see the faxes dated 13 and 14 July 2005 [Exhibit EKJ1, Tab 3))."

I accept that the evidence and observation establishes Mr Pilling's summary of the facts contained in these two paragraphs. There is no evidence of the holding of any board meetings of BES at which the decision to launch the proceedings was discussed and, after those proceedings had been launched, discussing and taking decisions in relation to their prosecution. There is no evidence of Ms Berry ever taking a decision with relation to the proceedings. It seems to me to be clear that she was simply a source of information about past events, but only that.

5. Where a non-party can be shown to have intervened in litigation so as to take control of the prosecution or defence of a claim, substantially for his own purposes or benefit, and the claim or defence thus taken over fails, the court has jurisdiction, in an appropriate case to order the intervener to pay the whole or part of the successful parties costs of the proceedings notwithstanding that he was not at any, material time, a party to them pursuant to what is now section 51(3) of the Supreme Court Act 1981. In a very recent decision of the Court of Appeal in Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414 which was heard on the 19^th April 2005 but in respect of which judgment has only recently been handed down this jurisdiction is described by Lord Justice Rix as being "a developing jurisdiction" and its application has been considered in a number of decisions of the Court of Appeal following on the Aiden Shipping Co Lt v Interbulk [1986] 2 WLR 1051 case. From those decisions it emerges that the position of directors who procure their companies to prosecute or defend litigation is treated as special, together with "office holders" over insolvent companies appointed pursuant to insolvency legislation. It is of note that the risk of not being able to recover the costs of Defendants to claims by insolvent companies can be met by an application for security under section 726 of the Companies Act 1985. No such application was made in the present case.
6. In the recent case in the Privy Council, Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, the principles governing the exercise of this jurisdiction were restated, in particular, its application to the position of directors, notwithstanding that the case did not actually concern a director. The judgment of the Privy Council was given by Lord Brown who, having found that the laws of England and New Zealand were the same in this area, approached the appeal under three heads jurisdiction, causation, and discretion. In the present case there is no issue as to the jurisdiction of the court to make an order under section 51(3) and, as I understand it, causation is conceded on behalf of Mr Dickens in the sense that it is conceded that without his funding of the BES claim there would have been no litigation and accordingly the defendant would not have incurred the costs of the defence. Thus there is a connection between the incurring of the costs and the actions of Mr Dickens see per Morritt LJ in Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 at page 241.
7. The issue in the present case is the correct approach of the court in the exercise of a discretion, which it is common ground the trial judge has, to order a non-party director to pay all or part of the costs of unsuccessful proceedings by his company, and the application of that approach to the facts of the case. In the Dymocks case Lord Brown sets out the applicable principles at paragraph 25 of his judgment as follows:-

"25 … (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 para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 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 the Knight case 174 CLR 178 and Millett LJ's judgment in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in T G A Chapman Ltd v Christopher [1998] 1 WLR 12, 22 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 the Knight case, provided that he is "a real party in ... very important and critical respects": see Arundel Chiropractic Centre Pty Ltd v Deputy Comr of Taxation (2001) 179 ALR 406, 414, referred to in the Kebaro case [2003] FCAFC 5, at [96], [103] and [111]. Some reflection of this concept of "the real party" is to be found in CPR r 25.13(2)(f) which allows a security for costs order to be made where "the claimant is acting as a nominal claimant". (4) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder's own financial interests."

8. Later in paragraph 25 and in the succeeding paragraphs Lord Brown cites extracts from a number of cases as illustrating the application of those principles. With reference to the position of directors Lord Brown quotes from the judgment of Tompkins J in the New Zealand High Court in the Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 :-

"The directors of a company may frequently be in a position different from other non-parties with a direct financial interest in promoting or defending proceedings. Even where a company is in receivership, directors may have a duty to prosecute or defend a claim through the company in the interests of creditors other than the creditor that had appointed the receiver, or in the interests of the shareholders."

9. At paragraph 26 he quotes from the judgment of Fisher J in another case from New Zealand Arklow Investments Ltd v Maclean (unreported) 19 May 2000 decided in the May 2000 :-

"Where a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third

party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation. ... 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."

10. Lord Brown quotes from the judgment of Lord Justice Millett in re Metalloy Supplies Ltd v MA (UK)Ltd [1997] 1 WLR 1613 at p 1620 where he says:-

"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. 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."

11. At paragraph 29 Lord Brown sums up the applicable principles in the light of these authorities as follows:-

"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"

12. It is Mr Irvin's submission on behalf of Mr Dickens, that in the light of earlier decisions of the Court of Appeal, well illustrated by the passage from the judgment of Lord Justice Millett cited by Lord Brown without apparent criticism, that for the court to make a non-party costs order against a director it is necessary to find that he was guilty of some impropriety or bad faith in procuring the company to prosecute or defend a claim. His alternative submission is that, even if impropriety or bad faith by the director is not a requirement of making an order, an order should not be made against Mr Dickens in the present case because although he may have funded and controlled the litigation from which, if it had been successful, he would have benefited (with others) nonetheless the claim which BES was induced by him to make is "realistically to be regarded" as in the interests of BES its shareholders and creditors, including, but not exclusively, him.
13. In the decision of the Court of Appeal in Floods of Queensbury Ltd v Shand Construction Ltd unreported 29 May 2002 the court was dealing with an application for a non-party costs order against a director. At paragraph 14 Lord Justice Buxton with whom the other two members of the court agreed, cites two previous authorities of the Court of Appeal Taylor v Pace Developments [1991] BCC 406 and the judgment of Lord Justice Millett in the Metalloy case as the source of the principles applicable to the exercise of the jurisdiction under section 51. At paragraph 18 he says this:-

"From those two authorities, which I emphasize are accepted on all sides as setting the correct boundaries of the section 51 jurisdiction, I would venture to draw the following principles:

(1) The decision under section 51 is a discretionary decision for the trial judge. The normal diffidence this court has in interfering with a discretionary decision will apply to it;

(2) The court will look for two circumstances in particular before it will be minded to intervene, more particularly in a case of a director of a company. The first is bona fides in the pursuit of the action. The second is conduct on the third parties part that is so exceptional as to make it just and reasonable for an order to be made against him."

14. Mr Irvin placed reliance on sub-paragraph (2). With great respect I am not sure that the judgment of Lord Justice Millett in the Metalloy case, in particular the passage which was quoted by Lord Justice Brown and which I have set out above, can be read as authority for Lord Justice Buxton's principle (2). Be that as it may Mr Irvin was bound to concede that that sub-paragraph was inconsistent with the conclusion of Lord Brown in the Dymocks case at paragraph 29.
15. Since the Dymocks case there have been two decisions of the Court of Appeal in which it has been considered. The first, Arkin v Borchard Lines Ltd & ors [2005] EWCA Civ 655 concerned an application for a non-party costs order against a professional litigation funder. The court cited the passage from the opinion of Lord Brown which I have set out above as summarising the applicable principles but the case itself concerned facts so different from those in the present case as not to assist in its decision. The second is the Goodwood case to which I have already referred. That case did concern a director who was found to be guilty of procuring the claimant company, of which he was a director, to commit improprieties in its prosecution of the claim with the result that the court concluded that those improprieties were causative of the entire costs incurred by the defendant in his successful defence.
16. Lord Justice Rix, with whom Lord Justice May agreed, having cited the passages from Lord Brown's opinion in Dymocks which I have cited above, cited a further passage at paragraph 33 as follows:-

"33 Thirdly, Associated [the third party in the Dymocks case] submit that there was no impropriety involved in their promoting this appeal; on the contrary they and the Todds had independently received encouraging advice from leading counsel. This cannot, however, avail them. The authorities establish that, whilst any impropriety or 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."

17. Lord Justice Rix then goes on:-

"59 In my judgment, it is clear from these passages that the law has moved on a considerable distance in refining the early approach of Lloyd LJ in Taylor v Pace Developments. Where a non-party director can be described as the "real party" seeking his own benefit, controlling and/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 paragraph 33 of his opinion "the pursuit of speculative litigation" is put into the same category as "impropriety"."

18. In my judgment, in the light of the Privy Council's decision in the Dymocks case as interpreted and applied by the Court of Appeal in the Goodwood case I have to reject Mr Irvin's first submission. It is not a requirement for the making of a non-party costs order against a director who has funded and controlled litigation consequent on a claim brought by his company at his instance, that impropriety must be shown in the way that the claim was prosecuted.
19. Even if I am wrong in that conclusion it seems to me that the claim in this case can be properly described as "speculative" as that word is used by Lord Brown in paragraph 33 of his judgment. I have found that the claim for R&D tax relief to the Inland Revenue was inappropriately prepared and grossly exaggerated. The claim which BES launched in these proceedings was based on that claim to the Revenue. Although the relevant opinions, which would of course be privileged, have not been made available to the defendant, I have no reason to doubt the strength of the advice which Mr Dickens said he received from his advisors that the claim would succeed. It may well be that Mr Dickens had little or nothing to do with the preparation of the claim for R&D relief. It does not seem to me that that can avail him.
20. I have come to the conclusion that I should order Mr Dickens to pay 4/5ths of the costs of the defendant in defending the claim assessed on the standard basis to the extent that those costs are not paid by BES. I do not accept that in March 2004 there was any realistic prospect of reviving BES as a profitable company or, which is perhaps the same thing, exploiting for profit its remaining intellectual property assets. In my view, even had it been possible to demonstrate that the amount of R&D relief claimed was properly payable there was never any reasonable prospect of recovering damages sufficient to realise a significant surplus for distribution to shareholders. The only realistic prospect was repayment of the loan creditors of whom Mr Dickens was by far the largest. Mr Dickens both funded and controlled the proceedings for BES. He stood to benefit personally if they had succeeded as, to a much lesser extent, would Ms Berry and Mr Novikov. Ms Berry assisted Mr Dickens in the prosecution of the claim and was an important witness. Neither she nor Mr Novikov can be regarded as other than "in-house creditors". In my judgment BES cannot "realistically be regarded" as the real party interested in the result of the litigation.