England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		Monday, 17th December, 2007

J U D G M E N T
1. MR JUSTICE LEWISON: This is an application for a third party costs order made under the discretionary jurisdiction which is given to the court under section 51 of the Supreme Court Act 1981. The application is made by Clydesdale Bank plc, which was the successful defendant in an action brought by Brampton Manor (Leisure) Limited ("BML"), of which the third party, Mr David Woolf, is a director.
2. The action was a claim by BML against the bank alleging that the bank had unlawfully appointed receivers under a debenture granted by the company. In essence, BML's claim was that there was no money outstanding under the debenture because of the bank's misconduct in overcharging the company and in interfering with its business.
3. The trial occupied a number of days in October and November 2006 and the trial judge, Evans-Lombe J, gave judgment on 28^th November 2006. He decided the case by reference to a different allegation, namely that the company was in breach of the terms of the debenture either by entering into a number of transactions or by opening a bank account at the Alliance & Leicester into which monies were paid, and thereby it ceased to collect the charged debts in the ordinary course of business. He did, however, also consider the allegations made by BML, although he did so relatively briefly, and he found in favour of the bank on all the issues save for one issue relating to what he found was a wrongful deduction from BML's accounts of £15,563.
4. Mr Woolf is not only a director of BML; he is also the majority shareholder in the company. He signed the statement of truth on the Particulars of Claim. He made a witness statement in support of successful opposition to an application for summary judgment under Part 24 of the Civil Procedure Rules, and he was the company's only witness at trial. He also represented the company at trial when solicitors and counsel withdrew. They withdrew, as I understand, because of a lack of funds. Until the withdrawal the funds to pursue the action had in fact been provided by Mr Woolf.
5. It appears that the receivers also made a complaint to the Secretary of State about alleged non-cooperation by Mr Woolf in connection with the receivership. The Secretary of State began proceedings under the Directors Disqualification Act and those proceedings came before Judge Behrens in the Newcastle-upon-Tyne District Registry. Mr Woolf applied for a stay of those proceedings, which Judge Behrens granted. Paragraph 2 of his judgment describes the basis of the application as follows:

"The basis of the application is that in the London action Leisure, acting by Mr Woolf, seeks to assert that the appointment of the Receivers was invalid. If the argument succeeds and the court determines that the appointment was void, there would be no insolvency within the meaning of section 6(2) of the Act and thus no jurisdiction to make a Disqualification Order."

6. As I have said, the bank made an unsuccessful application for summary judgment under Part 24. That application was heard over three days by Chief Master Weingarten, and he decided that BML had a real prospect of success in the action. He ordered the bank to pay BML's costs, but because there was a cross application for security for costs he ordered that the sum assessed as those costs were to be paid into court.
7. The bank also made a second application for security for costs. That application failed because it was made so close to trial that an order for security might have stifled the action.
8. The main point on which the bank won, namely the breaches of the terms of the debenture, was introduced by way of amendment some five weeks before trial. It appeared as paragraph 46(a) of the Re-Amended Defence. Mr Edwards, who appears on this application for the bank and who also appeared at the trial, has shown me his written opening and Mr Woolf's written submissions at the start of the trial, and it is plain from both those documents that the point was a live one and properly before the judge.
9. The other procedural matter that I should note is that on 15^th June 2006 the bank's solicitors told Mr Woolf by letter that they reserved the right to ask for a third party costs order.
10. The principles which govern the making of a third party costs order are now authoritatively found in the decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1WLR 2807. The opinion of the Board was given by Lord Brown of Eaton-under-Heywood. He posed the question in paragraph 24 of his opinion:

"What, then, are the principles by which the discretion to order costs to be paid by a non-party is to be exercised…

He then continued in paragraph 25 and summarised the position as follows (I omit citation of authority):

"(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…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… (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. Since this particular difficulty may be thought to lie at the heart of the present case, it would be helpful to examine it in the light of a number of statements taken from the authorities."

11. Lord Brown then refers to a number of authorities. He cited them with approval. The two passages that I think I should quote are the following. First, from the judgment of Fisher J in Arklow Investments Ltd v MacLean, in the High Court of New Zealand on 19^th May 2000:

"'20. … 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 second passage is from the judgment of the High Court of Australia in Knight v FP Special Assets Ltd [1992] 174 CLR 178:

"'For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. The category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.'"

12. Having cited those passages, Lord Brown continues in paragraph 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."

13. The question of the jurisdiction was considered further by the Court of Appeal in Petromec Inc v Petroleo Brasiliero SA Petrobras 19^th July 2006 [2006] EWCA Civ 1038. The leading judgment was given by Longmore LJ. In paragraph 10 he said:

"If the evidence is that a respondent (whether director or shareholder or controller of a relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction.  Whether such jurisdiction should be exercised is, of course, another matter entirely and the extent to which a respondent has, in fact, funded any proceedings may be very relevant to the exercise of discretion."

14. He then referred to the Dymocks Franchise case plainly on the basis that it represented English law and endorsed the following quotation from the judgment of Rix LJ in Goodward Recoveries Limited v Breen [2005] EWCA Civ 414:

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

15. In paragraphs 13 and 14 Longmore J considered the effect of the availability of an order for security for costs. The submission that he was dealing with was that the fact that the defendant had obtained an order for security for costs should have inhibited the judge from making a third party costs order. Longmore LJ said:

"This puts the matter much too high.  The ability to obtain an order for security for costs and the existence of any security put up as a result of such order are matters which a judge has to take into consideration.  Moore-Bick LJ had those factors clearly in mind, see paras. 5, 6, 15 and 43 of his judgment.  The security that was put up (after opposition) by the Petromec/Maritima interests turned out not to be enough to satisfy Petrobras' claim for costs.  No doubt if more substantial security had been ordered, the current application would not have been necessary.  But the fact that in the course of the proceedings a judge (Andrew Smith J in this case) ordered security which, in the event, has turned out to be inadequate should not be any reason for declining to exercise jurisdiction in an otherwise appropriate case."

16. One of the earlier cases dealing with the jurisdiction is the decision of the Court of Appeal in Symphony Group plc v Hodgson [1994] QB 179. There are two points that I should refer to in the course of Balcombe LJ's survey of the discretion, bearing in mind, of course, that this was an early case and the law has since moved on. The first passage I should refer to is principle (3) on page 193 of the report, where Balcombe LJ says:

"Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. At the very least this will give the non-party an opportunity to apply to be joined as a party to the action…"

That principle, he said, required no further justification. It was an obvious application of the basis principles of natural justice.

17. On the same page in principle (6) Balcombe LJ said (I omit citation of authority):

"The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger… Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible… This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule."

18. The question, therefore, is whether it is fair for Mr Woolf to be bound by the findings of fact made by the judge. It is important to see that the principle, as formulated by Balcombe LJ, depends on the closeness of the connection between the third party and the party to the action rather than to the quality of the judgment. Mr Woolf's principal argument is that, on the material before the judge, he reached the wrong conclusion on the questions both of fact and of law that he had to decide. Some of these questions turned on questions of credibility of witnesses. These points could have been put before the Court of Appeal in support of the application for permission to appeal which Mr Woolf in fact made. Some of them, it appears from Mr Woolf's written documents, were put, others were not. I do not consider that the possibility that the judge might have reached a wrong conclusion distances Mr Woolf from the claimant, especially since Mr Woolf himself conducted the claimant's case. Mr Woolf also complains that the point on which the bank won was raised late in the day and that he had no opportunity to deal with it. It was in fact raised some five weeks before trial and, as I have mentioned, the point was referred to both in Mr Edwards' opening submissions and in Mr Woolf's own written submissions. There is, in my judgment, no substance in that point.
19. Mr Woolf has also complained that the trial judge was biased against him. He has made a complaint to the Office of Judicial Conduct and to the European Court of Human Rights. There is no real evidence to support that serious allegation but, in any event, if it is true, it would be a ground of appeal in itself which could and should have been put before the Court of Appeal. Mr Woolf says that it is BML's intention to apply to re-open the refusal of permission to appeal under CPR 52.17. The company may or may not do that. It is not for me to second guess the outcome of any such application. It will be a difficult application to make, because the power to re-open final decisions is only exercised in exceptional circumstances. Mr Woolf believes that the circumstances are exceptional. Whether the Court of Appeal agrees with him remains to be seen.
20. Mr Woolf's closeness to the claimant BML is, in my judgment, demonstrated by the fact that (a) he is a director of the company; (b) he is a majority shareholder of the company; (c) he funded the company's litigation; (d) he had a real interest in the outcome of the litigation, both in his capacity as a majority shareholder in the company and also in his capacity as director, because, as his application to Judge Behrens made clear, victory in the action would have short-circuited the application for disqualification against him personally; (e) he conducted settlement negotiations both on behalf of the company and on his personal behalf seeking payment of the monies which he was asking by way of settlement to himself rather than to the company; (f) he personally conducted the case and therefore had access to all the material that was before the court; and (g) he was the company's only witness at trial and the facts upon which the company's case was based were, or ought to have been, within his personal knowledge.
21. In a previous action a third party costs order was made against Mr Woolf. That order was appealed unsuccessfully to the Court of Appeal. In the course of his judgment on that appeal Mance LJ said

"This was not simply a case of a controlling director raising a defence which failed on behalf of the company.  This was a case based on an account of facts involving, and wholly dependent on, the controlling shareholder and upon his knowledge and evidence."

These observations apply to the present case as well.

22. I must, of course, take into account the fact that the bank applied for security for costs. However, the security for costs represented by the costs order in BML's favour turned out to be inadequate, and the second application failed not on its merits but because an order for security might have stifled the claim. This reason for refusal recognises the practical impossibility of BML being able to pay the costs in the event of a failure in the action. Mr Woolf nevertheless persisted with the action.
23. Mr Woolf argues that, as a director, he had a duty to pursue the claim, and his duty was all the more important given that after a three-day hearing Chief Master Weingarten decided that the company had a real prospect of success in pursuing its claim. No doubt it is a director's duty to pursue a claim where the directors believe that the pursuit of the claim is in the best interests of the company. But the Master's decision was based on the evidence adduced on both sides. At trial, of course, the trial judge had to decide which evidence to prefer, and for the purposes of this application, despite Mr Woolf's criticisms of the judge's judgment, I must accept the facts as they were found by the trial judge. In other words, this was a case in which the directors pursued a claim on behalf of the company based upon a misapprehension of the facts which were or should have been within their own knowledge.
24. In addition, however generously a director's duty is interpreted, a director's duty does not, in my judgment, extend to personally funding the litigation, nor to personally conducting it.
25. Looking at all these facts in the round, I consider that this case does fall within the categories of cases referred to both in Dymocks and by the High Court of Australia in Knight, which make it just to impose a liability for costs on Mr Woolf.
26. In Symphony v Hodgson Balcombe LJ stressed the need to warn the third party at the earliest opportunity. While the giving of a warning is not a condition precedent to liability, it is plainly a highly material factor. As I have said, the warning in the present case was given on 15^th June 2006. Mr Edwards realistically accepts that it might be unfair to saddle Mr Woolf with a liability for costs before he was made aware that this was a possibility. I agree with that. I also add that Mr Woolf would, in my judgment, have needed a short time to consider his position once the warning was given.
27. All in all, therefore, I order Mr Woolf to pay the defendants' costs from 1^st July 2006 on the standard basis, to be assessed if not agreed.