England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre
		6th March 2008

Judge Purle QC:

1. The Defendant/Part 20 Claimant ("Mr Yousef") was a director of Logic Systems Consultants Limited ("Logic") when that company went into insolvent liquidation. He was also a director of LSC (UK) Limited ("LSC") which traded after the demise of Logic in the same line of business.
2. LSC also failed, and the Claimant in the original action ("HMRC") brought proceedings against Mr Yousef in respect of revenue debts incurred by LSC in the period following Logic's liquidation.
3. HMRC's claim was based upon sections 216-7 of the Insolvency Act 1986 ("the 1986 Act"). Mr Yousef denied liability.
4. Under section 216 it is (put broadly) made a criminal offence for a person who was a director of a company which has gone into insolvent liquidation to be a director (for the next 5 years) of a company carrying on business under a name so similar to the company in liquidation as to suggest an association.
5. Under section 217(1), any person involved in the management of a company is personally responsible for all the relevant debts of the company if acting in contravention of section 216.
6. Under section 217(2), the person responsible under the section is expressed to be "jointly and severally liable … with the company and any other person who, whether under this section or otherwise, is so liable."
7. Under section 217(3)(a), "relevant debts" are said to extend to "such debts and other liabilities" as are incurred when the person in question was involved in the management of the company.
8. The Part 20 Defendants ("the Additional Parties") became directors of Logic shortly before its demise and also became directors of and investors in LSC. HMRC did not sue the Additional Parties. Mr Yousef did, however, join them by the Part 20 claim, seeking contribution or indemnity. The Additional Parties resisted that claim.
9. Mr Yousef eventually compromised HMRC's claim against himself upon terms that there should be no order as to costs as between himself and HMRC, save that one costs order in his favour remained undisturbed. HMRC had applied for summary judgment, which was largely unsuccessful, except that they succeeded in striking out reliance by Mr Yousef on section 727 of the Companies Act 1985, on the grounds that liability under section 217 could not be relieved under section 727.
10. Before compromising the claim with HMRC, Mr Yousef endeavoured to persuade the Additional Parties to settle on similar terms but this was not acceptable to the Additional Parties.
11. The significant feature of Mr Yousef's settlement with HMRC is that he has not been found liable, nor has he made any payment to HMRC on the footing that he might be liable. The settlement proceeds on the basis that Mr Yousef is not liable at all to HMRC.
12. Following the HMRC settlement, the Additional Parties applied to the Court to dismiss the Part 20 proceedings on the basis that, as Mr Yousef was not liable to HMRC, they could not be liable to him, and the Part 20 claim could not therefore succeed. On that basis (they say) Mr Yousef should pay their costs.
13. Mr Yousef's riposte is that he defended proceedings which it was in all the parties' interests to defend, and ought not to be left bearing the costs of that exercise alone. Had he been found liable, there would (he says) have been no answer to a claim for (at least) contribution and the Additional Parties ought to have acknowledged that in their defence. In all the circumstances (he says) the proper order is that the Additional Parties should pay the costs of the Part 20 proceedings and should contribute to his costs of defending the HMRC proceedings. In any event, it would be quite wrong for him to be ordered to pay any part of the Additional Parties' costs.
14. The normal approach to the costs of a Part 20 claim when the Claimant in the main action is ultimately unsuccessful is that the Claimant is ordered to pay the Defendant's costs and the Defendant/Part 20 Claimant is ordered to pay the costs of the Part 20 Defendants. The Defendant is in addition allowed to add the Part 20 Defendants' costs for which he is liable to his own costs and thus collect those costs also from the Claimant (as long as the Claimant has the means to pay). In some cases, a direct order may be made that the Claimant pays the Part 20 Defendants' costs, and the Defendant/Third Party Claimant is absolved of liability in that respect. The difference between the 2 forms of order is immaterial so long as both the Claimant and the Defendant are solvent: see, generally, Arkin v. Borchard Lines Ltd and others (Zim Israel Navigation Co Ltd and others, Part 20 defendants) (Nos 2 and 3) [2005] 1 WLR 3055.
15. What is unusual about this case is that Mr Yousef claims costs from the Additional Parties even though HMRC's claim (and therefore the Part 20 claim) was ultimately unsuccessful. As, however, the HMRC claim was resolved as a result of a compromise, it is not open to Mr Yousef to claim costs from HMRC. It might, at least in theory, be open to the Additional Parties to claim costs from HMRC, but they do not do so. They do not need to do so, as there is no question mark over Mr Yousef's ability to pay and, if they are not entitled to costs against Mr Yousef, they could hardly hope to recover against HMRC.
16. I am prepared, especially in the CPR regime of greater flexibility in matters of costs, to assume that there may be circumstances when it would be appropriate to order a successful Part 20 Defendant to pay the costs of an unsuccessful Part 20 Claimant, including the Part 20 Claimant's costs of defending the main action. A similar question sometimes arises between unsuccessful Claimants and Defendants, when circumstances change necessitating a discontinuance. It is well established that the court can depart from the normal rule entitling a successful defendant to costs, and may (in appropriate circumstances) even order a successful defendant to pay the unsuccessful claimant's costs: see, generally, Walker v Walker [2005] CP Rep 33; Kay v Tibbs and others [2007] All ER (D) 31 (Feb)
17. It follows that under the normal order, the Additional Parties' costs should be paid by Mr Yousef. If, however, I were satisfied that the Additional Parties had no answer to the claim for contribution or indemnity (had liability been established), that would be a powerful argument in favour of departing from the normal order.
18. As a subsidiary argument, Mr Yousef also says that the Additional Parties acted unreasonably in not joining in with the settlement with HMRC, which would have left them bearing their own costs. There would be much to be said for this view if there were a serious issue as to the Additional Parties' liability, as it could hardly be right to keep the Part 20 proceedings alive for the purposes of costs alone. If, however, there demonstrably never was anything in the Part 20 Claim, it is less easy to criticise the Additional Parties.
19. It is necessary, therefore, to examine the basis of the claim for contribution or indemnity.
20. Mr Yousef relies first on the Civil Liability (Contribution) Act 1978 ("the 1978 Act"). Section 1(1) provides as follows:

"Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)."

21. Section 6(1) provides as follows:

"A person is liable in respect of any damage for the purposes of this Act if the person who suffered it (or anyone representing his estate or dependants) is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise)."

22. The problem with reliance on the 1978 Act is that HMRC's claims were all debt claims. Whilst the Court of Appeal has on more than one occasion emphasised the width of the wording of the 1978 Act, there is clear authority (of Mr Kevin Garnett QC sitting as a Deputy High Court Judge) that debt claims are not within the 1978 Act: Hampton v Minns [2002] 1 WLR 1. In the absence of binding authority to the contrary, it seems to me that I should follow that decision, unless convinced that it is wrong (which I am not).
23. I note also that in Braspetro Oil Services Co and another v FPSO Construction Inc and another [2007] EWHC 1359 (Comm); [2007] All ER (D) 89 (Jun), Cresswell J recorded the following at para 261 of his judgment:

"I should add for completeness that the Particulars of Claim include a plea that Brasoil is entitled to contribution under section 1(1) of the Civil Liability (Contribution) Act 1978. Having investigated the matter further, Brasoil does not pursue its claims on this basis since (according to Brasoil) it seems likely that the 1978 Act does not apply where there is liability for the same debt, as opposed to liability for the same damage: see Goff & Jones at para. 14-003A."

24. Reliance was placed on certain comments in Howkins and Harrison v Tyler [2001] 1 LRPN 1, at paragraphs [13] and [24], to the effect that a party may suffer relevant "damage" for the purposes of the 1978 Act as a result of non-payment of a debt. The suggestion is that a breach of a contractual obligation to pay gives rise to damage (recoverable as such) in the amount of the unpaid debt. That argument (even if correct) does not arise in the present case, as the only obligation giving rise to the debt is a statutory one. There is no possibility of a claim for breach of contract nor is there a sustainable claim in tort such as breach of statutory duty. The only remedy is to recover the debt as unpaid tax. There is no recoverable "damage" and the remedy is not "compensation".
25. Reliance was also placed on the definition of "relevant debts" in the 1986 Act (para 7 above) referring as it does to "debts and other liabilities". I agree that "other liabilities" could include a liability to pay damages, and that the 1978 Act would in such a case be engaged. But that is not this case.
26. It follows that there never was a sustainable claim based on the 1978 Act.
27. Mr Yousef also relies on the doctrine established as long ago as Dering v Earl of Winchelsea (1787) 1 Cox 318. That case held that parties who are subject to a common demand (in that case sureties) have a right to insist upon appropriate contribution among themselves so that the burden is shared equally. That results from a general equity irrespective of contract, though subsequent cases unsurprisingly hold that the right may be excluded by contract (expressly or impliedly). It must also be the case that the result can be excluded (expressly or impliedly) by statute.
28. Unlike the position under the 1978 Act, contribution is a matter of right, not discretion. As the doctrine is based on the need to achieve equality, there is no right of indemnity under this head, though such a right does arise where a person is compelled to pay a debt for which some other person is primarily liable (in the surety example, a right of indemnity arises against the principal debtor).
29. As noted, under section 217(2) the person liable is said to be "jointly and severally liable … with the company and any other person who, whether under this section or otherwise, is so liable." As is pointed out in Sealy & Milman: Annotated Guide to the Insolvency Legislation 2007/2008 at p. 241 of Vol 1, anyone caught by the section is primarily liable, with the company and others concerned, and not in any secondary way.
30. The primary effect and evident intent of declaring all those involved to be "jointly and severally" liable is to ensure that the creditors can proceed against all or any of them for the whole amount of the debt, but not so as to recover more than 100%. Had the section merely made the relevant parties severally liable for the amount of the debts, that might have given rise to an argument that a creditor could pursue each of them for the whole debt and recover several times over. The reference to joint as well as several liability precludes this argument. Parliament did not however address the question of contribution amongst the persons affected by the section.
31. The words "jointly and severally" do not by themselves create any right of contribution. It would be surprising if they did, as the company would then (if Mr Yousef is correct) be entitled to seek contribution (once it has paid the debt) from its infringing directors. Whilst, of course, reliance on sections 216-7 will usually be triggered by failure of the successor company which will therefore not have paid the debts in question, that is not necessarily the case. If a company run in breach of section 216 were to be sold after (say) 5 years of successful trading, the new owners could cause it to turn round and seek contribution from all its previous infringing directors and managers for the debts it had paid in the whole of the 5 year period. Or if the company went into liquidation after 5 years, its liquidator could do the same. That would hardly be just yet, in the absence of a discretion such as there is under the 1978 Act, the result would (on Mr Yousef's argument, if correct) follow automatically.
32. Other examples are equally strange. The infringers under section 217 are jointly and severally liable with "the company and any other person who, whether under this section or otherwise, is so liable." So, for example, a guarantor of the company's debts, who would on ordinary principles be entitled to an indemnity from the company, is by this section apparently treated as primarily liable with it. On Mr Yousef's argument therefore (taken to its logical conclusion) the surety would no longer be entitled to an indemnity but would be subject to a claim for contribution from infringing directors and the company itself. Or if a company was in a joint venture with another, on terms which made the 2 parties liable for the debts of the joint venture in specified proportions, the presence of infringing directors in one of the joint venture companies would mean that the contributions would have to be equalised amongst all those involved, irrespective of what the specified proportions were.
33. I find it impossible to believe that Parliament can have intended by this language to reverse established rules for indemnity or contribution in such circumstances. The section is concerned solely with protecting creditors and widening the range of people from whom recovery can be sought. Rights of indemnity or contribution in respect of the liabilities it creates are in my judgment impliedly excluded, thereby leaving unaffected rights of contribution or indemnity in respect of liabilities for the same debts arising otherwise than under the section.
34. When I put to him the example of a company claiming contribution from its directors, Mr Yousef's Counsel suggested that the Company might in those circumstances be precluded from doing so as it would have been guilty of participating in the criminal acts of its directors. I think he is right about that (if, contrary to my primary view, the right of contribution is not excluded anyway) but this highlights another difficulty his client faces. To establish his right of contribution, he needs to rely on both his own and his fellow directors' breaches of section 216, which are criminal offences. That necessary reliance is another reason for holding that rights of contribution are excluded, and a separate ground for barring his claim: compare Tinsley v Milligan [1994] 1 AC 340.
35. I should perhaps mention for the sake of completeness that in K v P (J, third party) [1993] Ch 140, Ferris J was of the view that contribution or indemnity could be claimed under the 1978 Act notwithstanding any illegality. Nothing I say in this judgement is intended to depart from that ruling. The 1978 Act does not apply for the reasons I have given. My comments on illegality relate only to the claim under the Dering v Earl of Winchelsea doctrine.
36. It follows from my rulings that none of the claims for contribution or indemnity had any foundation in law. The proper order is therefore for the Part 20 claim to be dismissed with costs. I do not think the Additional Parties can fairly be criticised for refusing to agree the compromise without payment of their costs.
37. In reaching this conclusion, I have not overlooked the fact that the Additional Parties raised other matters which have not been tested, claiming that Mr Yousef was the real driving force behind both companies, and that his responsibility was greater than theirs. They also claim (in effect) to have been misled by Mr Yousef in becoming involved as directors and investors in the 2 enterprises. These matters would not have been an answer to a claim for contribution, had I held that the doctrine of Dering v Earl of Winchelsea applied. However, I have held that the doctrine does not apply. In addition, these matters may have been relevant to a claim under the 1978 Act, where the Court has a discretion, and so I cannot say they should not have been pleaded. I have held that the 1978 Act does not apply, but Mr Yousef raised it, and cannot complain that issues were raised which focussed on where the true responsibilty lay. The Additional Parties have not established the truth of the matters they allege. They have not had to. Equally, Mr Yousef has not established their falsity, or their irrelevance. In those circumstances, I see no sufficient reason to depart from the normal order that the Additional Parties should have their costs from Mr Yousef, and I so order.