England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		2 May 2008

Mr. Justice David Richards:

1. I-Remit Incorporated applies under section 51 of the Supreme Court Act 1981 for a third party costs order against Lalaine Ong Ubando ["Mrs Ubando"] and Adan Mejia Ubando ["Mr Ubando"]. The order sought relates to the costs of a successful action brought by I-Remit against Far East Express Remittance Limited ["FEER"]. A counterclaim made in the action was dismissed. Following judgment, FEER went into creditors' voluntary liquidation. Mr and Mrs Ubando were the sole shareholders and directors of FEER.
2. The action and counterclaim concerned the remittance of large numbers of small payments from England to the Philippines, almost exclusively by Philippines citizens employed in the UK to their families. I-Remit carries on business in the Philippines as a collector, processor and distributor of remittances from abroad. FEER was established by Mr and Mrs Ubando and collected remittances in the UK for transmission to I-Remit in the Philippines. A dispute arose between them as to whether sums were owed by FEER to I-Remit in respect of payments made in the Philippines on FEER's instructions. I-Remit claimed that it was owed over £458,000 while FEER disputed any liability. The parties instructed a firm of accountants to prepare a reconciliation of the amount between them and agreed to be bound by their determination of the amount due, if any. They agreed that the accountants would rely on a database of transactions taken from I-Remit's records, which I-Remit warranted to be accurate. The accountants reported that FEER owed over £416,000 to I-Remit.
3. FEER refused to make any payment to I-Remit and defended I-Remit's claim in the action, principally on the grounds that the database was inaccurate. At the trial, FEER sought to make extensive allegations of fraud and forgery against I-Remit, which I held to be both made too late and lacking any substantial evidential support. The trial required a detailed examination of FEER's principal witness, Mrs Ubando. I found her evidence to be highly unsatisfactory, with a good deal of it being deliberately untrue. At an early stage in the action, I-Remit had reduced its claim to £379,462 and I gave judgment for that amount. FEER counterclaimed for nearly £349,000, which I dismissed in its entirety.
4. The grounds advanced by I-Remit for the third party costs order, as summarised in the application notice, are as follows. First, Mr and Mrs Ubando controlled and directed FEER's defence and counterclaim for their personal benefit. Secondly, they funded the litigation. Thirdly, they transferred assets out of FEER in order to avoid liability for the judgment debt and costs. Fourthly, they conducted the litigation with impropriety and dishonesty.
5. The jurisdiction to make a costs order against a non-party is treated in the authorities as exercisable only in exceptional cases, in the sense described by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2004] 1 WLR 2807 at para [25]:

"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."

6. Many of the authorities recognise the combination of controlling litigation, funding it and personal benefit if it succeeds as providing grounds for a third party costs order if, in all the circumstances, it is just to make it. Citing again from Dymocks Franchise Systems (NSW) Pty Ltd v Todd at para 25:

"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 Mettaloy Supplies Ltd v MA (UK) Ltd [1977] 1 WLR 1613."

See also Petromec Inc. v Petroleo Brasileiro SA Petrobas [2006] EWCA Civ 1038.

7. Where, as in this case, the third parties are the directors and shareholders of the unsuccessful party, it will necessarily follow that they control the litigation and may well benefit personally, albeit indirectly, if it succeeds. In these circumstances, it is necessary to look closely to see if these factors can properly support a third party costs order. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd, the Privy Council stated at para 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 most especially its shareholders and creditors) than in his own interests."

8. It is not in dispute that the conduct of FEER's case was controlled by Mr and Mrs Ubando. Although Mrs Ubando had been primarily responsible for the remittance business which was the subject matter of the action, Mr Ubando had been responsible for other parts of FEER's business. They were both directors and both were in court for much of the trial. In her witness statement on this application, she confirms that she and her husband gave instructions to FEER's solicitor (paragraphs 3 and 4).
9. Mr and Mrs Ubando accept that FEER's defence and counterclaim was for their personal benefit in the sense that they were the shareholders, but they rely on Mrs Ubando's evidence that their main motive was not to benefit themselves personally but to benefit FEER. In this context it is necessary to look at the content of FEER's business, particularly at the time of the trial and in the preparation period before it.
10. Until mid-2005, FEER's business comprised remittance services to the Philippines and the sale of phone cards. Its turnover was £1.125m in the year to 31 March 2004 and £1.321m in the following year, with respectively a pre-tax loss of £52,262 and a pre-tax profit of £87,765. In April 2005, the phone card business was transferred out of FEER to another company owned and controlled by Mr and Mrs Ubando. In June 2005, Mr and Mrs Ubando established a new company called Far East Express Services Limited ["FEES"] offering on-line remittance and other services. Rather than do this business through FEER or retain the phone card business in FEER, Mrs Ubando states that the course adopted was not "with a view to running down FEER, but with a view to making management and accounting of the various products and services provided together with the analysis of financial performance, simpler". FEES used FEER's computer and other equipment, ownership of which was transferred to FEES in March 2006. After June 2005 FEER serviced only existing customers and, according to Mrs Ubando's witness statement, continued to do so until shortly before its liquidation.
11. Judging from its accounts, the effect was a sharp decline in FEER's business. Turnover in the year to 31 March 2006 was £257,017, and it seems likely that a good part of it arose in the early part of the year before the new companies commenced business. Some gauge of the extent of FEER's business may be that while at 31 March 2005 it had trade creditors of over £76,000, it had none at 31 March 2006. At the creditors' meeting held after FEER went into liquidation, Mr and Mrs Ubando said that FEER had been virtually dormant since June 2005. The only creditors shown in the statement of affairs were FEES (for £7,755), I-Remit and FEER's solicitors (for £47,000).
12. The absence of any substantial business in FEER after June 2005 and the absence of any creditors except those connected with the litigation demonstrate that Mr and Mrs Ubando personally, as shareholders, would have been the principal beneficiaries of success in FEER's defence and counterclaim. There was no general and substantial body of creditors and shareholders, other than Mr and Mrs Ubando, who stood to gain from the litigation.
13. I should for completeness mention that I have not had regard to I-Remit's submission, based principally on the payment of foreign exchange commissions in the Philippines, that Mr and Mrs Ubando were accustomed to treat FEER's money as their own even while it was a going concern. It is not possible on this application to resolve the differences in evidence on the commission payments nor to draw the general inference advanced by I-Remit.
14. Turning to funding for FEER's defence and counterclaim, there is no evidence that Mr and Mrs Ubando directly and personally provided more than small amounts. However, substantial payments were made by FEES, owned by Mr and Mrs Ubando, and by Far East Express Remittance Inc. ["FEER Philippines"] a Philippines company in which Mr and Mrs Ubando have at least substantial interests, which was reimbursed by FEES. It is not suggested that FEES had any independent interests in funding the defence and counterclaim. In my judgment, it makes no difference for present purposes whether the litigation was funded by FEES or by Mr and Mrs Ubando directly: Petromec Inc. v Petroleo Brasileiro SA Petrobas.
15. The evidence concerning the provision of funding, including the precise terms on which FEES and FEER Philippines made it available, is not clear. In her witness statement Mrs Ubando said only that some of the solicitors' invoices were paid by those companies, and that FEES became entitled to reimbursement by FEER. Mr Cohen points out that FEER's accounts for the year to 31 March 2006 show sums due to FEER from FEES (£13,074) and the new phone card company (£56,961). Mrs Ubando refers to those debts owed by FEER being discharged "by way of offset of its indebtedness" to those companies. There are also unspecified "other creditors" of £100,315 shown in FEER's accounts. FEES does not appear as a creditor in the statement of affairs of FEER in November 2006. Mr Cohen submits that there must have been inter-company dealings which discharged FEER's liability to FEES as regards funding the costs of this case. On a matter of this sort, I do not think the court should be required to speculate and draw uncertain inferences, when Mr and Mrs Ubando could have given clear evidence of each payment and how it was reimbursed. In any event, the important point is that the defence and counterclaim depended on funding provided by FEES and FEER Philippines.
16. It is not in point that not all of the costs of FEER's solicitors have been paid and that they are creditors for £47,000 in the liquidation. I should mention also that although I-Remit's solicitor was told by FEER's liquidator that the solicitors claimed that Mrs Ubando had personally guaranteed their fees, the evidence on this application does not support it.
17. The third ground on which I-Remit makes its application is that Mr and Mrs Ubando transferred assets out of FEER to avoid liability for the judgment debt and costs. The circumstances of the transfer, and the establishment of the new phonecard and remittance companies, certainly raise questions as to their purpose. However, on this summary application, in which Mrs Ubando gives an explanation which cannot be rejected out of hand and which necessarily cannot be challenged on cross-examination, it would not be right to reach a conclusion on this issue. Mr Knight for I-Remit relies on my decision in Total Spares & Supplies Ltd v. Antares SRL [2006] EWHC 1537 (Ch). In that case, the transfer of the major part of the defendant's business occurred at an undervalue two weeks before trial and no evidence was given as to the reasons for it. I was satisfied that its purpose was to protect the business from an adverse result in the action. Accordingly, I do not regard this ground as established for the purposes of the present application.
18. The fourth ground relied on by I-Remit is dishonesty and impropriety in the conduct of the litigation. This can provide a powerful ground for a third party costs order: see Goodwood Recoveries Ltd v. Breen [2006] 2 All ER 533 and [2006] 1 WLR 2723. So far as dishonesty is concerned, I have already referred to my findings as to Mrs Ubando's evidence. Without her untruthful evidence, the defence and counterclaim were not sustainable. Attempts to rely on legal advice to justify the defence and counterclaim must fail, because the advice was inevitably based on Mrs Ubando's statements of fact.
19. No similar findings were made as regards the evidence of Mr Ubando which I described as of peripheral relevance. Dishonesty and impropriety could apply to him only if it could be shown that he knew that his wife was giving untruthful evidence or that he knew that the claims of fraud and forgery against I-Remit were without foundation. This is not shown on the evidence on this application, so that it is not a ground which can be relied on against Mr Ubando.
20. In considering whether it is appropriate to make an order in this case, Mr Cohen for Mr and Mrs Ubando draws attention to two matters which, he submits, argue against an order. First, I-Remit gave no notice of any intention to seek an order against Mr and Mrs Ubando while the case was continuing. The absence of such notice is a factor to be taken into account. However, on the facts of this case, it is not in my view a strong factor. Although I-Remit knew that Mr and Mrs Ubando were the sole directors and shareholders of FEER, they did not know the more important facts on which the application is made. They did not know that Mr and Mrs Ubando had greatly reduced the business of FEER by June 2005, so that they could not know the extent to which the defence and counterclaim was for the personal benefit of Mr and Mrs Ubando. They did not know that through FEES and FEER Philippines Mr and Mrs Ubando were providing substantial funding towards the litigation. They did not know that the court would reject a good deal of Mrs Ubando's evidence as deliberately untrue. This is in contrast to Myatt v. National Coal Board [2007] 4 All ER 1094, concerning the costs of an appeal, where the relevant facts were known to the applicant from the start of the appeal process.
21. Secondly, Mr Cohen relied on the absence of any application for security for costs. This, too, can be a relevant factor: Petromec Inc v. Petroleo Brasileiro SA Petrobas at para. 16. There must, however, be serious doubts that this was an appropriate case in which to make an application for security. I-Remit was the claimant and so any application could have related only to the costs of defending the counterclaim. Although the counterclaim related principally to payments unrelated to the claim, the factual context for the claim and FEER's defence of it was essentially the same as for the counterclaim. The same analysis and investigation into FEER's methods of operating were required for each. This can be seen from paragraphs 93-108 of my judgment in the action. The shortness of that part of the judgment relative to the rest is a good indication that the bulk of the costs would in any event have been incurred. Secondly, the accounts of FEER as at 31 March 2005 disclosed net assets of over £139,000, which would suggest sufficient resources to meet an order for I-Remit's costs of defending the counterclaim.
22. I do not therefore consider that the absence of notice of a possible application for a third party costs order or the absence of an application for security for costs constitute in this case material factors against a third party costs order.
23. In considering whether this is an appropriate case in which to make an order against Mr and Mrs Ubando, Mr Cohen reminded me that the fact that a non-party promotes and funds litigation, even for his own benefit, does not automatically lead to an order. He pointed out that it could not be said that the entirety of I-Remit's claim was never in doubt, as their initial claim for £416,820 was later reduced to £379,462. This, however, occurred at an early stage and had virtually no impact on the costs of the proceedings.
24. Mr Cohen submitted that if it were appropriate to make any order against Mr and Mrs Ubando, it should be for a proportion only of I-Remit's costs. They had, through their other companies, funded only part of FEER's costs. Out of total costs of £137,000, a sum of £47,000 remains owing and some of the costs may have been paid by FEER itself. In Arkin v. Borchard Lines Ltd [2005] 1 WLR 3055, an order was made against a commercial funder who had provided a proportion of the costs in exchange for a proportion of any judgment recovered but had not assumed control of the litigation. The order was limited to the amount of funding which it had provided. The considerations in that case were very different from those in the present case. Mr and Mrs Ubando may have provided only part, albeit a substantial part, of the funding but they fully controlled the conduct of the defence and counterclaim and success would have been largely or entirely for their own benefit.
25. In my judgment, in all the circumstances of this case, it is appropriate to make an order against Mr and Mrs Ubando in respect of all the costs of I-Remit, having regard to their control of the defence and counterclaim, their funding of it to a substantial extent and the fact that success would be largely or entirely for their own personal benefit. This is not a case in which they can realistically be regarded as acting rather in the interests of FEER, and its creditors, than in their own personal interests. The issue of causation does not arise, because I-Remit's costs were incurred only because of the decision of Mr and Mrs Ubando that FEER should defend and counterclaim and, moreover, they carried through that decision with funding which they indirectly provided. The case for an order against Mrs Ubando is all the stronger because the defence and counterclaim were sustained on the basis of her evidence, a good deal of which she knew to be untrue. But, even apart from that factor, the considerations referred to above justify an order against both Mr and Mrs Ubando that they pay I-Remit's assessed costs of the action.