England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre The Priory Courts 33 Bull Street Birmingham B4 6DS
		23 November 2012

JUDGMENT (No 4)

HHJ Simon Barker QC :

1. This, the fourth judgment in this litigation, follows (1) a judgment handed down on 31.5.12 (Judgment (1)) following a trial which took place over 12 days in November - December 2011; (2) a judgment given on 9.10.12, following oral argument on the previous day and that morning, determining the appropriate remedies as between Cs and D1 and, in addition, making a consent order to dispose of all matters, including costs, as between Cs and D2; and, (3) a judgment given on 19.10.12 following oral argument between Cs and D3 about interest payable by D3 on the sum of £324k held by D3 as constructive trustee for Cs.
2. Following the remedies hearing, there remains for determination the appropriate order(s) for costs as between Cs and D1 and as between Cs and D3.
3. Cs seek an order against D1 and D3 jointly and severally for 70% of Cs' costs of the action to be assessed on the on the standard basis if not agreed.
4. In addition, Cs seek an order for a payment on account of some £200k (identified by Mr Beever, counsel appearing for Cs at the remedies hearing and junior counsel appearing for Cs at the trial, by reference to the aggregate fees of Cs' leading and junior counsel through to the conclusion of the trial including VAT). I should make clear at this stage that the VAT status of each of C1 and C2 was not stated during the hearing and it occurs to me that C2, at least, may be registered for VAT.
5. D1's and D3's respective positions are that the appropriate order for costs in the particular circumstances of this case is an order for no order as to costs.
6. Notwithstanding that Cs seek an order for a proportion of the costs of the action against D1 and D3 jointly and severally, the circumstances and arguments were addressed separately in submissions and are quite different. Accordingly, I shall consider Cs' applications for costs against D1 and D3 separately in this judgment.

The orders made following Judgment (1)

7. Substantive orders have already been made in relation to the claims made by Cs and costs as between Cs and D2 as follows :

(1) Cs and D1 : (a) D1 is to restore to C2 the sum of £39,244.67 and (b) D1 is to pay interest to C2 on sums totalling £363,244.67 between the dates when payments were made by C2 to D1 (20.6.05 – 15.12.05) and 29.6.06 at base rate + 2% without compounding and on sums totalling £136,585.71 between the dates when payments were made by C2 to the Isle of Man (IoM) Treasury and the date when tax and NI deducted at source would have been payable to the IoM Treasury if a bonus in the sum of £363,244.67 had been paid to D1 on 29.6.06;

(2) Cs and D2 : by consent (a) Cs' claims against D2 have been dismissed and (b) Cs are to pay D2's costs of the action on the indemnity basis. Terms agreed between Cs and D2 are set out in the schedule to a Tomlin order agreed between Cs and D2 on 8.10.12; and,

(3) Cs and D3 : (a) D3 has acknowledged that he holds £324k as constructive trustee for C2 and has given a formal undertaking to pay that sum to C2 (which he has done), and (b) D3 is to pay to C2 the interest earned and accruing on that sum from 9.10.09 (the date of receipt by him) until payment to C2.

The orders sought at the trial and following Judgment (1)

8. At trial, Cs sought orders against D1 and D3 as follows :

(1) Cs and D1 : (a) Cs quantified their loss at £499,830.38^[1] and claimed damages for breach of contract, (b) repayment of all sums held repayable to Cs as a result of breach of contract or as unauthorised payments, (c) equitable compensation or damages for breach of fiduciary duty, fraud, and/or fraudulent breach of trust including diversion of funds, (d) a declaration that all monies diverted or paid by or for C1 by reason of breaches of fiduciary duties, fraud or fraudulent breach of trust are held on constructive or resulting trust for Cs, (e) an inquiry as to what money is so held, (f) a declaration as to Cs' entitlement to trace such money in equity, (g) interest, and (h) any other relief as appropriate; and,

(2) Cs and D3 : Cs sought (a) a declaration that £363,244.67 or part thereof held under the control of D3 is held on trust for Cs, (b) an inquiry as to what money is held by D3, (c) a declaration that Cs are entitled to trace such money and any profits in equity, (d) interest, and (e) any other relief as appropriate.

9. Following the handing down of Judgment (1), Cs sought orders against D1 and D3 as follows :

(1) Cs and D1 : (a) wide ranging declarations specifying fraudulent conduct on the part of D1, (b) judgment in the sum of £499,830.38 and an order for payment, (c) interest thereon at base rate +2% compounded with yearly rests (reduced during submissions on behalf of Cs to base rate +1% compounded with yearly rests), and (d) an order that D1 and D3 be jointly and severally liable for 70% of Cs' costs of the action, to be assessed on the standard basis if not agreed, and an order for payment of £300k on account thereof (reduced during submissions to some £200k); and,

(2) Cs and D3 : (a) declarations as to D3's position as a constructive trustee and C2's entitlement to trace £324k into the hands of D3, (b) judgment against D3 in the sum of £324k and an order for payment, (c) interest thereon at base rate +2% compounded with yearly rests (also reduced during submissions on behalf of Cs to base rate +1% compounded with yearly rests), and (d) an order that D3 and D1 be jointly and severally liable for 70% of Cs' costs of the action, to be assessed on the standard basis if not agreed, and an order for payment of £300k on account thereof (reduced during submissions to some £200k).

The starting point for a costs order in this case

10. This has been hard fought adversarial litigation and is unquestionably a case where it is appropriate to make a costs order; for this purpose, 'no order as to costs' based on reasoning would count as a costs order.
11. The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but, the court may make a different order (CPR 44.3(2)).
12. In general commercial litigation, where the disputes are ultimately about money, the successful party is generally to be distinguished from the unsuccessful party by identifying which party is to pay money and which party is to receive it, see A L Barnes Ltd v Time Talk (UK) Ltd [2003] EWCA Civ 402, Longmore LJ at paragraph 28 with whom Clarke LJ (as he then was) and Ward LJ agreed.
13. In Barnes, the claimant (Barnes) obtained a quantum meruit judgment over-topping a successful counterclaim for dishonest assistance by some £125k and beating a late Part 36 offer. The trial judge arrived at a costs order that Barnes should nevertheless pay 50% of the defendant's (Time Talk) costs of the action as the result (1) of making no order as to costs of and connected with the expert witnesses and their evidence and (2) after reminding himself of the general rule as to costs, of concluding that because the great bulk of the trial time was taken up by an issue of dishonesty which Barnes lost, Time Talk should be viewed as the successful party. The Court of Appeal held that the judge's approach was incorrect; he should have decided who the successful party is at the outset, and he should not have segregated and pre-determined the costs of the experts, which represented most of the costs of proving the claim. Exercising the discretion afresh, the Court of Appeal held that Barnes was the successful party. However, because Barnes had lost on an issue as to dishonesty which, as the trial judge found, had occupied most of the time in court, Barnes' recovery was reduced to 25% of the costs of the claim and counterclaim.
14. In this case, C2 has established a right to recover sums of money from both D1 and D3. D1 contested Cs' claims against him throughout the action down to judgment. D3 joined issue on Cs' claims against him through to the PTR on 3.11.11 but thereafter adopted a neutral position.
15. As between Cs and D1, the starting point is therefore that Cs, or at least C2, should be viewed as the successful party and D1 as the unsuccessful party.
16. As between Cs and D3, the starting position is more complex, but, in respect of the action through to the PTR, Cs may properly say that D3 had joined issue and that, at least for the period through to 3.11.11, D3 is exposed to the risk of some liability in costs. In fact, Cs go further and, by his oral submissions, Mr Beever, contends that Cs were forced to commence and pursue these proceedings because of the stance taken by D3 and, for that reason, that Cs are entitled to a costs order against D3 by reference to their costs of the action.

The principles relevant to determining the appropriate costs order(s) in this case

17. It is common ground that the general rule does not apply and that the court should make a different order.
18. To that end, regard must be had to all the circumstances, including (1) the conduct of all the parties, (2) whether a party has succeeded on part of his case, even if he has not been wholly successful, and (3) any offers of settlement (other than Part 36 offers) or payments into court (CPR 44.3(4)).
19. When considering the conduct of all the parties, the court will have regard to (a) conduct before as well as during the proceedings; (b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; (c) the manner in which a party has pursued or defended his case or a particular allegation or issue; and, (d) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim (CPR 44.3(5)).
20. These provisions are not intended to encourage a lengthy and detailed analysis of each of the allegations and issues in the case, their progress and their outcome, and the making of corresponding adjustments to the general rule. In particular, the general rule is not to be understood as requiring that a successful party is to be deprived of any part of his costs because he has failed on some issues or allegations; rather, the general rule reflects the more fundamental failure on the part of the unsuccessful party to make an offer sufficient to meet the winner's true entitlement, and departure from the general rule is appropriate where allegations have been made and issues raised when they should not have been Bugden v Andrew Gardner Partnership [2002] EWCA Civ 1125, Simon Brown LJ at paragraphs 26 and 35.
21. It is implicit in an adjustment for an allegation or issue which was, but ought not to have been, raised or defended or pursued that there is some conduct based fault, such as unreasonableness, manner or exaggeration, which engages the discretion to make an adjustment.
22. In addition, the court must stand back and consider, or at least keep in mind, whether costs attributable to an allegation or issue unsuccessfully raised by the successful party were unique to that particular allegation or issue or whether they were common to, or overlapped with, a number of issues including, at least in part, those by reference to which the successful party achieved overall success.
23. Thus, the objective of a court's order as to costs is no different from the objective of its substantive order, namely to do justice between the parties according to the law.
24. Finally, if and when making a different order, the court must have regard to the range of orders that may be made, which include payment of : (1) a proportion of another party's costs; (2) a stated amount in respect of another party's costs; (3) costs from or until a certain date only; (4) costs incurred before proceedings began; (5) costs relating to particular steps in the proceedings; (6) costs relating to a distinct part of the proceedings; and, (7) interest on costs from or until a certain date. If a court is contemplating an order under (6), it must instead, if practicable, make an order under (1) or (3).

Costs orders to be taken into account

25. There are three specific costs orders in this action to be taken into account in this costs decision.
26. First, at a hearing before me on 30.6.11 Cs were given permission to re-amend their statement of case to add most (but not all) of a lengthy schedule of "particulars of knowledge and participation" on the part of D1 to support allegations of fraudulent conduct over the period 2002 - 2005. These particulars alleged procuring or authorising (1) payments totalling £200k, €1.137m, and $371k in five transactions with entities in which D1 was alleged to have an interest, (2) disclosure of confidential information to a business in which D1 was alleged to have an interest, and (3) the bonus payments the subject of the action. No relief was sought in respect of the allegations referred to at (1) and (2). The purpose of the amendment was to encourage the court to find D1 generally and thoroughly fraudulent and thereby to reinforce findings of fraud in relation to the bonus payments. The allegations were set out as Appendix 1 to the Re-Amended Particulars of Claim and those referred to at (1) and (2) were referred to during the trial as the 'badges of fraud' allegations.
27. The costs of and occasioned by the re-amendment (that is the costs relating to the consequential amendment of the Defence) were ordered to be paid by the Claimant in any event. However, the costs of the application itself were reserved to trial; that was because those costs were material in amount and it was not possible at that stage to determine whether and, if so, to what extent the 'badges of fraud' allegations would turn out to be of significance.
28. Secondly, three case management orders were made with 'no order' costs orders (one express and two implicit) and two applications for specific disclosure have been the subject of summarily assessed costs orders adverse to Cs (one order made by HHJ Cooke on 7.2.11 and the other by me at the PTR on 3.11.11, barely two weeks before trial). Cs' costs of and relating to the subject matter of those applications and orders are, of course, to be excluded from their costs of the action. Whether or not that was in fact taken into account in Cs' costs schedule at present before the court is unclear but, even if not, I do not consider that it will make any material difference to any calculation of either a proportionate disallowance of Cs' costs or a payment on account of such costs.
29. Thirdly, Cs have failed in their claim against D2 and have consented to an order for payment of D2's costs on the indemnity basis. The terms of the agreement are set out in the schedule to the Tomlin order which is confidential to the parties. During argument, Mr Cullen QC stated that D2's costs were understood to be in the region of £250k. D2 was represented throughout the trial and her costs together with Cs' costs of their unsuccessful claim against D2 will be a substantial sum. Further, in a skeleton argument submitted for this costs hearing and before reaching agreement with Cs, Miss Lucas, D2's counsel, proposed that a payment on account of D2's costs should be ordered in the sum of £150k and noted that Cs had made a counter proposal of £130k; for the purposes of this judgment, I may safely proceed on the basis that D2's costs will have exceeded £150k. Further, Cs' agreement to a costs order in D2's favour on the indemnity basis is to be seen as recognition that vis-a-vis D2 the facts of the case and/or Cs' conduct have gone beyond the norm for litigation and to the extent that Cs' conduct is a factor it has been, at the lowest, unreasonable to a high degree.
30. By seeking the costs of the action rather than the costs of the claims against D1 and D3, Cs seek to have all those costs (that is the costs payable to D2 and Cs' own costs of its claim against D2) taken into account and borne (as to 70%) by D1 and D3 jointly and severally.

Adjustments conceded by Cs

31. First, Cs submit that an issues based approach is not appropriate in this case. The rationale advanced by Mr Beever is that the claims in contract and breach of fiduciary duties against D1, although separately pleaded, cannot sensibly be separated, did not give rise to distinguishable costs, and were merely "wrapped up" together in the litigation.
32. Cs recognise that Judgment (1) contains criticisms of the manner in which Cs conducted the litigation and propose that, notwithstanding a finding that D1's breaches of fiduciary duty were fraudulent, the appropriate basis of assessment of costs is the standard basis and that a proportionate disallowance of 30% be made.
33. The 30% disallowance is to take into account both disallowance of Cs' costs and, to an appropriate extent, contribution to the unsuccessful party's costs. Mr Beever explains that the 30% reduction encompasses three adjustments, each compensated for by a 10% reduction, namely :

(1) the impact of the costs order in favour of D2 ~ 10%,

(2) the unnecessary Appendix 1 allegations (ie the 'badges of fraud') ~ 10%, and

(3) the criticisms in Judgment (1) of Cs' conduct ~ 10%.

34. Although the difference between costs on the indemnity basis and costs on the standard basis is essentially a matter for assessment, it is important to keep in mind that quantification on the standard basis engages two considerations not present on an indemnity basis assessment : (1) costs must be proportionate to the matters in issue, and (2) the burden of proof (justification of quantum) falls upon the receiving party. In a case such as this, the practical effect will be a further reduction when the costs come to be assessed. No submissions are made as to the percentage impact of the standard basis of assessment applied to Cs' costs. Accordingly, I proceed on the basis that Cs are in practice acknowledging that if the order they seek is made they will recover something less than 70% of their costs of the action.
35. There is a material difference between the costs incurred by Cs and those incurred by each of the other parties. Thus, it is not realistic to view proportionate or percentage adjustments in isolation. To put the percentages in context :

(1) Cs' present solicitors, Nelsons have provided an outline schedule of Cs' costs for the period 13.1.10 to 7.12.11; the total is £1.45m including VAT. The core elements of these costs are : (a) solicitors' base costs £515K, (b) solicitors' uplift £515k, (c) VAT thereon £206k, (d) counsel's fees £202k including VAT^[2], and (e) disbursements £12k;

(2) D1's costs are estimated at £401k. The core elements are : (a) solicitors' costs £242k, (b) counsel's fees including expenses £93k, and (c) VAT £66k;

(3) D2's costs, which are relevant because Cs seek to recover these costs from D1 and D3, are sufficiently accurately taken into account if I adopt D2's payment on account sum of £150k;

(4) D3's costs are unknown.

36. Between 11.11.09 and 13.1.10 Cs were represented by Eaton Ryan & Taylor and before that (certainly from 21.5.08, if not before) by Manches. Although it is not expressly stated on behalf of Cs, I assume that Cs wish such costs to be embraced in the costs order they seek. However, there is no statement before me of the chargeable work done prior to 13.1.10 or of the amount of those costs.
37. For present purposes, the best I can do on the available information is treat a 10% disallowance of Cs costs as having a monetary value in the order of £150k. This is obviously imperfect and is likely to turn out to be inaccurate on assessment, but the purpose is simply to have a realistic idea of the overall effect of any proportionate reduction of Cs' costs, and this suffices for that purpose.
38. On this basis and if Nelsons are entitled to a 100% uplift and if neither C1 nor C2 is (or was at the material time) registered for VAT, Cs are seeking an order that, in monetary terms, D1 and D3 are jointly and severally liable for costs in the order of £1m.
39. Mr Cullen QC submits that the court must consider in this case whether to make an issue based order, but he also makes the broader submission that the circumstances of this case, including Cs' conduct, are so exceptional that the just order is no order as to costs. In his oral submissions, Mr Cullen QC is generally content to approach the question of deductions on a percentage basis.

(1) The impact of the costs order in favour of D2 ~ 10%

40. Mr Beever's analysis of the allocation of costs to Cs' claims against D2 is in summary : (1) 1½ days (say 15%) of the trial was occupied by these claims; (2) no other costs were incurred by Cs which are specifically attributable to the claims against D2 as distinct from being relevant to the claims against D1 and tracing through to D3; and, (3) 15% of the trial costs is broadly approximate to 10% of Cs' overall costs.
41. The proportionality of the last adjustment is not easy to reconcile with Cs' outline costs schedule.
42. What is curiously lacking is a clear statement on behalf of Cs as to whether a separate costs record was maintained in respect of the claim against D2. It is evident that a costs file or ledger was maintained by Cs' present solicitors identifying and recording Cs' costs of the claim against D3^[3].
43. In response, Mr Cullen QC takes issue with Mr Beever's allocation of time and submits that the appropriate trial time allowance would be more than 2 days; Mr Cullen observes that Mr Steele (RS), Cs' principal witness, devoted some 40 paragraphs of his written evidence to the case against D2, Miss Lucas cross-examined RS and two other officers of Cs who signed statements of truth relating to allegations against D2, D2 gave evidence for almost 1 day, and closing submissions relating to the case against D2 occupied almost 1 day. Mr Cullen submits that Cs failed entirely in their claim against D2 and their consent to an order for costs on the indemnity basis reflects Cs' acknowledgment that their conduct of this aspect of the action is worthy of censure.
44. Mr Cullen submits that Cs should also compensate D1 for his costs of the time taken at trial in relation to D2. By reference to the estimated costs schedule prepared by D1's solicitor, Forbes Anderson Free this would be some £20k to £25k including VAT.
45. Mr Cullen also submits that rather than making a proportionate deduction to Cs' costs of the action, the better course is to decline to make an order by reference to the costs of the action and instead make an order relating only to the costs of the claims against D1 thereby eliminating the risk of an adjustment failing to compensate fairly for any allowance to be made.
46. Mr Cullen submits, in the alternative, that if a percentage reduction is the route to be taken then the appropriate percentage is 30%. There is no supporting analysis or argument underpinning this figure. Moreover, it is necessary to bear in mind that D1's own costs to 7.12.11, including disbursements and VAT, total some £401k, a sum materially less than Cs' total costs.
47. First, in my judgment the appropriate course is to start by making clear that no part of the costs ordered by consent to be paid by Cs to D2 is to be passed on to D1. Thus, Cs' costs of the action are to be confined to the costs and disbursements incurred by Cs in respect of their own representation.
48. Secondly, if it had been clear from the material before me that Cs' solicitors have maintained a separate costs record for the claim against D2, I would have had no hesitation in ordering that those costs be excluded from the costs for which D1 is liable. However, that is not clear. Therefore, in order to achieve certainty and having regard to CPR 44.3(7) in particular, the appropriate course is to attempt to identify for disallowance a percentage which fairly reflects Cs' costs attributable to their case against D2. I am inclined to the view that the appropriate proportion of Cs' costs lies somewhere between 10% and 30%, near but perhaps not quite at the mid point (20%).
49. Thirdly, Cs' conduct and the circumstances of this case are such that it is right to make a further adjustment to enable D1 to be compensated for the cost of his representation at trial during the period devoted to Cs' case against D2, which is realistically to be taken as 2 days.
50. Cs' conduct and the circumstances that I take into account are :

(1) D2 was not given an opportunity to refute Cs' claim before proceedings as Cs chose not to engage in a pre-action protocol or even give any advance notice of proceedings;

(2) the case against D2 was exaggerated, for example reference was made to D2 being involved in passing monies through many bank accounts whereas in fact some transactions were merely automated clearing of balances pursuant to a commonplace sweep instruction;

(3) D2 was an honest witness with a credible explanation for innocent as opposed to unconscionable receipt of monies from D1 which was unscathed by cross-examination; and,

(4) Cs' own witnesses were discredited in cross-examination and it is no answer to submit that a statement of truth merely verifies allegations settled by leading counsel.

In short, by pursuing the case against D2 through to trial, Cs caused D1 to incur costs needlessly.

51. In monetary terms, the cost of representation for D1 over two days of trial time equates to £20k.
52. In the absence of any more specific guidance from either party as to the proportion of Cs' costs attributable to their case against D2 and on the basis that £20k equates broadly to more than 1% but less than 2% of Cs' own costs, and also having regard to the potential value and importance of the case against D2, 20% of Cs' costs is a realistic proportion to deduct in order to (1) disallow Cs' own costs of their claim against D2 and (2) compensate D1 for his costs at trial of Cs' case against D2.
53. Thus, adjustment is most appropriately made as between Cs and D1 in respect of the costs relating to the claims against D2 by an order that :

(1) the costs payable by Cs to D2 be excluded from any costs liability of D1 to Cs; and,

(2) Cs' own costs of the action be reduced by 20% to reflect disallowance of their costs of the claims against D2 and the award to D1 of his costs at trial attributable to Cs' case against D2.

(2) The unnecessary Appendix 1 allegations (ie the 'badges of fraud') ~ 10%

54. On behalf of Cs, Mr Beever submits that the 'badges of fraud' allegations were not pursued for the purpose of seeking compensation and that, in that sense, they were not issues. He further submits that where fraud is alleged and credibility is in issue the court should allow the complainant a degree of latitude so that evidence broadly relevant and believed to be useful may be adduced. Thus, submits Mr Beever, the criticism is not of the fact that the issues were raised but of the time spent on them.
55. The allegations were introduced by the amendment permitted on 30.6.11 and the costs of addressing the amendment have already been awarded to D1. The costs of the application were reserved, as noted above, and in view of my findings in Judgment (1), these reserved costs should be adjusted for as part of the overall disallowance under this head. I assume that Mr Beever had that in mind when making his submission as to the percentage deduction.
56. The 'badges of fraud' allegations were addressed in Cs' written evidence served in January 2011 (6/69 pages) and in the further statements served in November 2011 (18/30 pages), and they were responded to by D1's November 2011 statement (16/32 pages). Mr Beever submits that in broad terms some two days of the trial were devoted to these matters. In addition, Mr Beever observes that D1 volunteered or accepted during cross-examination that he had lied and been involved in "some pretty horrible stuff".
57. Taking all of these factors into account, Mr Beever submits that disallowance of 10% of Cs' costs on the standard basis is the appropriate adjustment to make.
58. Mr Cullen QC does not accept that the criticism in Judgment (1) is confined to the time spent on the 'badges of fraud'. He is correct. The final three paragraphs of my judgment, added as a postscript, were intended to convey my strong disapproval of the approach taken by Cs to alleging and proving fraud. The four findings of fact crucial to the conclusion that Cs' breaches of his fiduciary duties were fraudulent are identified at paragraph 328 of Judgment (1).
59. As Mr Cullen QC had argued (unsuccessfully) at the interim hearing on 30.6.11, the wide ranging allegations of fraudulent conduct were unnecessary. My finding castigating this completely unnecessary collateral attack is expressed at paragraph 172 of Judgment (1).
60. That being said, I should not lose sight of the fact that allegations of fraud were made as a response to D1 raising s.281 of the Insolvency Act 1986 as a defence to Cs' claims. But for that, the likelihood is that the case would have proceeded as it had originated, namely as a breach of contract and breach of fiduciary duties claim without allegations of fraud. However, and as already noted above, the necessary findings of dishonesty could and should have been achieved without recourse to any of the 'badges of fraud' allegations.
61. The appropriate reflection of these circumstances is not only to disallow Cs' costs attributable to these allegations, but also make an adjustment to compensate D1 for his costs unnecessarily incurred (in so far as not already the subject of an order).
62. Mr Cullen submits that the appropriate adjustment is to disallow 30% of Cs' costs of the action.
63. My impression of the trial time occupied by evidence and submissions on the 'badges of fraud' allegations is that it exceeded two days and was at least two and a half days. This equates to 20% of the trial time. In terms of pre-trial matters, it is necessary to disallow Cs' costs of their written evidence, pleading, and voluminous documentary material relating to the 'badges of fraud' allegations and their related application costs. Taken in the round an overall adjustment disallowing 20% is proportionate.
64. As to D1's costs, he has already received the benefit of a payment of £10,000 on account of the costs of and occasioned by Cs' re-amendment. In oral submissions, Mr Cullen referred to D1's estimated costs breakdown, and in particular the second page^[4]. The first three items were said to be partly attributable to the 'badges of fraud'; the fourth to sixth and eighth items were said to be entirely so attributable; the seventh and tenth items were said to be largely so attributable; and, 30% of the trial preparation costs were also said to be so attributable. Allowing also for 20% of the trial costs, and taking partly to mean 25% or less and largely to mean 65% or thereabouts, this equates quite closely to 30% of D1's total costs of £401k. Of course, this includes £10k already received and is therefore closer to 27.5% of D1's costs.
65. However, the relevant question is what does this (a sum in the order of £115k) equate to as a percentage of Cs' costs. As a percentage of Cs' full costs, including uplift, it is obviously less than 10% (approximately 8%); as a percentage of Cs' base costs it is close to 14%; and if Cs, or one of them, is registered for VAT, it equates to 9%.
66. Taken in the round, a 30% reduction in Cs' costs of the action fairly reflects an adjustment to disallow Cs' costs and compensate D1 for his costs (in so far as not already received) of the costs attributable to the 'badges of fraud' allegations.
67. For the avoidance of doubt, this adjustment subsumes the outstanding balance of D1's costs of and occasioned by re-amendment of the particulars of claim and the reserved costs; accordingly, no further account is to be taken of paragraphs 2(ii), 3 and 8 of the order made on 30.6.11.

(3) The criticisms in Judgment (1) of Cs' conduct ~ 10%

68. Mr Beever rightly submits that the criticisms in Judgment (1) of Cs' conduct do not affect the conclusion that Cs (or C2) are(is) the successful party.
69. In his written and oral submissions Mr Beever makes the following points :

(1) criticisms of RS's evidence were not findings of dishonesty but were of a lower order being observations about reliability and credibility resulting in the court preferring the evidence of others, including D1, where RS's evidence was at odds with other evidence, and the consequence should be that no adjustment should be made on this account;

(2) restatement of C1's 2005 accounts was criticised on the basis that, being unsupported, it should have been withdrawn or bypassed (Judgment (1) paragraph 292) but it is nevertheless a fact which cannot be contradicted that KPMG IoM did approve a prior year adjustment which converted C1's 2005 profit into a loss and rendered D1 ineligible for any bonus at all, and it is a fact that Cs' did seek to enlist KPMG's assistance, accordingly any adjustment should be confined to a proportion of the trial costs occupied by this issue, and does not warrant a significant adjustment;

(3) criticism of Cs' approach to and participation in the conduct of the litigation is not susceptible to costs analysis but is an adjustment to mark the court's disapproval. As to disclosure, Cs accept that Mr Manning did concede that his searches were incomplete but, Mr Beever submits, it would be unfair to conclude that Mr Manning was not conscientious. As to verification of factual allegations by Mr Kenneth Wells (KW) and Ms Kay Cregeen (KC), Mr Beever submits that the verifications the subject of criticism were documents pleaded by counsel relating to matters outside KW's and KC's knowledge.

In summary, Cs submit that criticisms which lead to a statement that a cautious approach to evaluation is required are not cost bearing because they relate only to the task of the judge.

70. Mr Beever submits that these criticisms are addressed by (1) surrendering a claim to indemnity costs, notwithstanding the findings of fraudulent conduct against D1, and (2) a further disallowance of 10% of Cs' costs of the action.
71. Mr Cullen QC submits that the effect of my findings in relation to RS on a number of factual issues is that he was untruthful and that this was not the product of oversight, forgetfulness or some other innocent explanation, but was conscious and deliberate in the pursuit of success in the litigation if and as need be at the expense of the truth. Mr Cullen referred to the summarised findings to this effect at paragraphs 159, 166 and 386 of Judgment (1).
72. Mr Cullen's submission is fairly made and is a correct analysis of the import of my findings. Other instances of RS's evidence rejected as unreliable, meaning untruthful as distinct from mistaken, could also have been given (e.g. paragraph 251 in relation to the non-receipt of management accounts); and, as was expressly (Mr Winrow) and implicitly (KW) confirmed by others of Cs' witnesses, they made statements of fact to relay what RS wanted to have said.
73. Criticism of Cs' disclosure and witnesses is set out at paragraphs 150-166 of Judgment (1). These are all serious matters and are not answered by Mr Beever's submissions :

(1) the criticisms of Cs' disclosure were not aimed at Mr Colin Manning's personal attitude but at the approach adopted to looking for disclosable documents, particularly when contrasted to the extensive work required for the purpose of marshalling the 'badges of fraud' documentation;

(2) at paragraphs 150-166, I refer expressly to a very serious allegation made by RS to the effect that D1 destroyed or removed evidence and thereby prevented Cs from adducing D1's contract of employment containing restrictive covenants. That accusation was simply not made out, and other evidence justified the making of contrary findings;

(3) the making of a statement of truth, following only a cursory read, is unacceptable in relation to a document containing serious allegations, such as unconscionable behaviour; nor is it acceptable to make a statement of truth simply because nothing is actually known to the contrary. However, these matters concern the statement of case and further information alleged by KC and KW against D2 and I have already made such disallowance as is appropriate.

74. In relation to the restatement of C1's audited accounts, the allegation that C1 had made a loss during the year ended 30.6.05 was maintained throughout the trial, was the subject of a qualified concession in Mr Booth QC's closing submissions, but was rejected in Judgment (1) for reasons including that serious questions had been raised, but not answered satisfactorily, as to both the principles and accuracy of and C1's motive for the adjustment.
75. These matters evidence serious conduct issues which had a material (prolonging) effect on the duration of the trial and the preparation time for both parties. An express disallowance of 10% for these matters plus a further disallowance on assessment implicit in the standard basis of assessment is significant, but a further pre-assessment adjustment should, in my judgment, be added to cover the materiality of these criticisms (in so far as not already addressed) and the costs impact upon D1.
76. Mr Cullen QC did not attribute a particular proportion of his client's costs to this head but included the relevant matters with others, to which I shall come, as part and parcel of his justification for a 'no order' order.
77. Doing the best that I can on the available material, I consider that I should disallow something in excess of a further 5% to cover the materiality of the criticisms in Judgment (1) of Cs' case and approach to the litigation, and adjust for something in the order of 15% to 20% of D1's costs, which equates to approximately 5% of Cs' costs, to address the cost to D1 of having to defend a case prepared and presented as happened in this case.
78. The just overall disallowance for criticisms of Cs' conduct in Judgment (1) is therefore 20% of Cs' costs.

Further adjustments proposed by D1

79. Mr Cullen QC submits that there are further or other circumstances which ought to be taken into account; specifically that further disallowance should be made for bad points which have been argued and lost.
80. In this context, Mr Cullen refers to the Court of Appeal's judgment in Kew v Bettamix Ltd [2006] EWCA Civ 1535. The point under consideration was the running of a bad point alongside a good or better point in order to bring a claim within eligibility criteria for ATE insurance. Leveson LJ observed (paragraph 46) that "It is incumbent on all those involved in litigation to ensure that they carefully reflect on those issues that they seek to put before the court and it will be no bad thing if that leads to the reduced pursuit of bad points" and (paragraph 49) that "there is a distinction between putting a case at its highest … and advancing a basis for relief on a basis that fails (especially if it is entirely unsupportable)". Agreeing with these propositions, Waller LJ added (paragraph 56) "It is certainly not an argument for an order that an opponent should bear all the costs of the successful party, that some bad points had to be run in order to obtain ATE insurance", ie for a funding or other collateral purpose, and (paragraph 58) "On any view in these types of case the courts should not be slow to make a reduction to the costs that a successful party should recover if they form the view that bad points have been argued and lost". The particular case was a personal injuries claim conducted on a CFA, but the reference to "types of case" is wide enough to embrace damages and restitution claims against fiduciaries, whether or not conducted on a CFA; and, even if that is incorrect, the principle is obviously entirely consistent with the overriding objective and equally applicable to cases such as that brought by Cs.
81. Mr Cullen QC seeks further adjustment for :

(1) the failure of C1 to obtain any relief,

(2) the failure of Cs' claims in contract,

(3) aspects of the fiduciary duties claims on which Cs were unsuccessful, and

(4) D1's costs incurred by reason of Cs' case against D3.

(1) The failure of C1 to obtain any relief

82. Mr Cullen QC submits that but for the joinder of C2 on 4.8.10 no substantive relief would have been obtained. For that reason D1 seeks an adjustment for all costs incurred in successfully defending C1's claims or, alternatively, an adjustment to exonerate D1 from liability to Cs and compensate D1 for all costs of the action up to 4.8.10.
83. From D1's estimated costs breakdown, it appears that some £20k (5%) of D1's costs were incurred prior to the joinder of C2. It is not possible to obtain equivalent information from Cs' costs schedule.
84. The point really concerns Cs' failure to focus attention on the basics of their case at an early stage and the incremental cost consequences. In principle, it would be just to make an allowance to reflect such consequences; however, as this point overlaps substantially with the next one, to avoid overlap in allowance the appropriate course is to bear it in mind in the context of the failure of Cs' claims in contract,

(2) The failure of Cs' claims in contract

85. My conclusions in Judgment (1) are that C1's claim for damages for or repayment of unauthorised bonus payments founded in contract was not made out and that C2's claim in contract failed for want of a contract.
86. Mr Cullen QC submits that a deduction of 25% would be appropriate. Mr Beever submits that no, alternatively only a minimal, disallowance should be ordered.
87. The thrust of Mr Beever's submission is that the contract claims carry over to and are "wrapped up" in the breach of fiduciary duty claims and, further, that the failure of the claims in contract is a practical example of the observation by Simon Brown LJ in Bugden to the effect that in almost every case the winner is likely to fail on some issues and should not be penalised simply for losing an issue.
88. The issues concerned the existence and terms of the contractual relationship between each of Cs and D1 going right back to D1's initial employment in 1991 (by a different group company, which remained D1's employer throughout). The dispute was entirely factual, required a step by step analysis of events over a 12 year period (1994 – 2006), and occupied a material proportion of trial time.
89. Before the trial, D1's legal advisers had given considerable thought to these issues as was apparent from the cross-examination of RS. Cs' thoughts on these issues were driven by RS and his evidence and, as was acknowledged in Mr Booth's closing submissions, were not thought through.
90. With the exception of one crucial point, namely the time(s) when a bonus fell due for payment, Cs' evidence and case was rejected and D1's accepted. In particular, and apart from the timing point, RS's evidence about D1's contractual arrangements was internally inconsistent, confused, unreliable and rejected. D1's account of circumstances and terms, save for the timing point, was accepted.
91. If RS had accepted that D1 was entitled to a bonus on revised terms (ie by reference to the Table 3X) and had contested only the timing point, the entire focus of the trial would have changed, and a material amount of trial time, four days at least, would have been saved.
92. All of this is reflected in the structure required for Judgment (1). Given the approach taken by Cs, there was no alternative but to undertake a chronology based review of the evidence. This occupies some 30 pages (approximately one third) of Judgment 1 and would have been greatly reduced if the only contract issue had been the timing point.
93. There would probably also have been a further consequence, namely that D1's claim to an even larger bonus upon the signing of C1's audited accounts for the year ended 30 June 2005, which claim vested and vests in D3, would almost certainly have been a feature of the litigation, and may well have led to a different overall outcome. Mr Cullen QC submits that this is a matter which may be taken into account on the question of costs, not least because the Barnes test for success in commercial litigation would have shown Cs to be the overall or net paying party and this litigation to have been an exercise in futility. Mr Beever submits that this point is irrelevant to any consideration of or decision as to costs of this litigation, which require a balance to be struck in recognition of what has been decided and, further, that it would be wrong to visit on Cs now a prospect which may or may not come to pass later. In my judgment, the point is of no direct relevance to the costs issues; there may be an indirect relevance in that if, after considering all the directly relevant points, the conclusion is that no order as to costs is the just order, it may provide fortification for such a conclusion; i.e. its relevance is confined to being at most a check.
94. The contract issues cannot fairly be treated as being "wrapped up" in Cs' overall claim or warranting only a minimal disallowance. Cs were very largely, but not entirely, unsuccessful. Cs' recovery in costs should be adjusted to reflect both a disallowance of their own costs and an award to D1 in respect of his costs. On that basis and having regard to both the pre-amendment costs and the substantial trial time that would have been saved had the contract issue been confined to the timing point, I accept Mr Cullen's proposed deduction of 25% as realistic and merited.
95. In reaching this conclusion, I have also had in mind that certain aspects of the contract issues (RS's evidence to the effect that contracts existed and relevant documents had been destroyed or removed by D1) overlap and have already been considered, and I caution myself against the risk of inadvertent double counting. Nevertheless, I consider a 25% disallowance to be realistic and merited.

(3) Aspects of the fiduciary duties claims on which Cs were unsuccessful

96. Mr Cullen QC contends that there should be a further 25% deduction to reflect Cs' relative lack of success. Mr Cullen acknowledges that Cs succeeded in establishing breaches of fiduciary duty and that C2 has secured recovery of the net of tax sum claimed; however, he submits that the point on which Cs succeeded ("jumping the gun") was no part of Cs' case and was not even put to D1 in cross-examination. Mr Cullen identifies a number of other points under this heading on which Cs' case was rejected or D1's preferred, most of which overlap either with general conduct or the contract issues which have already been taken into account. Other points (such as the allegation that D1 and another director interfered with C1's board information packs) made by Cs but rejected in Judgment (1) do not in my view justify separate or additional consideration.
97. The point of substance made by Mr Cullen is that had the case been about whether D1 "jumped the gun" the trial could and should have been completed in two days. However, and in the event, Cs expanded the case to a 12 day trial and justice in costs requires not only disallowance of the great majority of Cs' costs but also an award to D1 of the great majority of his costs. Mr Cullen also points to the inequality of arms (in the depth of pocket sense).
98. Mr Beever submits that the inescapable fact is that the fiduciary duty claims succeeded and those issues which fell by the wayside were merely an incidence of litigation. As to this being a two day case, Mr Beever submits that D1 is riding a wave of criticism in Judgment (1) and has become infused with hindsight. Accordingly, Mr Beever submits, no adjustment should be made under this head.
99. Had the issues between Cs and D1 been confined to whether D1 was entitled to take the bonus payments when he did ("jumping the gun") the trial would have been very much shorter, but this is a point which more appropriately falls to be borne in mind when I review the incremental costs decisions in the round and arrive at an overall conclusion.

(4) D1's costs incurred by reason of Cs' of case against D3

100. No specific costs attributable to Cs' case against D3 are discernable from Cs' or D1's costs schedules. However, Cs' solicitors have maintained a costs file or ledger identifying and recording Cs' costs of the claims against D3; one page of what appears to be a 337 page document is included in the costs hearing documents^[5]. Thus, distinguishing between Cs' costs of the action relating to the claims against D1 and Cs' costs relating to the claims against D3 should be straightforward. Is it appropriate?
101. The involvement of D3 as a party is the result of D3 resisting Cs' tracing claims. That was outside D1's control. In my judgment, it is appropriate to exclude from the costs recoverable by Cs from D1 all of Cs' costs relating to the claim against D3.

Costs order as between Cs and D1

102. The cumulative effect of the incremental approach thus far taken is that Cs' own costs of the action, after excluding (1) the costs already the subject of orders^[6] and (2) the costs attributable to the claim against D3, are be reduced by 95%. Is that a just reflection of the fact that C2 is the successful party?
103. In my judgment it is : (1) Cs had no regard to any pre-action protocol before taking proceedings against D2; (2) the case against each of D1 and D2 included serious factual allegations which were unsupported other than by unreliable evidence, notably of or on the instructions of RS; (3) Cs' disclosure was woefully inadequate; (4) nevertheless, the trial bundle grossly exceeded that which was pertinent to the real issues between the parties; (5) the description of Cs' case as riddled with flaws is no exaggeration; and, (6) Cs' approach to the litigation led to an express finding that winning is regarded by Cs (in this context : RS) as more important than adhering to an obligation to tell the truth.
104. In consequence, Cs put themselves and the other parties (D1 and D2) to very substantial unnecessary and costly work going far beyond the boundaries of the ordinary incidence of litigation and what may be accepted or excused as failures for which no adjustment in costs is appropriate.
105. The disparity between the pocket depth of Cs and D1/D2 is also relevant in this context in that it will have been readily affordable for Cs case to be expanded and pursued in the way that it was but a considerable financial burden for D1 and D2 to bear the cost of addressing the same.
106. If the case against D1 had been confined to "jumping the gun", a two day trial would have been tight but possible and a three day trial generous but more realistic. Had that happened and had the evidence been equally focussed, the overwhelming likelihood is that an order for costs on the indemnity basis would have been made against D1 if he had contested the claim unsuccessfully. That is no small "if" because D1's contractual right to a bonus would have been common ground and just compensation might properly have been confined to the cost of money for up to one year which might have been overtopped by a claim for unpaid bonus entitlement. But that is not what happened, and this decision on costs is required to do justice between the parties in the actual circumstances of the case.
107. Having regard to all the circumstances, I consider there to be two critical considerations : (1) it would be wrong to make an order that failed to recognise, at least in principle, that Cs were compelled to come to Court to obtain redress against D1, and (2) it would be no less an error, in the exceptional circumstances of this case, to make an order which failed to reflect Cs' approach to and conduct during this litigation, extending as it has to disregard and abuse of the court's process.
108. Standing back from the detail of the step by step approach taken to arrive at the conclusion set out above, is the overall result a just costs order in the particular circumstances of this case? I consider that it is.

Payment on account

109. To put the application for a payment on account in perspective, Cs' solicitors' base costs total some £515k before VAT, Cs' counsel's fees total some £168k before VAT and disbursements total some £10k before VAT. So, taken in the round, Cs' potentially relevant costs total some £693k before VAT, which figure includes Cs' costs relating to their case against D3 and may include other pre-trial costs the subject of costs orders adverse to Cs. As already noted, the VAT position of C1 and C2 is unclear. A payment on account of £200k is obviously out of the question. Should any payment on account be ordered?
110. In broad terms, Cs stand to recover 5% of their costs. Disregarding uplift and VAT, this equates to a sum of less than £35k. On the one hand, a proportion of this sum further reduced to allow for the matters referred to above and the impact of standard basis assessment, to say £20k, is a very modest sum. However, in exercising the discretion to order a payment on account of costs, it is necessary to have regard to other circumstances; these include (1) whether or not the unsuccessful party wishes to appeal (Mr Cullen QC has indicated that D1 does intend to seek permission to appeal); (2) the relative financial position of each party (D1 is a discharged bankrupt who has lost his professional qualification and standing in the financial services sector and whose wife is the owner of the family home and works part-time for a local zoo. Cs, by contrast, are part of a substantial group under the control of RS and ultimate beneficial ownership of RS's family trusts); and, (3) the overriding objective.
111. It is normal practice to make an order for an interim payment on account of costs. In the circumstances of this case, I cannot be confident as to what, if any, sum is likely to be payable by D1 following agreement or assessment of Cs' costs. Moreover, I readily infer that D1 will need the means available to him for the purposes of any appeal. Although no indication has, as yet, been given of any grounds of appeal by Mr Cullen QC, I recognise that it may well be of assistance to those concerned with insolvency law to have the benefit of the Court of Appeal's judgment on the meaning of the phrase "any fraud or fraudulent breach of trust" as used in s.281 of the Insolvency Act 1986. Further, an award of say £20k or less would be of relatively trivial significance in the hands of Cs. Having regard to all the circumstances, which include seeking to avoid a risk of D1 having to seek to recover an overpayment from C2, I decline to make an order for a payment on account of costs.

Costs as between Cs and D3

112. Cs seek the same order against D3 as they do against D1, namely that D3 should be liable for 70% of Cs' costs of the action on the standard basis.
113. Cs contend that D3 brought the entire action upon himself by the uncompromising attitude and approach he adopted until 3.11.11, the date of the PTR, when D3 sought to amend his Defence and adopt a neutral position.
114. In so contending, Cs are not to be taken as asserting that D3 either advanced or actively supported the case as run by D1, but rather that, by (1) being put to proof that D1 was not entitled to bonus payments totalling £363k odd net taken in 2005 and (2) being required Cs to establish the route by which a proprietary right to trace £363k (in the event £324k) into D3's hands had arisen, they had no alternative but to issue and pursue these proceedings.
115. Because D3 did not participated in the trial, Mr Beever has had to lay the factual ground on which to base his submission as to D3's costs liability. In summary form, the points Mr Beever makes are as follows :

(1) Cs have succeeded in precisely the terms advanced from the outset : they have recovered the full amount of the net bonus payments taken in 2005;

(2) the issues ("battleground") between Cs and D3 have always been clear;

(3) D3 brought the litigation upon himself and the parties went into the litigation with their eyes open;

(4) it is irrelevant that D3 took a neutral stance as from 3.11.11, he still required Cs to prove that the bonuses were not lawfully taken and the route by which Cs' proprietary claim was made good;

(5) the 'bona fide purchaser' point was hopeless because D3 knew by 30.10.08 at the latest (the earliest being a letter dated 19.8.08) the fact and details of Cs' claim that (a) bonus payments totalling £363k (net) paid to D1 were unauthorised and (b) the payment of such monies to D2 gave rise to a proprietary claim by which Cs claimed to be entitled to trace such payments into, at that time, D2's hands;

(6) that D3 appreciated that he was on notice of Cs' claims is evidenced by his letter dated 4.9.09;

(7) thus, on 9.10.09, the date of D3's impugned transaction with D2, D3 was unquestionably on notice of Cs' claims;

(8) nevertheless D3 implemented a policy of active resistance to Cs' claim (as evidenced by reference to D3's former solicitor's e-mail and correspondence in November - December 2009 relating to an undertaking to retain the £363k claimed until 15.2.10);

(9) even on the eve of the issue of proceedings, 23.2.10, D3 strenuously denied Cs' claims, asserting that the amount of money Cs claim D1 took unlawfully "bears no resemblance to the sums received by [D3]"; and,

(10) Cs were left with no choice but to litigate because D3 refused to continue an undertaking to retain £363k out of the settlement with D2 which had brought an end to D1's bankruptcy in 2009.

116. In relation to D3 being on notice of Cs' claim, it is common ground that the question is fact sensitive.
117. On the law, Mr Beever refers to Sinclair Investments (UK) v Versailles Trade Finance Ltd (in administrative receivership) and others [2011] EWHC Civ 347. Mr Berragan, D3's counsel, also draws particular attention to passages in the judgment of Lord Neuberger MR, with whom Richards and Hughes LJJ agreed. Both counsel refer to a passage at paragraph 106 in particular as providing a succinct statement of the relevant principles and test. I shall refer at this point to the combined submissions of counsel, not least because there is no disagreement between them as to the relevant principles.
118. In Sinclair, Lord Neuberger noted that "Just as in some cases but not in others a defendant ought to make further inquiries as to facts, so in some cases but not in others it may be that the defendant should be taken to know the law. In my opinion, once a person knows certain facts, he should only be treated as appreciating the legal consequences if he actually knew of those consequences, or if in all the circumstances he ought reasonably to have appreciated those consequences" (paragraph 104). As to what ought to be appreciated as a result of knowledge of facts, citing a passage from the judgment of Danckwerts LJ in Carl Zeiss Stiftung v Herbert Smith & Co (No. 2) [1969] 2 Ch 276 at p.290, Lord Neuberger drew attention to the proposition that knowledge of a claim against a party is not of itself sufficient to constitute notice of a trust or of misapplication of monies (paragraph 105). Lord Neuberger then formulated the question as "whether a recipient of money to which another person has a proprietary claim can properly retain the money, in the face of a claim made by the other person, given what the recipient knew or ought to have appreciated at the time he received the money"? (paragraph 106). As to the attribution of knowledge of facts and of their legal consequences, the approach is to ask "what the [actual recipient] actually knew, and what further inquiries, if any, a reasonable person, with the knowledge and experience of the [actual recipient], would have made, and, in the light of that, whether it was, or should have been, obvious to the [actual recipient] that the transaction was probably improper" (paragraph 100) (emphasis added). Depending upon the actual circumstances of the particular case, the knowledge and experience of the actual recipient might include the benefit of advice obtained from highly experienced professional advisers and practitioners (paragraph 109).
119. In his short submission in reply, Mr Beever draws attention to the distinction on the facts between Sinclair and this case on the basis that (1) in Sinclair although there was plenty of evidence to support the contention that the monies in question were subject to a claim, it had not occurred to the recipient of the monies and was not right to attribute to the recipient (even though the recipient had the benefit of skilled and experienced professional advisers) knowledge of the legal consequences of a proprietary claim, but (2) in this case Cs clearly identified to D3 that they were claiming a proprietary interest in the monies received.
120. To emphasise the point that D3 was on notice both of the fact and basis of the claim and of the claimed legal consequences, Mr Beever refers to the letter of 30.10.08 and to the agreement of 9.10.09 between D3 and D2 pursuant to which D3 received £600k from D2, which sum included £324k of the bonus payments unlawfully taken by D1 passed to D2 and, at 9.10.09, held in a client account by Gough & Co.
121. As to the obviousness or otherwise to D3 that the underlying transaction was probably improper, Mr Beever refers to the detail of the 30.10.08 letter, to the further 'badges of fraud' allegations which were raised in correspondence by Cs' solicitors, and to D3's acknowledgment to D1's creditors, in a letter dated 4.9.09, that in view of D1's "track record of dishonesty" it would be "reckless of me to totally disregard the allegations made by [C1] at this stage".
122. On behalf of D3, Mr Berragan submits that D3 has no personal interest in the bankruptcy estate and that as an office holder and an officer of the court, his duties included the protection and preservation of that estate for the benefit of the creditors; moreover, D3 acted throughout on the advice of experienced insolvency solicitors and counsel (a reference, for periods prior to 3.11.11, to other solicitors and counsel).
123. In relation to liability for Cs' costs of the action (or 70% thereof), Mr Berragan draws attention to the following :

(1) D3's conduct did not bring about the litigation, the litigation was necessitated by D1's refusal to accept that the bonus payments were unauthorised and D2's refusal to accept that she was a knowing recipient, they were the principal defendants and the claim against D3 was consequential rather than primary in nature;

(2) D3 cannot be criticised for not simply taking Cs at their word because (a) the initial claim letter, dated 21.5.08, asserts a monetary claim against D1's estate in respect of systematic fraud causing loss to C1 as at 31.3.08 (i.e. before bankruptcy) of £5m which sum is based on 11 claims and includes £445k in respect of bonuses taken in 2005 and other 'badges of fraud' claims, (b) on 16.6.08 C1 lodged a proof of debt in the total sum of £3.45m with a schedule identifying only that there were 9 claims in total and ascribing individual values to the nine claims which did not match any of the claims identified in the letter dated 21.5.08, (c) the strength of the allegations relating to monies held by D2 was uncertain and, on 18.8.08, C1 offered to fund investigations by D3, and (d) D3 asked C1 what steps had been taken to notify D2 of the proprietary claim but received no answer;

(3) all of the correspondence relied upon by Cs pre-dates the issue of proceedings, and the prospect of C2 having a claim, whether against D1 or to the monies passed to D2, was first raised, on 4.8.10, by amendment of the pleaded claim to add C2 as a claimant;

(4) as an extension of the last point, until 4.8.10 the claim as stated to D3 was in fact made only on behalf of C1, not Cs and not C2, and that claim (including the assertion that D1 had no contractual right to be paid a bonus) has failed;

(5) had that claim succeeded, D3 would have been able to assert against C1 a matching or over-topping claim or set off by reason of the entitlement which D1 was found to have (namely, to receive an even larger bonus upon the signing of C1's 2005 accounts);

(6) even when asserting C1's claim in correspondence (see the letter of 23.2.09), C1's solicitors expressed the hope that D3 would prefer C1's version of events to D1's; and,

(7) in relation to the draft pleading prepared on behalf of C1, C1's solicitor was careful to point out in an e-mail (23.2.10 at 10.48) that proposed amendments to the draft pleading "do not effect (sic) the part of the pleading that concerns your client", and C1's solicitor confirmed after issue of the proceedings that D3 was a bystander caught up in the litigation and "is only a defendant as he is the current recipient of the asset" (e-mail of 24.2.10 at 19.43).

124. Having regard to these matters, Mr Berragan submits that it is simply not correct for Cs now to assert that proceedings were only issued on 24.2.10 because D3 had refused to extend his undertaking not to distribute or draw on the £324k received (albeit that it remained held in a solicitors' client account) from D2. Mr Berragan submits that the true position is as stated in the e-mail of 24.2.10 from Cs' solicitor.
125. In my judgment, Mr Berragan's submission puts out of the question any realistic possibility of D3 being at risk of liability for costs other than those as between Cs and himself.
126. As to this, Mr Berragan submits that save for raising the point that he was a bona fide purchaser for value without notice, D3 did in fact remain neutral.
127. Mr Berragan submits that this contention had a minimal impact on the costs of the litigation. In particular, he submits that such liability should not commence until after C2 became associated with C1's claim on 4.8.10 (i.e. on amendment of the pleadings) and should end as on 3.11.11 (i.e. at the PTR) at which point D3 had obtained advice from a new legal team and decided to adopt a neutral position.
128. Mr Berragan submits that even if it was correct to take account of the impact that D3's resistance to the claim had on the litigation, and even if the correspondence and documents were to be treated for this purpose as written on behalf of C2 as well as C1, the total impact would be measured as :

(1) 150 pages of correspondence and other documents, say half of one lever arch file in a trial bundle which at 3.11.11 extended to 26 volumes (2% of the trial material);

(2) RS's written evidence concerning the case against D3, which occupies 16 pages of a 53 page statement and merely summarises Cs' view of the 150 pages referred to above.

To this should be added the costs incurred in relation to D3's adoption of a neutral position including a proportion (albeit small) of the hearing on 3.11.11, in respect of which costs were reserved.

129. Turning to notice of Cs' interest, and by reference to Sinclair, Mr Berragan submits that knowledge of a claim is not the same thing as notice of the trust alleged.
130. It is perhaps as well to remind myself of the pleaded case against D3. At paragraph 1 of the Re-Amended Particulars of Claim Cs expressly allege that D3's liability is consequential, being that of a person to whom misappropriated monies were transmitted. The pleaded case to be answered by D3 raises three points : (1) money held in a bank account by D2 and transferred to the control of D3 is subject to a trust in favour of Cs; (2) at all material times one of Cs was the beneficial owner of the money; and, (3) D3 is liable to account to Cs because they have a proprietary claim or are entitled to trace the money.
131. Although a proprietary interest has been found to exist in Judgment (1), it was not that asserted against D3 before the proceedings were issued or at any time prior to amendment of the claim.
132. It is clear from D3's receipts and payments account dated 1.3.10 sent to all creditors, including C1, that D3 had had already determined that the monies received would be retained to abide the event.
133. In the light of Judgment (1), it is difficult, if not impossible, to criticise D3 for not accepting at face value C1's assertion that D1 had no contractual entitlement to a bonus or for not accepting that C1 had a proprietary interest in the monies passed to D2 and then accepted by D3 pursuant to the 9.10.09 agreement.
134. Returning to the lens through which D3's conduct is to be viewed : what D3 actually knew, and what further inquiries, if any, a reasonable person, with the knowledge and experience of D3 advised as he was by his (former) solicitors and counsel, would have made, and, in the light of that, whether it was, or should have been, obvious to D3 that the transaction was probably improper, the observation to be made is that it was not obvious nor should it have been obvious that the transaction was probably improper.
135. Viewed from another perspective, D3 might reasonably ask why he should be responsible for Cs' costs of taking proceedings against him given that through to the joinder of C2, Cs had failed to identify and assert a sustainable claim and the initial case was doomed to failure.
136. Notwithstanding the apparent force of Mr Beever's submissions and the measured and persuasive way in which they were put, when subjected to Mr Berragan's careful and detailed analysis they are shown to be fundamentally flawed.
137. The appropriate order for costs of the action as between Cs and D3 is no order.

Conclusion

138. As between Cs and D1 : D1 is to pay 5% of Cs' own costs of the action, after excluding (1) Cs' own costs incurred in connection with the orders referred to at paragraph 28 above^[7] and (2) the costs attributable to Cs' claim against D3, such costs to be assessed on the standard basis if not agreed. There is to be no interim payment on account of costs by D1 to Cs.
139. As between Cs and D3 : no order as to costs.

Note 1   £363,244.67 + £136,585.71    [Back]

Note 2   Roughly £168k + £34K    [Back]

Note 3   Exhibit to the 7th witness statement of Mr Roberts [2/2/256]    [Back]

Note 4   Hearing bundle 2/116    [Back]

Note 5   [2/2/256]    [Back]

Note 6    See paragraphs 28 and 67 above and orders of DJ George 30.3.10 paragraph 2, DJ O’Regan 13.4.10 no order made, DJ Bull 21.4.10 no order made, HHJ Cooke 7.2.11 paragraph 6, HHJ Simon Barker QC 3.11.11 paragraph 5    [Back]

Note 7   DJ George 30.3.10 paragraph 2, DJ O’Regan 13.4.10 no order made, DJ Bull 21.4.10 no order made, HHJ Cooke 7.2.11 paragraph 6, HHJ Simon Barker QC 3.11.11 paragraph 5    [Back]