Seeking the real deal

Neil Hickman asserts that directors who litigate by using a company as a shield are playing a dangerous game

It has been clear since Aiden Shipping v Interbulk [1986] AC 965 that section 51 of the Supreme Court Act 1981 allows the court to make costs orders against those who are not parties to the proceedings. Many applications for non-party costs orders have been unsuccessful (see, for example, Hamilton v Al Fayed (No 2) [2002] EWCA Civ 665, [2002] 3 All ER 641).


However, a number of recent applications have fared better, and there has been important guidance from the Privy Council and from the Court of Appeal.


In Dymocks Franchise Systems v Todd [2004] UKPC 39; [2004] 1 WLR 2807, Associated Industrial Finance Pty advanced monies to the defendant against the security of a debenture. Appeals to the Court of Appeal and the Privy Council, brought solely in the interests of Associated, were funded in this way.


The Privy Council held that an order for costs should be made against Associated. Lord Brown set out the following principles, among other things:

Although costs orders against non-parties are 'exceptional', this only means that they are outside the ordinary run of cases. The ultimate question is whether it is just to make the order.

Generally, the discretion would not be exercised against a 'pure funder', described in Hamilton as someone with no personal interest in the litigation, who does not stand to benefit from it, and does not seek to control its course. In this situation, the public interest in the funded party obtaining access to justice should normally prevail.

However, where the non-party not only funds the proceedings but controls or is to benefit from them, justice will normally require that if the proceedings fail he will pay the successful party's costs.


Dymocks was applied in Gemma v Gimson [2005] EWHC 69 (TCC) [2005] All ER (D) 79 (Feb), by Judge Thornton QC in the Technology and Construction Court. Mr and Mrs Davies were the shareholders in Gemma Limited, a building company. Mr Davies was the sole director and Mrs Davies the company secretary.


Gemma spent something like £170,000 on professional fees in litigation with Mr and Mrs Gimson, as well as providing £50,000 security for the Gimsons' costs. Mr and Mrs Davies funded all of this.


The defendants applied under rules 48.2 of the Civil Procedure Rules 1998 - an important procedural point - to add Mr and Mrs Davies as parties for the purpose of seeking costs against them. That application was stood over by consent until after the trial of the main action.


Judge Thornton extracted from Dymocks further guidance that:

Where a party seeks a costs order from a non-party who is connected with an insolvent company, the court must bear in mind that the order will erode the principle that a company has separate liability from the individuals associated with it.

Where the non-party is an officer of an insolvent company, a non-party costs order will not normally be appropriate if the funder was acting in the best interests of the company and its creditors and shareholders.

However, where the officer stood to benefit from the litigation and pursued it unreasonably or for an ulterior purpose, an order will usually be appropriate.

Almost the entire funding of the claim had come from Mr and Mrs Davies. They controlled the proceedings and if Gemma had succeeded, would have enjoyed the fruits of that success.


The remaining question was whether the circumstances as a whole justified an order against the Davieses. One factor proved fatal for them. Mr Davies failed to disclose certain documentation to his own advisers until very late in the proceedings. That documentation demonstrated that Gemma's claim was hopelessly misconceived and the Gimsons' counterclaim bound to succeed.


The litigation had been started by a company whose dominating influence ought to have known that the company had no answer to the inevitable counterclaim, and had been continued for ulterior motives. Accordingly Judge Thornton ordered both Mr and Mrs Davies to pay all the costs Gemma had been ordered to pay. Note that Mrs Davies was held jointly and severally liable. Although never a director, she had been company secretary and bookkeeper 'and she obviously shared the decisions taken about the litigation'.


The Court of Appeal in Goodwood Recoveries v Breen [2005] EWCA Civ 414, [2005] All ER (D) 226 (Apr) took a similar approach. Goodwood was a debt recovery company that Mr Slater owned and controlled. It purchased a debt allegedly owed by Mr Breen but that Mr Breen claimed to have settled some three years previously, and issued proceedings to seek to recover it.


Recorder Woods spoke harshly of Mr Slater, finding that he had been dishonest in failing to disclose a key document, had lied in giving evidence, and had improperly attempted to dissuade an important witness from attending to give evidence.


Upholding his order that Mr Slater pay Mr Breen's costs on an indemnity basis, the court applied Dymocks and held that where a director was the 'real party', litigating for his own benefit, then even where he had acted in good faith justice might demand that he be liable for the costs.


Similarly, in CIBC Mellon Trust Co v Stolzenburg & Others [2005] EWCA Civ 628 [2005] All ER(D) 352 (May), a shareholder who, for his own purposes, funded unsuccessful applications to set aside judgments found himself ordered to pay the costs of them, though he did escape being held liable for the entire costs of the proceedings.


The Court of Appeal took matters a stage further in Arkin v Borchard Lines [2005] EWCA Civ 655, [2005] All ER (D) 410 (May). MPC, described as a professional funder, funded a disastrously unsuccessful case to the extent of £1.3 million. It was to receive a share of any recovery but did not seek to influence or control the conduct of the litigation. A strong appeal court held that MPC should contribute a further £1.3 million to the successful defendants' costs. Had MPC controlled the litigation for its own benefit, the court would have held it liable for the whole of the defendants' costs.


Following these cases, it is clear that directors - and other officers, such as Mrs Davies, and shareholders, as in Goodwood and CIBC Mellon - who litigate using a company as a shield, and funders who litigate for their own benefit, are playing a potentially ruinous game.


District Judge Neil Hickman sits at Milton Keynes County Court