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“For those who believe that most Civil Litigation does not end up being about the costs that were incurred in pursuing that same litigation in the first place, look away now”, said LJ Coulson in the Court of Appeal decision in Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Ticaret Ve Sanayi AS v Aytacli  EWCA Civ 1037 (13 July 2021). The Court was asked to consider non-party costs orders and particularly the circumstances when a Director and Shareholder of an insolvent company funds litigation can, or perhaps more pertinently in this case, cannot be held to be personally liable for some or all of the cost’s liabilities incurred.
The Facts of the Case
The Respondent was the Managing Director of a family run wholesale company, when in October 2016 he was replaced by his wife. The company is based in Turkey, with a turnover in the region of £100M per year and was contracted as one of only two UK suppliers of the Defendant Appellant Company’s juices.
There was a dispute between the parties as to the juices supplied, which led to the Appellant issuing proceedings against the wholesale company seeking payment of £104,465.17 in respect of stock which had been delivered but not paid for. The wholesaler defended and filed a counterclaim seeking £352,014.04, which was said to be the losses incurred as a result of the Appellant’s alleged breach of contract in respect of the juices supplied.
Following interlocutory orders and attempted appeals by the Appellant, their claim was struck out on the basis of their failure to comply with an Unless Order. Following further disputes as to the sums that were due on account of the costs of the claim, an order was ultimately made which resulted in the sum of £185,300 being paid on account of costs.
The counterclaim continued to trial, where the wholesaler had something of a pyrrhic victory, successfully demonstrating that there had been a breach of the contract, but failing on causation, leading to the award of £2 nominal damages. Cue a further debate on costs, with the Court ultimately determining that the wholesaler should pay 25% of the Appellant’s costs. A Default Costs Certificate was then obtained by the Appellant in the sum of £65,305.43, since it seemed that the wholesaler was unable to fund representation in the costs proceedings.
That failure to be able to fund the Detailed Assessment was to have further consequences. The Appellant made an application that, unless Detailed Assessment was commenced by the wholesaler, then not only would their costs be disallowed but also the sum of £185,300 paid on account would be repaid. There was no compliance with that order.
Consequently, the Appellant made an application for a non-party costs order against the Respondent in the sum of £249,605.43, which comprised of the payment on account in the sum of £185,300, and the sums due on the Default Costs Certificate in respect of the adverse costs order from the Counterclaim, to be paid by the Respondent personally.
It appears that throughout this rather lengthy and contested litigation, which also included failed applications by the Appellant for security for costs, the wholesaler was balance sheet insolvent. It was clear that the company had serious financial problems with the Respondent having previously provided a personal guarantee of £150,000 to the company’s bankers and obtained loans which were secured by a charge over the family home. Further personal guarantees had been provided by the Respondent and his wife to their own Solicitors in respect of the company’s own costs.
The Appellant failed to convince the Court to exercise their discretion and make a non-party costs order against the Respondent under S51 of the Senior Court’s Act and CPR 46.2. The Court referred to the relevant authorities and summarised the same in terms of when a non-party costs order is appropriate, but warned that this was not to be used as a mandatory checklist.
a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).
b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as “the real party to the litigation” (Dymocks, Goodwood, Threlfall).
c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s.51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).
d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the “real party”, and could justly be made the subject of a s.51 order (North West Holdings, Dymocks, Goodwood).
e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indiciaas to whether or not a s.51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).
f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).
g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.
The Court of Appeal, having analysed the facts of the case, upheld the High Court’s decision to refuse an Order that the Respondent pay the costs personally.
To reach that conclusion, it is clear that any party involved in such an application can expect the Court to consider the full background and analyse the full history of the litigation and the manner in which the claim has been conducted. On this occasion, the Appellant was not able to persuade the Court that the high threshold to make an order for costs against a Director personally, was met.
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Published 18 October 2021
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