Goodwood Recoveries Ltd v Breen

This appeal concerns a costs order made by a trial judge against a third party under the general power now contained in subsection (3) of the reformulated section 51 of the Supreme Court Act 1981: see Aiden Shipping Co Ltd v. Interbulk Ltd (The Vimeira) [1986] 1 AC 965, where it was subsection (1) of the earlier form of section 51 which was in issue. I shall refer to section 51(3).

The costs order was made against the appellant, Mr Michael Slater, in circumstances where the judge described him as playing the parts of director, shareholder, company secretary, solicitor and investigator and only witness for the claimant. The claim which has given rise to the litigation and to the costs in question was purchased by Mr Slater’s company and pursued by him in the name of his company (which he owned together with his wife). The judge had harsh things to say of Mr Slater’s conduct in the course of the proceedings, finding that he had been dishonest in failing to disclose a key document, had lied in his evidence, and had attempted by means of an “intimidating and grossly improper letter” to persuade a witness from coming from overseas to give evidence at trial in favour of the defendant. The judge found that he had personally conducted the litigation as he thought fit both before and after the purported sale of the claimant company to another party. However, the judge did not find that he had funded the litigation, other than, it has to be said, arranging on his company’s behalf a conditional fee arrangement with the firm of solicitors to which he was himself a consultant and in whose name he conducted the litigation himself. The judge suspended his judgment as to whether Mr Slater did or did not have a bona fide belief in the claim.

Against this unpromising background, none of which is disputed, Mr Nicholas Bacon has submitted on Mr Slater’s behalf that the judge was not entitled to make him liable for the whole of the costs of the unsuccessful action, on the twin grounds that (1) it requires exceptional conduct to render a director liable for his company’s litigation costs; and (2) such improper conduct as may exceptionally justify an order for costs against a director must be the effective cause of the incurring of the costs in question. Mr Bacon submits that in the present case it is critical that the judge did not make a finding of initial bad faith against Mr Slater; and that the conduct during the course of the litigation which was the subject of judicial criticism did not cause any costs other than the costs of an adjournment during the trial, for which the claimant’s solicitors had already accepted financial responsibility.

On behalf of the defendant at trial and respondent to this appeal, Mr William Breen, it is submitted that the judge’s order was justified; and, by a respondent’s notice, that the judge should in any event have found that Mr Slater never had any bona fide belief in the claim.

Before returning to the parties’ competing submissions and to the authorities which bear on them, I shall have to set out the factual background to them. This falls into four parts: the background to the claim against Mr Breen; Mr Slater’s interest in it; the merits of the litigation against Mr Breen; Mr Slater’s conduct of that litigation.

Back in the 1990s Mr Breen carried on business as a civil engineering and groundwork contractor through his company, W P Breen Ltd (“Breen Ltd”). He used to hire plant and machinery from Macloy Groundworks Ltd (“Macloy Ltd”), where a Mr Molloy was a director and a Mr McHale also played a major role.

In the latter part of 1998 both Breen Ltd and Macloy Ltd were facing financial difficulties. Macloy Ltd engaged a firm of solicitors, Butcher Burns, who had been introduced to them by their accountants and were not the solicitors who ordinarily acted for them, to obtain payment from Breen Ltd. Mr Slater was a consultant solicitor with Butcher Burns. After Breen Ltd had managed to pay off £20,000 of a larger debt, Mr Breen was prevailed upon by Butcher Burns (although not on this occasion acting through Mr Slater) to give a personal guarantee on 16 October 1998 for the then outstanding debt, inclusive of Butcher Burns’ alleged fees, in the sum of £16,700.

On 15 December 1998 the Inland Revenue presented a winding up petition against Macloy Ltd. On 18 December 1998 Butcher Burns, on this occasion acting through Mr Slater, issued a bankruptcy petition against Mr Breen in respect of his guarantee.

On 10 February 1999 this bankruptcy petition was adjourned to 12 March 1999 and on that day it was dismissed with no order as to costs. It subsequently became an issue in the litigation between Mr Slater’s company and Mr Breen as to why this happened. The judge found, and there is no appeal from that finding, that it was because at a meeting between 10 and 17 February 1999 between Mr Breen and Mr McHale (for the earlier part of which Mr Molloy had also been present) Mr Breen had come to terms with Macloy Ltd by paying them a sum of money in cash which was accepted in full discharge of his guarantee. On 17 February 1999 Macloy Ltd went into winding up.

On 24 February 1999 Mr Slater wrote a letter, bearing his initials, for Butcher Burns, to the Canterbury County Court thanking them for the order concerning the 10 February adjournment. The letter stated:

“Please note that it has been agreed that the Petition will be withdrawn and accordingly please refer this matter to a District Judge so that the Petition can be dismissed forthwith with no order as to costs.”

That letter, which I shall refer to as the “24 February letter”, did not state why it had been agreed that the petition would be withdrawn, but it was in fact because, as stated above, the parties had come to terms.

On the previous day, the Insolvency Service had written to Butcher Burns concerning the winding up order that had been made against Macloy Ltd on 17 February 1999, asking them for details of all matters in which they had acted as the company’s solicitors over the last three years. Mr Slater handled the letter in reply on behalf of Butcher Burns: it was dated 8 March 1999 and read as follows:

“We acted for the Company between September 1998 and February 1999 in one matter only, namely proceedings against a debtor, W P Breen Limited and a director of this company, Mr W P Breen.

The debt was some £34,000 odd. Following legal action the sum of £20,000 was paid by the debtor directly to the company. Mr Breen personally guaranteed the outstanding balance plus costs. The balance due, £16,700 was not paid and we then issued bankruptcy proceedings against Mr Breen. Apparently terms were negotiated for the petition to be withdrawn but we had no involvement in these discussions and we do not know what terms were agreed.

For your information we are a creditor of the company in respect of unpaid fees of about £1,000…”

I shall refer to this letter as the “8 March letter”. It is entirely consistent with Mr Slater being informed of the fact that Macloy Ltd and Mr Breen had come to terms, and with the instructions upon which he had acted in his letter to the court of 24 February having come from his clients.

There the matter rested, for almost three years.

On 28 January 2002 a company known as Nicholson Slater Limited (the “claimant”) took an assignment by deed from the Official Receiver for Macloy Ltd of a debt of £16,700 plus accrued interest, said to be outstanding to Macloy Ltd from Breen Ltd and Mr Breen personally. The claimant paid the Official Receiver £1,000 for the assignment.

The claimant was a debt recovery company. Mr Slater and his wife were the sole directors and shareholders in it. Nicholson was Mrs Slater’s maiden name. Mr Slater was also the company secretary. The company operated from their home. Butcher Burns were the claimant’s solicitors, and Mr Slater acted in this matter for Butcher Burns as solicitor.

On 6 February 2002 Butcher Burns served a statutory demand on Mr Breen for £21,169 inclusive of interest. The statutory demand stated that any communication should be addressed to Mr Slater of Butcher Burns. On 15 February 2002 Mr Breen’s solicitors wrote to Butcher Burns to confirm that Mr Breen made payment to Macloy Ltd in full and final settlement of any debt. On 26 February 2002 Mr Breen made a witness statement in relation to the statutory demand to similar effect. He annexed a letter from Mr Malloy dated 22 February 2002 that the debt “has been settled in full. Agreement on contra charges.” On 26 May 2002 Mr McHale also made a witness statement evidencing the settlement.

On 10 April 2002 Butcher Burns presented a bankruptcy petition against Mr Breen, which was withdrawn on 28 June 2002. On 2 October 2002 Butcher Burns wrote a letter before action to Mr Breen at the end of which they informed him that on 27 September 2002 Butcher Burns had entered into a conditional fee arrangement with their client. The claimant commenced proceedings on 19 November 2002. When it did so, it knew that each of Mr Breen, Mr McHale and Mr Malloy said that Mr Breen’s personal debt had been settled.

In March 2003 Mr Slater and his wife sold their shares in the claimant, which was renamed Goodwood Recoveries Ltd. The sale price was £500. The purchaser, Omega Holdings SA, was registered in the British Virgin Islands with an address in Switzerland, and operated by a business acquaintance of the Slaters described by Mr Slater as a fiduciary agent and by the judge as a “shadowy figure”. The Slaters resigned as directors, but Mr Slater remained as company secretary (until after judgment on the claim in February 2004) and solicitor. He continued to have management and conduct of the litigation against Mr Breen, as before, subject only to the possibility that the “shadowy figure” may also have had some involvement. The judge’s finding was that “Mr Slater continued to conduct the action as before as he thought fit in the interests of himself and the firm of solicitors, Butcher Burns”. The purchasing company was now the sole director. The judge was obviously sceptical about this sale, but ultimately made no finding one way or the other as to whether it was genuine or a sham. Despite protestations to the contrary in Mr Slater’s latest evidence adduced to meet Mr Breen’s section 51(3) application, the judge found that, subject to the value of the claim against Mr Breen, the claimant was essentially worthless and that Mr Slater must have known this. Its assets consisted of little more than a few items of office equipment. The judge commented that the price of £500 was “a reasonable indication of [the Slaters’] estimate of [the company’s] worth at that time”. My comment is that a sale price of £500 hardly seems worth the trouble of such a sale, unless it was for the purpose of distancing Mr Slater from the litigation which he had started and which, even after the sale, he continued to pursue. Certainly the £500 price must have valued the claim at practically nothing.

In his judgment on the section 51(3) application the judge, Mr Recorder Woods, referred to Mr Slater’s interest in the claim against Mr Breen in the following terms:

“24.

Mr Slater’s connection with the original action was of course very close indeed. An observer might have been forgiven for thinking that it was his case and no-one else’s. He played all the parts of director, shareholder, company secretary, solicitor and investigator and was the only witness for the Claimant. He was also responsible for the decision to purchase the alleged debt in the first place and of making it the subject matter of the claim, although I don’t doubt that he also discussed matters with his wife.

25.

Not surprisingly in the circumstances, it was not contended on his behalf that I should not have regard to my findings in the original action, or that his connection with the original proceedings was not so close as to make it permissible for me to do so without any injustice to him.”

The claim against Mr Breen failed, and there is no appeal from that conclusion. In a detailed judgment handed down on 5 February 2004 by Mr Recorder Woods in the Central London County Court the judge dealt fully with the arguments which had been raised. It is unnecessary to rehearse them here, save to mention the following matters.

The critical finding (at para 64) was that Mr Breen met Mr McHale and Mr Molloy at their offices in Crawley, where, after Mr Molloy had left early, Mr McHale concluded negotiations with Mr Breen and agreed on behalf of Macloy Ltd in consideration for the immediate payment of a sum agreed between them to release Mr Breen from any further liability under his personal guarantee. The sum was paid in cash, and contra items in the overall account between Breen Ltd and Macloy Ltd entered into the negotiations.

The critical witnesses were the only two parties to that final agreement, namely Mr Breen and Mr McHale, and on the other side Mr Slater, albeit he could give no direct evidence on the subject of the meeting and agreement. Indeed, his case was that such a meeting had never even taken place and that Mr Breen’s debt had never been settled. His case in this regard was essentially a negative one, challenging Mr Breen’s and Mr McHale’s evidence as false (and Mr Molloy’s, albeit that was only available in documentary form) on the ground of lack or inconsistency of detail in it. Nevertheless his own evidence was important because he had been involved as solicitor in the adjournment of the hearing that had been scheduled for 10 February 1999 in relation to the petition for Mr Breen’s bankruptcy and thereafter in the withdrawal of that petition. His own letter of 24 February 1999 (the 24 February letter, see para 10 above) said that “it has been agreed that the Petition will be withdrawn”. Mr Breen relied on this as evidence consistent with and confirmatory of the settlement, and indeed of Mr Slater’s knowledge of it. That letter had been obtained by Mr Breen and disclosed by him. It had not been disclosed by Mr Slater.

When cross-examined in relation to this letter, Mr Slater’s answer was to say in the witness box that he had written it not on the instructions of his clients but on the instructions of the Official Receiver for Macloy Ltd following its winding up on 17 February 1999. That answer led to a successful application by Mr Breen at trial for disclosure in relation to both the Official Receiver’s and Butcher Burns’ files. Mr Slater had not brought the latter with him to court, and had previously stated, by his letter dated 7 August 2003, that all documents relevant to the issues in the case had been disclosed. The application for disclosure led to the adjournment of the trial, at first for one day (from 4 to 5 September 2003) and subsequently to 19 November 2003.

The Official Receiver’s file was promptly supplied to both parties. It produced for the first time Mr Slater’s letter to the Insolvency Service dated 8 March 1999 (the 8 March letter, see para 12 above) in which Mr Slater had informed the Service that “Apparently terms were negotiated for the petition to be withdrawn, but we had no involvement in these discussions and do not know what terms were agreed.” The Official Receiver’s file not only produced nothing to support Mr Slater’s evidence that he had acted on their instructions in withdrawing the petition, but it was obvious from the 8 March letter that his instructions had come from his clients, that he was informing the Insolvency Service about matters about which they did not know rather than acting on their instructions, and that he had been told by his clients enough for him to know or make inferences about the negotiation of agreed terms in discussions which had led to the withdrawal of the petition, even if he did not know what terms were agreed. The Butcher Burns file when disclosed also produced a copy of the 8 March letter. The judge said that it “turned out to be a slim file comprising relatively few documents”.

The judge described his findings about Mr Slater’s evidence in the following paragraphs taken from his judgment on the merits of the claim:

“47.

When Mr Slater resumed his evidence on 19.11.03 he still maintained that his recollection was that he had written the letters in question on the instructions of the Official Receiver, as he may have felt bound to do having previously said so on oath in respect of the letter dated 24.2.99.

48.

Not only do I find his recollection is wrong, but I regret that having heard his evidence when he first gave it and subsequently I do not accept that at any material time he has had any genuine recollection of receiving instructions from the Official Receiver’s office not to proceed with the bankruptcy petition.

49.

Nor having seen the meticulous interest in the detail of this case shown by him throughout the trial or his grasp of the detail evident from his various letters and statements in the course of this dispute, am I able to accept that his failure to disclose the letter of 8.3.99, or his declaration by letter dated 7.8.03 that all documents relevant to the issues in this case had been disclosed, were simply oversights or mistakes on his part.”

The judge was, on the other hand, impressed by the essential honesty of Mr Breen and Mr McHale, albeit they were not at ease in the witness box and Mr Breen was at times a rather muddled witness. However, despite the “quite extensive cross-examination” which they bore, the judge said this –

“58.

One thing however was to my mind clear from their evidence and that was that they were both genuinely convinced that the matter had been settled between them in 1999 and that the claim now being made against Mr Breen was quite unjustified.”

This was despite the fact, much relied on for the claimant at trial and again on behalf of Mr Slater for the purposes of the section 51(3) application and on this appeal, that in the Insolvency Service questionnaire which Mr Molloy had completed on 8 March 1999 he had listed Breen Ltd’s debt of £16,700 as still outstanding. As the judge pointed out, however, the claim before him was concerned with Mr Breen’s personal debt on his guarantee. That was not listed as a debt by Mr Molloy, which, if it had remained outstanding, it should have been.

Although, as the judge also observed, Mr Slater’s dishonest evidence did not assist him in relation to the truthfulness of Mr Breen’s and Mr McHale’s evidence, the 8 March letter clearly did so. In his subsequent judgment on the section 51(3) application, he described that letter as “key” and said that its emergence from the Official Receiver’s file “transformed the case”.

At the conclusion of his judgment on the merits the judge listed six matters of complaint made by Mr Breen’s counsel about Mr Slater’s conduct of the litigation. Those complaints included (1) the deliberate suppression of Mr Slater’s copy of the 8 March letter; (2) the false declaration that he had disclosed all relevant documents; (3) his letter to Mr McHale designed to dissuade him from returning from Ireland to give evidence on behalf of Mr Breen at trial; and (4) his false evidence at trial concerning the circumstances in which he had come to write the 24 February letter to the Insolvency Service. The judge said that the proper course was to direct that the papers be referred to the Office for the Supervision of Solicitors without further comment from himself. However, in the course of his judgment the judge had already effectively given his own findings as to these complaints: for he had found, as to (1) and (2), that the failure of disclosure had been deliberate and dishonest (see the judge’s para 49 quoted at para 26 hereof above); and as to (4), that Mr Slater’s evidence had indeed been dishonest (see paras 47/48 of the judgment, also quoted at para 26 above).

It is necessary to say something further about item (3) above. On 7 August 2003 Mr Slater had written in the name of Butcher Burns to Mr McHale, in Ireland, with respect to a witness statement which had been made by Mr McHale and served on the claimant. The letter drew attention to Mr Molloy’s Insolvency Service questionnaire and went on to raise a series of questions for Mr McHale to answer prior to trial, such as “Have you been made aware of the provisions of the Perjury Act by either Mr Breen or his solicitors?” and “Given Mr Molloy’s several statements verbally and in writing that the £16,700 due from Mr Breen was still outstanding how is it possible that he was at the meeting which you allege took place in February 1999?” Of course, Mr Molloy had not stated that any debt from Mr Breen, as distinct from Breen Ltd, was outstanding.

Mr Breen’s counsel described this letter to Mr McHale as “intimidating and grossly improper”. The judge contented himself in his judgment on the merits by saying this:

“101.

Mr McHale, who no longer has any business connection with Mr Breen giving him a financial incentive to do so, was fortunately for Mr Breen and the interests of justice not deterred from giving evidence and has come over from Ireland to do so on both occasions – for the original hearing on 4.9.03 and also for the resumed hearing on 19.11.03 – but had he been deterred by Mr Slater’s letter to him dated 7.8.03 this also would have given rise to a real risk of Mr Breen being denied justice.”

The judge said “this also” because in his previous paragraph he had stated –

“100.

These complaints have of course to be considered in the context of the claim ever since [the claimant] at the instance of Mr Slater took an assignment of the alleged debt the subject matter of this claim, and Mr Slater’s repeated attempts to get Mr Breen to cave in and to accept his assertions in one form or another that any defence of the claim was hopeless, in circumstances where there was a real risk of Mr Breen being denied justice as a result of being denied access by Mr Slater to the letter dated 8.3.99, which demonstrated the contrary.”

In his judgment on the section 51(3) application, the judge returned to complaint items (1) to (4) above and stated or restated that he found them justified, despite Mr Slater’s protestations of innocence in a new post-trial witness statement dated 9 March 2004. He therefore adopted Mr Graham’s description of these matters of complaint, including his characterisation of the letter to Mr McHale as an “intimidating and grossly improper letter”, while repeating that he was not intending to pre-empt the decisions of others as to whether Mr Slater’s conduct amounted to professional misconduct.

When it emerged in the course of his evidence at trial that Mr Slater and his wife had sold the claimant company for a mere £500 to Omega Holdings SA, Mr Breen’s solicitors advised him to make an application for security for costs. The application was foreshadowed in a letter to Butcher Burns dated 18 September 2003 and came on for hearing before HHJ Collins on 14 November 2003, a few days before the adjourned resumption of the trial. The application was dismissed but costs were reserved. HHJ Collins felt that he could not consider the merits, and the decisive point for him was that the application was made too close to the resumption of trial at a time when an order for security would have delayed the trial still further.

Mr Slater was not required under the section 51(3) order to pay the reserved costs of this application, even though the claimant was ordered to pay them.

Before the judge Mr Slater relied in some measure on the failure of Mr Breen’s security for costs application. He sought to submit that if Mr Breen is out of pocket, the real cause is his failure to make a timeous application for security. The judge thought that was “somewhat rich”.

The judgment which is under appeal is that delivered by Mr Recorder Woods on 22 May 2004 relating to the section 51(3) application. The judge, who had conducted the trial, was wholly familiar with the facts of the case. I have already stated above his material findings. As for the law, he stated that he had had his attention drawn to the relevant principles and authorities and that he bore in mind that he should treat such an application with considerable caution, the making of such an order as exceptional, and that he should only proceed to make an order where it would be just. He also directed himself that directors of companies which bring claims without having the means to pay an order for costs, if unsuccessful, were not generally to be made liable for the costs personally. Something exceptional was required, such as lack of a bona fide belief in the litigation. As for that, he suspended judgment, but said that a bona fide belief would not necessarily give a director immunity where he adopted non bona fide means to pursue or defend a claim, as had been found in this case.

As for the authorities relied on for Mr Slater, he said this:

“36.

The cases Mr Bacon relies on are all very different from this one, and not cases such as this of intermeddling in other people’s affairs by taking an assignment of a perceived debt owed to someone else and then pursuing it with a view to gain and using a worthless husband and wife company operated from their home address as the vehicle for doing so, when if Mr Slater and his wife had taken an assignment of the debt themselves, which they could just as well have done, there would have been no question but that he would have been liable for costs.”

He dealt finally with an argument on causation, which is part of Mr Bacon’s primary concern on this appeal, to the effect that no sufficient causal connection had been shown between the costs and the grounds relied on. The judge referred briefly to the written submissions on both sides, stated that he accepted Mr Graham’s submission on behalf of Mr Breen that if there had been timely proper disclosure then an application for security for costs would probably have been made successfully at an earlier stage, and then proceeded swiftly to his conclusion as follows:

“49.

I do not by any means accept all the submissions made by Mr Graham, or to be found in his Skeleton Argument, but I am satisfied for the reasons I have given that more than sufficient of the grounds he relies on are made out and there is quite sufficient causal connection between them and the costs in question to bring this case on its particular facts within the accepted principles and the ambit of section 51(3). The case is out of the ordinary and exceptional. Thus I do have jurisdiction to order Mr Slater to pay the Defendant’s costs, if I think it just to so.

50.

On the essential question of whether it is just to do so in the particular circumstances of this case, I am also of the view that it is and that justice would not be done, if I did not do so. I will therefore exercise my discretion in the matter accordingly.”

The judge therefore awarded the costs of the action, including the costs of the section 51(3) application, against Mr Slater on an indemnity basis, including the costs of the adjournment, although credit might be taken for the £6,000 which Butcher Burns had agreed to pay once it had been paid.

On this appeal Mr Bacon has developed his twin submission, stated at the outset of this judgment (in para 3), by reference to the authorities. First, there was nothing exceptional in the facts of this case to make Mr Slater, as a director of his company, responsible for the costs of its litigation as a whole. He was not the funder of the litigation. There was no finding of lack of bona fides against him in bringing the claim and it would be wrong for this court to make such a finding where the trial judge had not done so. Secondly, although there was no getting away from the severe criticisms that had been made of his conduct in the course of the litigation, those criticisms nevertheless did not embrace the litigation as a whole and had caused only the limited costs of the adjournment, for which Butcher Burns had already accepted responsibility. The judge had been wrong to say that earlier disclosure would have led to an earlier successful application for security for costs: it was impossible to say that such an application would have been made, or would have been successful, or what the consequences of any order made on such an application might have been. Only extra costs which had been proved to have been directly caused by the exceptional conduct which might justify an order against a director third party could be made the subject of a section 51(3) order. Without causation, there was no jurisdiction to make the order. The judge had failed in his general comments on the subject of causation to be fair to Mr Slater, and his order was unjust.

On the other side, Mr Thomas Graham on behalf of Mr Breen has supported the judge’s order by reference to the same authorities. The facts of this case were quite exceptional enough to justify an order against Mr Slater, who was not only a director of the claimant company, but essentially (with his wife) its alter ego and the “real party” in the action, who had bought up the claim for his own benefit and driven the litigation from beginning to end. As for causation, on a proper analysis his misconduct had caused the whole costs of the litigation in any event. And even if it had not, it had caused enough of its costs to make it just to make the order which the judge had made. There did not have to be a complete causal identity between the exceptional misconduct and the costs in question. Finally, if it was necessary, the court should be prepared to say that Mr Slater had never had any bona fide belief in the claim.

Both parties relied on essentially the same authorities, but not always on the same parts of them.

The principles of the developing section 51(3) jurisdiction are in general well known. They have been restated in leading cases in this court such as Symphony Group plc v. Hodgson [1994] QB 179, Murphy v. Young & Co’s Brewery plc [1997] 1 WLR 1591 and Hamilton v. Al Fayed (No 2) [2003] QB 1175. I do not propose to set them out anew, in part because each of those cases is concerned with different aspects of the overall question – Symphony Group with questions of procedure and the idiosyncratic problem of a third party funder who could himself have been made a defendant, Murphy with the issue of funding by liability insurers, and Hamilton v. Al Fayed with the problem of funding by well-wishers (“pure funders”) – and in part because, since the judgment below, there has been an important new decision by the Privy Council, Dymocks Franchise Systems (NSW) Pty Ltd v. Todd [2004] UKPC 39, [2004] 1 WLR 2807, which has itself restated the principles and in particular has addressed that aspect of the jurisdiction with which we are here especially concerned, namely the role of directors and shareholders who control and support the litigation of the companies in which they are interested.

I shall therefore concentrate on a small number of cases, culminating in Dymocks, which have been concerned with that aspect.

The earliest is Taylor v. Pace Developments Ltd [1991] BCC 406. The plaintiff sued and succeeded against the defendant company, which turned out to have been hopelessly insolvent from the commencement of the proceedings. The plaintiff then sought a section 51(3) order for costs against the defendant’s managing director and sole beneficial shareholder on the basis that he had known all along of his company’s insolvency; but the application failed. Lloyd LJ said (at 409F/H):

“The controlling director of a one-man company is inevitably the person who causes the costs to be incurred, in one sense, by causing the company to defend the proceedings. But it could not be right that in every such case he should be made personally liable for the costs, even if he knows that the company will not be able to meet the plaintiff’s costs, should the company prove unsuccessful. That would be far too great an inroad on the principle of limited liability. I do not say that there may not be cases where a director may not properly be liable for costs. Thus he might be made liable if the company’s defence is not bona fide, as, for example, where the company has been advised that there is no defence, and the proceedings are defended out of spite, or for the sole purpose of causing the plaintiffs to incur irrecoverable costs. No doubt there will be other cases. But such cases must necessarily be rare. In the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs.”

That is a well-known passage. I would merely comment first, that the passage is carefully balanced between the normal situation and the exceptional, and secondly, that the case of a company which is forced to defend a claim is not necessarily the same as the case of a company which initiates a claim.

In Metalloy Supplies Ltd v. MA (UK) Ltd [1997] 1 WLR 1613 Millett LJ returned to the role of a company director in this context. He said (at 1620):

“Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit…It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified. The position of a liquidator is a fortiori…”

Three matters may be noted about this passage. The first is that the concept of “the real party interested” is advanced. The second is that it follows that it is relevant to focus not only on a party’s (or non-party’s) bona fides but also on his expected benefit or interest. The third is that the concept opposed to good faith extends not merely to bad faith but to “some impropriety or bad faith”.

In Re North West Holding plc [2001] EWCA Civ 67, [2001] 1 BCLC 468 the insolvent companies were defendants to winding up petitions presented by the Secretary of State for Trade and Industry. The companies were controlled and owned by a husband and wife. The petitions were opposed bona fide on the basis of counsel’s advice and then conceded when counsel advised that the companies were insolvent. The Secretary of State applied for section 51(3) orders against the husband and succeeded both at first instance and on appeal. Aldous LJ said (at 477):

“34.

A crucial question is whether the relevant directors (or director) hold a bona fide belief that (i) the company has an arguable defence, and (ii) it is in the interests of the company for it to advance that defence. If they do then (in the absence of special circumstances) to make them pay costs of proceedings in which they are not a party would constitute an unlawful inroad into the principle of limited liability…

35.

I cannot accept Mr Elleray’s submissions that the defence to the petitions was conducted in a belief that it was in the interest of the companies. Despite the judge accepting that Mr Backhouse had been advised that there was a reasonable chance of defending the petitions, the judge held that Mr Backhouse did not give any serious consideration as to what was in the interests of the companies and their creditors. The costs were expended for Mr Backhouse’s personal interests…”

Mance LJ reasoned to similar effect (at paras 43/44) where he said that –

“Prior to presentation of the petitions, Mr Backhouse had only his own and his wife’s interests in mind. He viewed, and treated, the companies as cyphers, and all moneys that they received as monies of his and his wife’s savings and protection business…The judge’s conclusion that Mr Backhouse was conducting the defence of the petitions in his own and his wife’s business interests, and not those of the companies, reflected in my view both the evidence (particularly his solicitors’ letter dated 12 June 1998) and the reality.”

Thus Re North West Holdings advances the position by focusing not merely on bona fide belief but also on whether the director, qua alter ego, is litigating for his own or his company’s interests.

The Privy Council in Dymocks has now reviewed the whole of this field in detail. The judgment of their Lordships was delivered by Lord Brown of Eaton-under-Heywood. He said (at para 25):

“A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows. (1) 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. (2) Generally speaking the discretion will not be exercised against “pure funders”, described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 as “those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”. In their case the court’s normal approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights. (3) 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 Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 22 as “the defendants in all but name”. Nor, indeed, is it necessary that the non-party be “the only real party” to the litigation in the sense explained in the Knight case, provided that he is “a real party in…very important and critical respects”: see Arundel Chiropractic Centre Pty Ltd v Deputy Comr of Taxation (2001) 179 ALR 406, 414, referred to in the Kebaro case [2003] FCAFC 5, at [96], [103] and [111]. Some reflection of this concept of “the real party” is to be found in CPR r 25.13(2)(f) which allows a security for costs order to be made where “the claimant is acting as a nominal claimant”. (4) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators designed to advance the funder’s own financial interests.”

Lord Brown then considered a number of statements taken from both Commonwealth and English authorities to illustrate the doctrine of the “real party” in such a context. Thus, in Carborundum Abrasives Ltd v. Bank of New Zealand (No 2) [1992] 3 NZLR 757 at 765 Tomkins J said –

“In many cases a major consideration will be the reason for the non-party causing a party, normally but not always an insolvent company, to bring or defend the proceedings. If a non-party does so for his own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest, it may, depending on the circumstances, be appropriate to make an order for costs against that person. Relevant factors will include…whether, in all the circumstances, the bringing or defending of the claim – although in the end unsuccessful – was a reasonable course to adopt.”

In Arklow Investments Ltd v. Maclean (unreported 19 May 2000, NZHCt) Fisher J said –

“21….the overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that the person will share in the costs of the proceedings if they ultimately fail.”

In Knight v. FP Special Assets Ltd (1992) 174 CLR 178 in the High Court of Australia Mason CJ and Deane J said (at 192/193):

“The category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject matter of the litigation. Where the circumstances of the case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.”

Lord Brown then referred to what Millett LJ said in Metalloy at 1620 (see above) and proceeded to synthesise these dicta as follows:

“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 in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

In applying these principles to the facts of that case, Lord Brown went on to say this:

“33.

Thirdly, Associated submit that there was no impropriety involved in their promoting this appeal; on the contrary, they and the Todds had independently received encouraging advice from leading counsel. This cannot, however, avail them. The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order.”

In my judgment, it is clear from these passages that the law has moved a considerable distance in refining the early approach of Lloyd LJ in Taylor v. Pace Developments. Where a non-party director can be described as the “real party”, seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances. It may also be noted that in Lord Brown’s comments at para 33 of his opinion “the pursuit of speculative litigation” is put into the same category as “impropriety”.

So far I have considered the above authorities for the general guidance that they provide in the context of directors and the like. It is also relevant to look for what is said about causation.

In Globe Equities Limited v. Globe Legal Services Limited [1999] BLR 232 Morritt LJ said this (at 241):

“It was not disputed that the conduct of the non-party must have been a cause of the applicant incurring the costs it seeks to recover. For Globe [the applicant] it was submitted that this requirement was satisfied by the obvious fact that the costs of Globe were incurred because of the defences and counterclaims maintained by the Firm ostensibly on behalf of GLS but in substance for its own benefit. Counsel for the Firm [ the non-party] contended that that was not enough. He submitted that all the circumstances which made the case exceptional must also be a cause of the costs sought to be recovered. He submitted that the proper question was “but for the exceptional circumstances would the costs sought have been incurred”. I do not accept that submission. I accept that the costs claimed must have been caused to some extent by the non-party against whom the order is sought for otherwise it is hard to envisage any circumstance in which it could be just to order the non-party to pay them. But I do not see why they must be caused by all the factors which render the case exceptional. For example, one of the factors likely to be present in most, if not all, cases where an order is made is that the litigation was for the benefit of the non-party; but that is no reason to require that the costs were all incurred in obtaining that benefit.”

Mr Graham relied on this passage.

On the other hand Mr Bacon relied on Byrne v. Sefton Health Authority [2001] EWCA Civ 1904, [2002] 1 WLR 775, where Chadwick LJ said this (at para 35):

“It cannot be right to make an order under section 51(3) of the 1981 Act unless the court is satisfied that the conduct of the person against whom the order is to be made has been causative of the costs which have been incurred by the person seeking the order. There must be a sufficient causal link between the person who is to pay the costs and the incurring of those costs. It is necessary to determine whether the conduct complained of is really an effective cause of the costs incurred.”

Mr Bacon submitted that that passage and in particular its last sentence was in his favour and limited the costs for which Mr Slater could be held liable to those additional costs caused by Mr Slater’s failure of disclosure.

Finally, in Dymocks there is a passage about causation early on in the Privy Council’s judgment, on which Mr Bacon also relied, as follows:

“Issue (ii): causation

18.

The Board was referred to very little authority on this issue, merely dicta from Hamilton v Al Fayed(No 2) [2003] QB ii75 and Gore (t/a Clayton Utz) v Justice Corpn Pty Ltd (2002) 189 ALR 712. In the Hamilton case [2003] QB 1175, Simon Brown LJ noted at p 1198, para 54 that: “there is ample authority” and “no dispute” but that “proof of causation is a necessary precondition to the making of a section 51 order against a non-party” before concluding, as a further ground for rejecting the application made in that case for costs against non-party funders, that some at least of the contribution “plainly did not cause Mr Al Fayed to incur any costs which he would not otherwise have incurred”.

19.

In the Gore case 189 ALR 712, 731, para 53, the Federal Court of Australia was clearly adopting the same approach when stating:

“Justice Corpn had nothing to do with the decision to institute those proceedings and it had nothing to do with any subsequent decision (prior to 21 April 1999) to prosecute those proceedings. There is no basis upon which Clayton Utz could claim its costs against Justice Corpn in respect of that period. As his Honour said, there was no causal connection between those costs being incurred and the involvement in the case of Justice Corpn.”

20.

Although the position may well be different when a number of non-parties act in concert, their Lordships are content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred without such non-party’s involvement in the proceedings. On the facts of this case, however, their Lordships conclude that, but for Associated’s involvement, the Todds would not have pursued their appeal to the Court of Appeal and thus occasioned the costs both in that court and on the further appeal to the Privy Council.”

It seems to me that that passage, as addressed to the facts and submissions in this case, gives no real support to Mr Bacon. First, it proceeds on an assumption only. Secondly, it does not approach the issue of causation as Mr Bacon submits should be done, by asking whether the third party’s exceptional conduct is itself the effective cause of the costs in question. The nature or quality of the third party’s intervention is only considered subsequently in the Privy Council’s judgment. And thirdly, if one asks in this case, as the Privy Council asked in Dymocks, whether, but for Mr Slater’s involvement, Mr Breen would have incurred any of the costs he incurred in this litigation, the answer would clearly be, No. Did Mr Slater’s involvement cause Mr Breen to incur the costs of the litigation? Yes. The litigation would never have taken place without Mr Slater’s involvement, and that answer remains the same whether or not one characterises that involvement, as the judge did, as “intermeddling in other people’s affairs” or in any other way.

For the rest, it seems to me that the issue of causation raised by Morritt LJ in Globe Equities has not received a determinative decision which is binding on this court.

In the light of the material set out above, I can now proceed quite swiftly to my conclusions.

The first question is whether any of the costs of the litigation brought by the claimant would have been incurred but for Mr Slater’s third party involvement. The plain answer to that, as I have already indicated, is No. Mr Slater is the cause of all the costs incurred. Subject to his wife’s involvement as a fellow director and shareholder, of which we have heard nothing, Mr Slater found the claim, bought it, and brought it, albeit in the name of his family company.

The second question is whether that is sufficient to found a liability under section 51(3) for all the costs of the litigation, or only for those additional costs which can be directly attributed to particular conduct on the part of Mr Slater which can be characterised as improper or otherwise sufficiently exceptional to justify the making of any order against him. I will assume for the moment that the latter alternative, which reflects Mr Bacon’s submission, is correct.

The third question is whether Mr Bacon is correct in his submission that it is only conduct which is lacking in good faith, such as Mr Slater’s deliberate suppression of disclosure, his attempt to intimidate Mr McHale from giving evidence, and his own lies in the witness box, which can justify a section 51(3) order. There are two separate answers to this question. The first, in the light of Dymocks is, No. Lack of bona fides is not a necessary condition (although it might otherwise be sufficient), if the third party is the “real party” for whose benefit the litigation is conducted, a fortiori where that litigation is conducted and funded by the third party. In this case, Mr Slater (together with his wife) was the real party for whose benefit the litigation was brought. He controlled it throughout. He did not fund it, but only because it was funded under a CFA by the firm of solicitors for whom he acted as consultant and in whose name he undertook the conduct of the litigation. Re North West Holdings is a case in point, albeit it preceded Dymocks. The judge’s decision in this case, although not assisted by the Privy Council’s judgment in Dymocks, may be said itself to have anticipated it in its realistic conclusions. The whole litigation, from beginning to end was the result of Mr Slater’s personal concern to win from Mr Breen the fruits of the alleged debt.

It is true that in March 2003 Mr Slater sold the claimant company and ceased to be a director or shareholder. But he remained involved in every other way, and I would not accept that he had proved that his sale had in truth divorced his interest as the real party in suit. Why otherwise should he have continued to act as he did, committing himself to such dishonesty?

But there is another answer to the current question. The whole of the costs of the litigation were in any event caused by Mr Slater’s dishonesty or impropriety. This is irrespective of the issue whether he had any bona fide belief in the claim. It is unrealistic to view his dishonesty in suppressing the disclosure of his file at Butcher Burns as only an incident during the course of the litigation. When he caused the claimant to issue proceedings he already knew that Mr Breen, Mr McHale and Mr Molloy were all saying that Mr Breen’s guarantee had been discharged by agreement. He must also have known, because, as the judge found, he had a meticulous interest in the detail of the case, what the small Butcher Burns file showed, even if perchance the fact would otherwise have escaped his memory: namely, that he had himself been instrumental in adjourning and withdrawing the bankruptcy petition against Mr Breen because, as his own letter said, “apparently terms were negotiated for the petition to be withdrawn”. In these circumstances, and in the light of his subsequent persistently dishonest conduct, it is an unavoidable inference that he was determined to press the claimant’s claim, even if he honestly felt that there was something in it, by dishonest as well as honest means, by fair means or foul. As the judge said (see at para 33 above), he had repeatedly tried to get Mr Breen to cave in and accept his assertions that defence of the claim was hopeless while deliberately depriving him of proper disclosure. This was an attempt at a denial of justice. The fact that it took a trial, the power of cross-examination, and the intervention of a judge concerned to achieve fair play, as well as Mr Breen’s (and Mr McHale’s) resilience, to ensure that access to justice was not denied does not mean that this litigation as a whole cannot be characterised as improper and dishonest, as well as grossly speculative. I would therefore hold that in any event the whole of the costs concerned were caused by Mr Slater’s improper and exceptional conduct.

In the circumstances, it is unnecessary to rule on Mr Breen’s respondent’s notice to the effect that the judge should have found Mr Slater to have lacked a bona fide belief in the claim from the beginning.

Moreover, to revert to the second question posed above, it is also unnecessary to rule on the question whether Morritt LJ in Globe Equities or Mr Bacon’s submission, said to be supported by Chadwick LJ in Byrne, is correct. However, I would express a preference for what Morritt LJ said. This is partly because, while this question was plainly and expressly before Morritt LJ, that was probably not the case in Byrne; partly because I see force in the reasoning and example given by Morritt LJ in the passage quoted (at para 61) above; partly because in Dymocks the Privy Council adopted an analysis which was consistent with Morritt LJ’s view, by asking whether the third party had caused the costs in issue and then leaving the rest for the exercise of a principled discretion in the ultimate interests of justice; and partly because it seems to me that such an analysis is more likely to provide a means to a clearer and juster solution to the myriad forms in which the issue under section 51(3) may arise.

In sum, for the reasons set out above, I would dismiss this appeal.

I agree this appeal should be dismissed for the reasons given by Rix LJ.