Apex Frozen Foods Ltd v Ali & Ors

This is an application by the second Defendant (“Foods”) for an order that the third Defendant (“Mr Smailes”) pay on the indemnity basis Foods’ costs of and occasioned by (i) the grant of a freezing order which I made on 26 May 2006 (ii) an unsuccessful application by the Claimant (“Apex”) to continue the freezing order and (iii) a successful application by Foods to discharge the freezing order. A payment on account of such costs is also sought. The claim is made under two heads: first, as “loss” within the cross-undertaking referred to below and secondly, pursuant to section 51 Supreme Court Act 1981 (“section 51”).

The background to the case and my reasons for discharging the freezing order are set out in my judgment dated 21 June 2006. I do not need to repeat that material here.

The original freezing order was sealed on 26 May 2006. It was subject to a cross-undertaking. I had required that undertaking to be given by Mr Smailes (who was then provisional liquidator of Apex) as a condition of granting the order. The undertaking appears in the sealed order in Schedule 2 which is headed “Undertakings given to the Court by the Applicant”. In the heading to the Order, the Applicant is shown as Apex not Mr Smailes as indeed it was.

However, in the application notice, the Applicant is shown as Mr Smailes described as provisional liquidator of Apex. Similarly, the draft order attached to the application notice showed the Applicant as Mr Smailes. The undertaking in Schedule 2 of the draft Order was to be given by the Applicant, that is to say Mr Smailes, described as provisional liquidator of Apex.

In order to take account of the fact that the Applicant was in fact Apex, the wording of the undertaking needed to be modified. The heading to Schedule 2 was not, perhaps erroneously, modified. But the undertaking itself was modified so as to read as follows:

“If the court later finds that this Order has caused loss to any of the Respondents, and decides that such Respondent should be compensated for that loss, Mr Robert Smailes as Provisional Liquidator of the Applicant will comply with any Order the court may make”.

This undertaking was repeated in relation to Foods following an inter partes hearing on 7 and 8 June 2006 at which Apex sought to continue the May order and Foods and Mr Ali sought discharge. The order was sealed on 9 June. On 21 June 2006, following my judgment, the freezing order was discharged and more limited orders made. Before the present application came before me, I understand that it was questioned on behalf of Mr Smailes whether he had in fact given a personal undertaking at all and if so whether it extended beyond the assets held by him as provisional liquidator; by the time I heard the application, he had accepted that such an undertaking had been indeed given and that it was not limited to the assets of Apex.

Mr Smailes was not represented personally at the hearing before me on 21 June 2006, although Apex appeared by Mr Morrison. Mr King asked for costs which I awarded against Apex on an indemnity basis. I also ordered that Mr Smailes be joined as a respondent in order that an application, on proper notice to him, could be made under section 51 Supreme Court Act 1981 for a costs order against him personally. So far as an enquiry into damages was concerned, Mr King made submissions to me that there should be an immediate enquiry whereas my inclination had been to leave that over to trial. I regret that, in the course of those submissions, I did not focus on the question by whom the undertaking had been given. The position was reached under which Foods would be entitled to an enquiry but the enquiry itself would not take place until, or after, the trial. At the very end of the transcript of the hearing which appears in the bundle for this application (Bundle C Tab 15 p 763) there is this exchange between Mr King and myself:

“Mr King: My Lord, one of the reasons for pressing you to ask you to decide to join Mr Smailes is that of course the inquiry in relation to damages will also be against Mr Smailes….

Judge: Of course it will, yes.”

Mr Smailes was not, however, represented before me and I could no more decide that an enquiry should be ordered as against him on the cross-undertaking than I could make a costs order against him: he was clearly entitled to notice before such an order could be made. Accordingly, what I said there is wrong (although I do not have the transcript after that exchange and more may have been said: I do not remember).

I have gone into this in some detail because there is now a dispute between the parties about the meaning of the undertaking. It is said by Miss Newman QC (who appears on behalf of Mr Smailes in this application) that “loss” in the undertaking does not include the costs which Foods has incurred in relation to the freezing order and its discharge. One of her arguments is that Foods has asserted, by seeking and obtaining from me an order for an enquiry, that Apex is liable under the undertaking; but if that is so, “loss” would not include costs because loss cannot be recovered in respect of the costs of litigation to which the person against whom recovery is sought is a party.

When it comes to enforcing a cross-undertaking in an ordinary case, loss is to be established in very much the same way as damages in contract. In Hoffmann-La Roche & Co AG v SoS for Trade and Industry [1975] 1 AC 295, Lord Diplock put the position (albeit obiter) as follows at p 361:

“[The Court] retains a discretion not to enforce the undertaking if it considers that the conduct of the defendant in relation to the obtaining or continuing of the injunction or the enforcement of the undertaking makes it inequitable to do so, but if the undertaking is enforced the measure of the damages payable under it is not discretionary. It is assessed on an inquiry into damages at which principles to be applied are fixed and clear. The assessment is made upon the same basis as that upon which damages for breach of contract would be assessed if theundertaking had been a contract between the plaintiff and the defendant that the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction.”

If that approach is literally applied, two results might be said to follow. First, if the cross-undertaking is enforced, all the damages flowing from the injunction having been granted (ignoring questions about forseeability and whether that is a requirement for recovery of any particular head of damage) are recoverable: it may be that there is no discretion in the Court to allow some heads of loss to be recovered but not others; it is “all or nothing”. Secondly, a cross-undertaking which is enforced against a claimant in the same action in which the cross-undertaking was given (which would be the almost universal procedure) would not be entitled to recover any part of his costs of the litigation (including the costs incurred in relation to discharge of the injunction). Costs are dealt with, as between the parties, pursuant to the Court’s costs jurisdiction and cannot be recovered as damages. And that, generally speaking, is so whether he seeks costs in the very litigation itself or in another action.

It is not entirely clear how such a strict contractual approach to cross-undertakings would apply in the case of an undertaking given by a third party. Presumably the notional contract would be a warranty by the person giving the undertaking, rather than a contractual obligation by the claimant, that the claimant “would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction”. If that approach were literally applied, it would again be a case of “all or nothing”. But, in contrast with the position in relation to costs as between parties to a piece of litigation, a claimant can, in appropriate circumstances, obtain as part of his damages the costs which he has incurred in litigation with a third party. For instance, if his litigation with the third party was caused by the defendant’s wrongful conduct, the costs of that litigation would be part of his damages. Applying that approach to the present case, Mr Smailes is a third party; it is true that he has now been joined to the proceedings in order to make an application that he pay costs under section 51 but that cannot, I consider, affect one way or the other his liability on his cross-undertaking. The position as I see it is that Foods has incurred costs in relation to the injunction proceedings as a result of Apex doing precisely that which Mr Smailes notionally warranted it would not do. Accordingly, if the Court decides that Mr Smailes’ cross-undertaking is to be enforced, Food’s damages will include its costs in considering and opposing the continuation of the freezing order.

I do not consider that it makes any difference to the conclusion that Foods is, in principle, able to recover its costs of the injunction proceedings under the cross-undertaking, that the undertaking had, perhaps mistakenly, been regarded by the parties and myself at the hearing on 21 June 2006 as one given by Apex itself. It is to be construed in the light of what it is, that is to say an undertaking by Mr Smailes. If it has been treated also as an undertaking by Apex then it may be that, vis a vis Apex but not otherwise, its scope is to be restricted as excluding costs.

It is, in any case, a difficult question whether the contract basis for assessment is too narrow. Jacob J considered the question, but did not need to decide it, in R v The Medicines Control Agency ex p Smith & Nephew Pharmaceuticals Ltd [1999] RPC 705, expressing much sympathy with the view that it is too narrow. He referred to the Australian case of Victorian Onion and Potato Growers v Finnigan [1922] VLR 819 where the Judge (Cussen J) thought that “damage” in the undertaking is to be given a very general meaning and not necessarily the same meaning as “damages” when used in connection with breaches of contract. It seemed to Cussen J that “damages” meant real harm rather than any strictly defined meaning. It is perhaps worth noting in similar vein that Lord Diplock refers to the “normal” undertaking which, in his day, used the word “damage” or “damages” rather than “loss” which is what appears in the undertaking in question in the present case and which may have a wider meaning. After all, the a claim to recover under the cross-undertaking is not actually a claim for damages at all. There is, in addition, a decision of the Ontario Court of Appeal, James v Canadian Trust of the Church of Latter Day Saints (1998) 165 DLR (4^th) 227, where the court held that the undertaking (referring to “damages”) did indeed include costs.

I should, however, say that even if the contract basis of assessment is correct, I doubt that it would be right to incorporate all the principles which apply in relation to an assessment of damages. The starting point must surely be the true construction of the particular undertaking in question. That is to be judged against the background and purpose of the undertaking which is required by the court to be given in order to ensure that a mechanism is available to make good any detriment suffered by a defendant against whom injunctive relief is obtained when it is subsequently established that there should not be an injunction. I think that there is much to be said for the view that the wording of the undertaking would be wide enough to subsume costs even if it had been given by Foods, and a fortiori wide enough to do so since it was in fact given by a third party, Mr Smailes.

However, I do not need to decide, any more than Jacob J, whether the contract approach is too narrow; nor do I need, whether or not it does apply, to decide the extent to which the policy that damages does not include costs is relevant. If a strict contractual basis is the correct approach, then the costs incurred by Foods in relation to the injunction proceedings form part of its damages against Mr Smailes since the analogy is with the case where a claimant seeks to recover against a defendant costs which it has incurred in other litigation with some third party. If the contractual approach is too narrow (the view which I favour), then I see no reason to exclude those costs from the “loss” within the meaning of the undertaking. The practical result so far as concerns Mr Smailes is therefore the same.

As to the “all or nothing” aspect, there is, in my judgment, nothing in what Lord Diplock said, or in any of the other authorities to which my attention has been drawn, which leads to the conclusion that the undertaking must be enforced as widely as possible or not at all. Lord Diplock’s notional contract only bites if the court decides to enforce the undertaking. Before Mr Smailes is found liable to Foods, there are two pre-conditions: first, the Court has to find that the order “has caused loss” to Foods; and secondly, the Court must decide that Foods should be compensated for “that loss”. I do not perceive any difficulty in the Court examining different items of loss separately (although I do see that it might be difficult to order only partial compensation in relation to a particular head of loss for which the Court considers the defendant should be compensated). The words “that loss” refer back to “has caused loss”. In the phrase “has caused loss”, there may be two or more distinct items of loss which the Court finds have been caused by the order; I see no reason why it should not decide that Foods should be compensated for some only of those items.

Before considering whether I should make an order pursuant to the undertaking in relation to Foods’ costs, I wish to consider briefly the law relating to costs orders against third parties such as Mr Smailes pursuant to section 51. I have had cited to me a considerable number of authorities from both this country and Australia dealing with, in our jurisdiction, section 51 and the particular way in which it applies in the case of directors and office-holders of a company which is a party to litigation. I will confine myself to three of them: Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, a decision of the Privy Council on appeal from the New Zealand Court of Appeal; Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 2 All ER 533 (CA); and BE Studios Ltd v Smith & Williamson Ltd [2005] EWHC 2730(Ch), [2006] 2 All ER 811 (Evans-Lombe J).

Although Dymocks was a case before the Privy Council, it was adopted in both Goodwood Recoveries and BE Studios and represents the law of England. At paragraph 25 of the Judgment delivered by Lord Brown, he says this:

“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:

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.

Generally speaking the discretion will not be exercised against 'pure funders', described in Hamilton v Al Fayed (No 2) [2003] QB 1175 at 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 usual 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.

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….

Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder's own financial interests.”

It should be noted that, in paragraph c., Lord Brown includes a reference to Knight v FP Special Assets Ltd (1992) 174 CLR 178. In that case, the High Court of Australia included within the category which Lord Brown is here considering a receiver of a company where the person who appoints him is to benefit.

Lord Brown then goes on to consider and cite from a number of authorities including the judgment of Millett LJ in Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 WLR 1613 at p 1620

“[An order] 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. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings … If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail.”

Lord Brown then summarised the position at paragraph 29 in this way:

“In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

He adds at paragraph 33 this:

“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 an order.”

So one sees there the idea that speculative litigation is to be viewed in the same way, for the purpose of a third-party costs order, in much the same way as impropriety, a feature noted by Rix LJ in Goodwood Recoveries at paragraph [59] where he says this:

“In my judgment, it is clear from these passages that the law has moved on 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/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 paragraph 33 of his opinion 'the pursuit of speculative litigation' is put into the same category as 'impropriety'.”

In BE Studios, Evans-Lombe J conducted a review of these authorities concluding, in the case of directors, that “it is not a requirement for the making of a non-party costs order against a director who has funded and controlled litigation consequent on a claim brought by his company at his instance, that impropriety must be shown in the way that the claim was prosecuted”. He then went on at paragraph [19] to say this:

“Even if I am wrong in that conclusion it seems to me that the claim in this case can be properly described as "speculative" as that word is used by Lord Brown in para.33 of his judgment. I have found that the claim for R & D tax relief to the Inland Revenue was inappropriately prepared and grossly exaggerated. The claim which BES launched in these proceedings was based on that claim to the Revenue. Although the relevant opinions, which would of course be privileged, have not been made available to the defendant, I have no reason to doubt the strength of the advice which Mr Dickens said he received from his advisors that the claim would succeed. It may well be that Mr Dickens had little or nothing to do with the preparation of the claim for R & D relief. It does not seem to me that that can avail him.”

So one sees there the Judge willing to apply Lord Brown’s approach to speculative claims, treating them in the same way as claims where impropriety can be shown.

There is one aspect of the section 51 jurisdiction which ought to be noted. It is often said that the jurisdiction should not be exercised in the light of the availability of an order for security for costs. Thus, where a company the solvency of which is in doubt sues a defendant at the instigation of a liquidator, provisional liquidator or other officeholder, the defendant’s position can be protected by such an order and there is not need to invoke the section 51 jurisdiction. In many cases that may be so. But it is not a possibility, and is not therefore of relevance, when the claimant company makes a without notice application. If the application is successful, the defendant will inevitably have to act on the order made against him. He will also inevitably incur cost in considering his position before there has been an opportunity to obtain an order for security. In the present case, for instance, it is unrealistic to think that Foods could have obtained an order for security for costs before incurring expense in relation to the injunction obtained against it and in preparing for the hearing on the return date.

In exercising my discretion, I consider that I am entitled to take into account, in both directions, all the circumstances of the case including Mr Smailes’ conduct. I am not restricted to considering only the matters which were before me when making and discharging the freezing order. Nor am I restricted to considering conduct which amounts to acting for an improper purpose or with improper motives. It includes any conduct which goes to show that it is just and reasonable to make an order for costs against Mr Smailes as well as conduct which shows the reverse.

Apex itself is clearly unable to shelter behind the action of its advisers in resisting a costs order against it. I do not consider either that Mr Smailes is entitled, when it comes to enforcing his undertaking or making an order under section 51 against him, to shelter behind those advisers (whether or not they were also his advisers for this purpose); he cannot say that, because he himself was not at fault, therefore no order can be made against him. What he can say is that he should not be criticised personally for the conduct of Apex and its solicitors when he himself was not at fault. In that regard, Mr Smailes’ evidence is that the non-disclosure and conduct which I criticised in my judgment when refusing to continue the freezing order against Foods did not result from any conscious fault of Mr Smailes himself. He also says that he had never been involved in an application of this sort before and relied on Apex’s advisers to tell him what he should disclose. Similarly, he played no part in the failure to explain the intended effect of the order which I had made on the without notice application. On that basis, to the extent that Mr Smailes’ own conduct is relevant, the actions of Apex and its lawyers are not in point. I do not know the extent to which that evidence from Mr Smailes is disputed: if it is disputed, the dispute is not something which I can resolve on this application and I am willing to accept, for the purposes of this application, what Mr Smailes says.

Assuming that I am correct in my analysis of the undertaking and the applicable law, Mr Smailes can, in principle, be made liable for Foods’ costs of the injunction proceedings pursuant to it. Moreover, it is, in my judgment, open to me to deal with that element of Foods’ loss without at the same time making any determination about whether Mr Smailes should be liable for any other loss (if indeed it has suffered any) of Foods: it is not a case of “all or nothing”.

Accepting for this purpose, as I do, that Mr Smailes is innocent of any personal conscious failing in relation to the obtaining of the freezing order and the manner in which matters proceeded thereafter, it nonetheless remains the position that, as a result of the freezing order, Foods has suffered loss within the meaning of the undertaking. It is to be remembered that the whole purpose of an undertaking of this sort is to guard against the injustice which could flow if an injunction is wrongly granted. Although the words “wrongly” or “in error” or similar phrases are conventionally used, this is to say no more than that, when the full picture emerges, it can be seen with the benefit of hindsight that the injunction should have been refused.

Normally, discharge applications are to be left to trial when it is possible to judge the matter against the facts as found. Moreover, even where an injunction is discharged or not continued, enquiries on any cross-undertaking are normally left until after trial for much the same reason.

However, in the present case, I can see no reason for postponing the enquiry so far as concerns costs until that stage. My reasons for reaching that conclusion are these. The freezing order, if it was to be justified at all, had to be based on the alleged wrongful collection by Foods of outstanding debts owing to Apex. I made it clear, and Mr Morrison when making the application accepted, that a freezing order in this case based on the passing-off element of Apex’s claim could not be justified. Whether or not Mr Ali had been collecting debts owing to Apex and not accounting for them, the evidence was inadequate, for the purposes of interim relief, to show that they had been collected on behalf of Foods. Importantly, even if it were shown, at the end of the day, that this had occurred, it does not alter the fact that the freezing order was not continued and would not have been made if there had been proper disclosure of material facts at the without notice hearing. Further, the costs are highly significant in the context of a small business such as that of Foods’ business. It would not be just to delay Foods’ ability to recover its costs from Mr Smailes, assuming he is to be made liable for them, until the end of the trial process.

Having decided to deal with the costs element of the loss occasioned by the order, I decide that Foods should be compensated by Mr Smailes for that loss. From Foods’ perspective, that is the only fair result. The loss has, if I am right in my analysis of the undertaking, been occasioned by the order, an order which I should not have made and which was obtained in the absence of proper disclosure of material facts. The fact that Mr Smailes is innocent of any personal conscious failure is insufficient, in my judgment, to absolve him from liability when such absolution would produce precisely the injustice which the undertaking is designed to guard against. The result which is fair to Foods is not, in my judgment, unjust to Mr Smailes and is the result which should follow.

Accordingly, Foods is entitled to recover its costs occasioned by the order (but not any other costs of the action) against Mr Smailes. Since quantum of loss is, it appears, to be ascertained in the same way as contractual damages, the recoverable costs should, I consider, be quantified in the same way as costs which are recoverable as damages. Although this is an area of some difficulty which would merit consideration by the Court of Appeal, the law which I regard as binding on me is to the effect that only costs on the standard basis can be recovered: see Redbus LMDS Ltd v Jeffrey Green Russell [2006] EWHC 2938, where HH Judge Behrens QC reviews the authorities, and also my decision in Dadourian Group International Inc. & ors v Simms & ors [2007] EWCH 454

Mr King puts his application alternatively under section 51, seeking an order for indemnity costs. There are two principal reasons why he submits that such an order should be made:

As to the funding of the claim, Mr King relies on the following matters among others:

In response to a submission on behalf of Mr Smailes, Mr King submits that an order against Mr Smailes will not deter persons from accepting appointments as provisional liquidators nor from acting in the best interests of creditors. A provisional liquidator, where there are insufficient assets in the company, is unlikely to take proceedings unless they have an effective indemnity from one or more creditors. I agree with that.

Mr Smailes’ conduct is relied on. Mr King submits as follows:

Mr King is critical of different accounts given by Mr Smailes of what happened during and after Mr Smailes’ visit to Apex’s premises. He has produced a helpful chart highlighting the differences between Mr Smailes’ third witness statement and his first and second witness statements. Miss Newman has drawn attention to what she considers to be inaccuracies in the summary, on that chart, of what Mr Smailes says. However, to be fair to Mr King, the chart contains only the briefest précis of what is said in the witness statements. I have gone back to each of the references which Mr King identifies and rely on what Mr Smailes actually says rather than on the summary. The accounts are not, I think, inconsistent in any substantial way, although the third witness statement gives a fuller picture and sheds a light on Mr Ali which allows of a more favourable impression of him than was previously given.

Mr King submits that Mr Smailes cannot shelter behind his solicitors in the way that he seeks to do. Mr Smailes must, he says, have realised that his evidence was liable to create a misleading impression of how Mr Ali had dealt with the matter on Mr Smailes visit to Apex’s premises. Mr King criticises Mr Smailes evidence about what he told his solicitors and when. Then he says that the position is that Mr Smailes came to the conclusion, without evidence, that Mr Ali was using Foods to collect Apex’s debts. In that regard, he was pursuing, according to Mr King, a speculative application thus laying the foundation for a submission based on Dymocks treating speculative actions in the same way as impropriety.

Miss Newman says that the case is one of, at most, unfortunate error. It is nowhere near a case of impropriety on the part of Mr Smailes. His evidence shows, and I accept for the purposes of this application, that he acted entirely innocently, relying on his advisers in a type of application in which he was not experienced. She submits that Apex was the real claimant (as that phrase has been used in the cases) and that Mr Smailes was not. It makes no difference, she says, to that proposition that he had an indemnity for his costs from Alma where the proceedings were brought for the benefit of creditors as a whole with the sanction of the court. Nor does it make any difference that the proceedings were brought at the request of one of those creditors, Alma.

As to the documents which Mr King submits Mr Smailes did not properly review before the application was made, and as to Mr Ali’s explanations, Miss Newman made detailed submissions to show that matters are not nearly as clear as Mr King would like to think they are. I think she is right when she says that there remain a number of unanswered questions about these documents and she may, at trial, be able to make something of them. I do not consider that these aspects of Mr King’s case really assist him in an application under section 51 where the case must be shown to be outside the norm. And although it is not necessary for there to be impropriety or speculative proceedings, there has to be something serious which justifies making an order against a non-party.

In that context, it must be remembered that we are dealing with the costs of the application and not with costs of the action. The application really stood or fell on a single aspect of the action, namely whether Mr Ali might be collecting Apex’s debts on behalf of Foods. Accordingly, if any impropriety or submission based on the speculative nature of the claim or application is to be relied on, it must be in relation to that single aspect of the action. This is not a case of conscious impropriety. But it is a case of less than adequate disclosure and possibly of a speculative application. It is precisely because the claim in relation to collection of debts rested entirely on inference – there was no smoking gun of any sort – that it was so important to observe to the full the duty of disclosure, a duty which, innocently or not, was not observed.

It seems to me that central to the claim under section 51 is the failure to make full disclosure, a failure which of itself was enough to lead to the discharge of the freezing order. Miss Newman accepts that, in principle, material non-disclosure leading to the discharge of a freezing order is capable of being regarded as something outside the ordinary run of litigation and thus outside the norm so as to result in a third-party costs order. She submits, however, that I have to find impropriety whereas Mr King submits that I do not have to do so. The cases show, I consider, that impropriety is not necessary: the position is as put by Evans-Lombe J in BE Studios as set out in paragraph 22 above. Material non-disclosure is, or ought to be regarded as, outside the ordinary run of litigation and therefore to be a highly material factor in the exercise of the section 51 jurisdiction. Even if that is wrong, full disclosure would have revealed in the present case that the application was quite possibly one which would not have succeeded.

Mr Smailes says that he simply acted on the advice which Apex was receiving. As I have already said, I accept that he was personally innocent of any conscious failure; he no doubt thought that he was doing everything in a proper professional manner. But the purpose of making a costs order against him is not to punish him: it is to enable justice to be achieved for Foods in having to deal with a freezing order which should not have been granted. The threshold for liability is not impropriety or speculative proceedings. The ultimate question is always whether it is just to make the order.

Very much on balance, I do not consider that this is a case where an order should be made pursuant to the section 51. It seems to me that the real claimant in Apex which is seeking to recover money for the benefit of its creditors generally. I agree with Miss Newman that it does not make any difference to what is just that Mr Smailes has an indemnity from Alma, one of the creditors. Whilst the failure to make full disclosure is at least unfortunate, Mr Smailes was unaware, I think, that he might be falling short of any duty. I do not regard the possibly speculative nature of the application as tipping the scales against him. In reaching this conclusion, I do not overlook the fact that Foods had no chance to protect its position by making an application for security for costs, a factor which of course is in favour of Foods on this application.

That makes it unnecessary to consider whether, had an order under section 51 been appropriate, Mr Smailes should be liable for indemnity costs which might have resulted in Foods obtaining more in money terms than it is entitled to pursuant to the undertaking.

As to Mr King’s submission that there is no reason to treat costs differently from any other loss and that if the undertaking is not wide enough to provide a remedy, it is legitimate to use section 51 to do so, I disagree. If the undertaking had not been wide enough to cover costs, there is no reason why the ordinary principles applicable to the making of third-party costs orders should not apply. It would be contrary to those principles to make a costs order simply because an undertaking did not cover it. If Mr King were correct, it should follow logically that any person who gives an undertaking against loss, but which is not wide enough to cover costs, should nonetheless be made liable for costs under section 51 even if he has taken no part in and had no influence over the conduct of the litigation at all. That cannot be right.

I should however, mention the reliance which is placed on the fact that Mr Smailes obtained an order on 30 May 2006 sanctioning the proceedings. It is true that the court gave liberty to commence proceedings: it was, however, Mr Smailes’ decision actually to do so and, more importantly, his decision to seek a freezing order, something which the court was not asked to sanction.

Mr King submits that the position of a provisional liquidator (which was Mr Smailes' position) is different from that of liquidator since the former has no duty to collect assets but had merely a power to take such actions as he considers necessary. However, the position of a provisional liquidator is certainly a fortiori that of directors. Lord Brown recognises in paragraph 29 of his judgment in Dymocks that directors, as well as liquidators, are in something of a special position, acting in the interests of the company (and it shareholders and creditors) rather than in his own interests. This is particularly so in relation to liquidators given the public interest in liquidators being able to perform their duties. In terms of categorisation, I think that the position of a provisional liquidator is closer to that of a liquidator than a director. A provisional liquidator, too, is an officeholder who owes duties to the creditors generally; Mr Smailes had to consider exercising the wide powers conferred on him by the order appointing him and if he felt that it was necessary to preserve assets and to seek ancillary freezing orders, he would be acting as he saw it in the interests of creditors. He was clearly not acting for his own personal advantage but was acting for the benefit of Apex and its creditors as a whole. In m view, a provisional liquidator falls in a category where the court should be less inclined to make an order under section 51 (although a receiver may be in a different position, especially having regard to the observation I have made at the end of paragraph 19 above).

Moving on from that point, I reject Mr King’s submission based on his observation that, if no order is made, Foods will be a creditor of Apex in respect of costs (under the order already made) so that other creditors will suffer if an order under section 51 is not made against Mr Smailes personally. There is, in my view, no reason why Mr Smailes should be made to suffer for that through the invocation of the section 51 jurisdiction. If, by taking proceedings against Apex, Mr Smailes acted unreasonably, then the creditors may have a remedy against him, although I acknowledge the difficulties the creditors would face with such a claim.

Mr Smailes is liable, pursuant to his undertaking, to meet Foods’ costs of the application to be assessed on the standard basis if not agreed. I make no order against him under section 51.