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Case No: B3/2000/0037
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION (COMPANIES COURT)
MR JULES SHER QC
(SITTING AS A DEPUTY HIGH COURT JUDGE)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 20th July, 2000
B e f o r e :
LORD JUSTICE SIMON BROWN
LORD JUSTICE SCHIEMANN
and
LORD JUSTICE MUMMERY
- - - - - - - - - - - - - - - - - - - - -
|
SECRETARY
OF STATE FOR TRADE & INDUSTRY
|
Appellant
|
|
-
and -
|
|
|
AURUM
MARKETING LIMITED & ANR
|
Respondent
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Michael Green (instructed by Treasury Solicitor, for the
Appellant)
Mr Paul Greenwood (instructed by Phillip Rudall, Castle Gardens, Caer
Street, Swansea, SA1 3PP for the Respondent)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE MUMMERY:
Introduction
On 18 May 1999 Mr Jules Sher QC, sitting as a deputy High Court Judge, made an
order on the petition, presented by the Secretary of State for Trade and
Industry on 2 June 1998 under section 124A of the Insolvency Act 1986
(following an investigation under section 447 of the Companies Act 1985), for
the winding up of Aurum Marketing Limited (the Company) on the ground of the
public interest.
On 15 July 1999 the judge ordered that the Secretary of State's costs of the
petition be paid out of the assets of the Company. He dismissed applications by
the Secretary of State for orders that
(1) the Secretary of State's costs and the Company's costs of the winding up
proceedings be paid personally by the sole recorded director and owner of the
Company, Mr Michael Richards ; and that
(2) the Company's costs should not be paid out of the Company's assets until
after the Company's unsecured creditors had been paid (a "Bathampton
order").
This is an appeal by the Secretary of State, with the permission of this
court, from the refusal of the judge to make either order.
Mr Green appears for the Secretary of State. Mr Greenwood now appears for Mr
Michael Richards. He did not appear for him or for the Company either on the
hearing of the petition or on the application for costs before the judge.
Background
Following the presentation of the petition and the appointment of a
provisional liquidator, affidavit evidence by Mr Richards was filed in
opposition to the petition, which was set down for a three day hearing
starting on 18 May 1999. The solicitors acting for the Company indicated to the
Secretary of State on 17 May 1999 that the defence to the petition was being
withdrawn and that it would not be opposed at the hearing on 18 May.
On 18 May the case was listed as a mention. The judge heard brief submissions
from Mr Green for the Secretary of State on the essential facts relating to the
Company's activities between September 1997 and May 1998 in raising £2.5m
(from which substantial sums had been remitted to accounts in Switzerland and
Florida) by "reverse marketing promotion" of health foods in "Exchange and
Mart", in other magazines and on the internet. This scheme involved promising
members of the public 100 % profit on an initial payment of £40 by the
customer or "agent" to the Company.
The judge had read a skeleton argument prepared by Mr Green. The judge's
attention was drawn to some of the Secretary of State's extensive evidence, but
not to the detail of the Company's evidence (running to four lever arch files)
in which Mr Richards asserted that the Company was conducting a genuine
business scheme under which income would be generated by the retail marketing
of health foods. The judge said that he was satisfied that there was no
business plan and that there was no evidence that the Company had any rights to
the "Body Bite" edible health food bar or the "Body Burst" energy health drink
promoted in the Company's scheme. The scheme was a "smokescreen for money
generation" that was bound to fail and hurt a lot of people financially. The
judge concluded that he was "convinced and clear that this was a proper case
for the making of a compulsory order on the public interest ground" and that he
had "no hesitation in making the compulsory winding up order."
Mr Green, on behalf of the Secretary of State, then applied for an order for
the entire costs, including the Company's costs as well as the Secretary of
State's costs, against Mr Richards personally. The solicitors then acting for
Mr Richards had been given notice on the previous day of the intention to make
that application. The application was opposed by Mr David Chivers, who was
counsel then acting for Mr Richards. Mr Chivers had been present in court
during the hearing of the petition. The judge ordered Mr Richards to be joined
as a party for the purposes of deciding the costs application and adjourned the
application with directions for evidence and skeleton arguments.
The judge heard the application on 28 May 1999. He described the application
as "a summary process upon the heels of a summary process." He delivered a
reserved judgment on 15 July 1999.
The Judgment
The judge held that the "summary way" in which the petition and the issue of
costs were dealt with meant that the Secretary of State's application faced
"considerable difficulties." He accepted that on the Secretary of State's
case
"...the business of the company was a smokescreen for a scheme of money
generation that was bound eventually to collapse leaving a lot a people hurt
financially."
But he pointed out that
"The company's defence , that the scheme was a marketing campaign and it was
hoped or expected that the proceeds of sale of the products themselves would
have supported the continuing cost of that campaign was not investigated at
all. From the investigations made on behalf of the Secretary of State there
appeared to me no substance in any such hope or expectation. But for all I
know, had I been taken over all the extensive evidence put in by the company, I
might have come to the conclusion that such hope or expectation,misguided as it
was, was at least genuinely held. I simply do not know."
The judge said that he undoubtedly had jurisdiction to order payment of the
costs of the proceedings by a person who was not a party to them and commented
"That I would have made the order if it could have been shown that Mr Richards
had caused the company to put forward a defence which was not bona fide or
otherwise manipulated the procedures of this court so as to delay the
inevitable liquidation of this company is also not in doubt."
The judge then returned to the difficulties in taking this course.
"But how can I be clear that this is the case after a summary hearing of the
petition without reference to the evidence put forward by the company and the
equally summary hearing on the issue of costs ? "
The essence of the judge's reasoning is in the following passage.
"In a claim against an individual director of the kind under consideration it
is not enough, in my opinion, to rely on a judgment procured in default of
defence and no more. The fact I have concluded on the evidence put forward by
the Secretary of State that the business of the company was a swindle does not
necessarily mean that the defence put forward, details of which I have not
seen, has not been genuinely put forward as a bona fide defence. To obtain an
order of this kind put forward in this application there must be evidence of
abuse of the court's process by the director or breach by him of his fiduciary
duty to the company in causing the company to put forward a defence known by
him to be hopeless. However strong my view of the case on the uncontradicted
evidence of one side, I do not think it can be a substitute, in a claim against
an individual director, for such claim to be supported by appropriate evidence
of mala fides or abuse which at the least calls for an explanation on the part
of the director. Such is sorely lacking in the present case."
The judge added
"If a petitioning creditor has nothing beyond the sheer strength of the
evidence supporting the petition itself then, in my judgment, to make good a
claim against the director for the costs of the petition , the petitioning
creditor must show the court the evidence filed on behalf of the company. Even
then it may not be possible to make good the claim; but at least the judge
would be in a better position to make a judgment as to whether the director has
abused the process of the court."
He concluded
" I must say that I have serious doubts whether the defence of this petition
was proper, but I am not satisfied , on the very limited material put before me
, that it was improper. It is plainly for the Secretary of State to so satisfy
me before making what is, in any event, an extraordinary order against a
non-party. I am in the circumstances not prepared to make the order against Mr
Richards either in respect of the costs of the Secretary of State or the costs
of the company."
He also refused to make an order in the Bathampton form (i.e. that the
costs of the Company after the first hearing of the petition should not be
paid out of the assets of the Company in priority to the payment in full of the
unsecured creditors of the Company, thus depriving the Company's solicitors of
their costs: see [1976] 1 WLR 168), saying that the "real question for the
court is whether the director should pay the costs of the proceedings" ; that
he had already answered that question in the negative ; and that was the end of
the matter.
The Law
This court will not disturb the judge's exercise of his discretion on costs
unless there is an error of principle or his decision is plainly wrong.
The relevant legal principles governing orders for costs against non-parties
are as follows:-
(1) Under section 51 of the Supreme Court Act 1981 the costs are " in the
discretion of the court, and the court shall have full power to determine by
whom and to what extent the costs are to be paid." This wide statutory
discretionary power, which is to be exercised by courts "in accordance with
reason and justice", is not subject to any express or implied limitation that
costs can only be ordered to be paid by the parties to the proceedings :
Aiden Shipping Co Ltd v. Interbulk Ltd [1986] 1 AC 965 at 980C-D
and 981-B. A non-party may be ordered to pay the costs if the circumstances are
such that it is just to do so.
(2) Part 44.3 (2) CPR provides that
" If the court decides to make an order about costs -
(a) the general rule is that the unsuccessful party will be ordered to pay the
costs of the successful party; but
(b) the court may make a different order."
These provisions have been applied to the costs of insolvency proceedings,
save where inconsistent: rule 7.33 Insolvency Rules 1986, as amended by the
Insolvency (Amendment) (No 2) Rules 1999. The discretion to make a different
order must accordingly be exercised to give effect to the overriding objective
of dealing with the case justly and in a way which is proportionate to the
amount of money involved, the importance of the case, the complexity of the
issues and the financial position of each party : Part 1.1 (1) and (2) and 1.2
CPR.
(3) As Lord Goff said in Aiden (supra) at 980
"....in the ordinary run of cases where the party is pursuing or defending the
claim for his benefit through solicitors acting as such there is not usually
any justification for making someone else pay the costs."
In this sense such an order is "exceptional", but I agree with the comment of
Morritt LJ in Globe Equities Ltd v. Globe Legal Services Ltd
(unreported 5 March 1999 cited by Hart J in his valuable review of the
authorities in Re Northwest Holdings (an unreported
decision of 24 September 1999 i.e after the costs judgment in this case) that
"...there appears to be a danger of treating the requirement that the
circumstances be `exceptional' as being part of the statute to be applied. It
is not.....In none of the cases to which I have referred have `exceptional
circumstances' been elevated into a precondition to the exercise of the power,
nor should they be."
(4) There is guidance in the cases highlighting various factors relevant to
the exercise of the discretion (see, in particular, Symphony Group plc v.
Hodgson [1994] QB 179), but none of the authorities attempt to
legislate for the exercise of the discretion. That must always depend on
consideration of the actual circumstances of each case. There is, for example,
no general rule that it is right in every case of a one man company to make the
controlling shareholder and director personally liable for the costs on the
ground that he has caused the company to defend the proceedings: Taylor
v.Pace Developments Limited [1991] BCC 406 at 409F. It
is wrong to treat the reported cases as providing a comprehensive check list of
factors which must be present in every case before the discretion can be
exercised in a particular case. What may be sufficient to justify the exercise
of the discretion in one case should not be treated as a necessary factor for
the exercise of the discretion in a different case.
Nature of the Proceedings
I agree with Hart J who pointed out in Northwest Holdings
(supra) that public interest petitions are themselves an unusual form
of proceedings which are more likely to attract orders for costs against
non-parties . He said
" In particular they have the characteristics that, while the burden of proof
is on the Secretary of State, in practice a respondent company will usually be
starting on the back foot; that (unlike most forms of litigation) they do not
lend themselves readily to compromise; and that the effect of a successful
petition is likely to be adverse to the general commercial reputation of those
involved in the promotion and management of the respondent company. Moreover,
and particularly where a provisional liquidator has been appointed, it is
likely that in the typical case the cost of the company's defence of the
petition will be underwritten by its owners and managers. It will therefore
more often than not be a normal feature of this type of litigation that, if the
petition is successful, the Secretary of State will be able to make out a case
for saying that some individual connected with the company has for his own
purposes resisted the making of an order which it was all along in the public
interest should be made, and that it is just that that individual should make
good to the public purse the cost incurred in the petition , or at least that
part of those costs directly attributable to the fact that the petition was
opposed."
Relevant Circumstances
In deciding whether to make a costs order against Mr Richards the judge should
have had regard to all the relevant circumstances, in particular the following
which appear either from the Secretary of State's evidence on the petition,
which was uncontradicted as the Company had withdrawn its defence to the
petition, or from the record of the proceedings :-
(1) The Secretary of State authorised a section 447 investigation into the
affairs of the Company by Mr David Boote who deposed to the fact that
Mr Richards had been evasive, contradictory and unco-operative in the provision
of information. Mr Richards was the sole recorded director and shareholder of
the Company.
(2) The substance of the petition, which was verified and supported by
affidavit evidence from Mr David Boote, was that it was in the public interest
to wind up the Company as it was insolvent and unable to pay its debts and
that the scheme operated by it
".....is a swindle and has been conducted dishonestly. Members of the public
are induced to send cash to the Company in the expectation of receiving a
larger sum in return. However, the Company has not and never has had any
serious expectation of being able to pay all the money it has promised to pay.
A large amount of the money so received by the Company has been transferred
abroad and misappropriated." (Paragraph 18 of the petition.)
(3) On 3 June 1998 Rimer J appointed a provisional liquidator of the Company.
Following the commencement of the winding up any disposition of the Company's
assets was void, unless validated by order of the court. The Company had
already ceased trading in May 1998. Affidavit evidence was sworn by Mr Richards
alone in opposition to the petition, which was set down for hearing and was due
to be heard on 18 May for an estimated 2-3 days.
(4) On 11 March 1999 the Official Receiver filed a report on the provisional
liquidation referring to the transfer abroad of substantial sums from the
Company's accounts and to the refusal of Mr Richards to co-operate with the
investigations of the Official Receiver or to return the money transferred.
(5) In April 1999 new solicitors instructed on behalf of the Company gave
notice of cross examination at the hearing.
(6) On 14 May 1999 an unsuccessful application was made on behalf of the
Company to Blackburne J to adjourn the hearing and for the release of money by
the Provisional Liquidator to pay legal fees and expenses. An affidavit was
sworn on 13 May 1999 by a solicitor (Mr Michael Gardner of Morgan Cole)
freshly instructed on behalf of Mr & Mrs Richards, and through them, on
behalf of the Company. He stated that his firm needed " to be put in funds for
the purpose of continuing the Company's defence." The applications were
rejected on the ground that the reality was that the petition was being opposed
by Mr Richards, that there was no evidence that he was unable to fund the
Company's defence and that indeed he had considerable assets at his disposal.
The evidence in support of that application does not reveal how the legal costs
and expenses of opposing the petition had been funded up till then.
(7) On 17 May, when the Company's solicitors informed the Secretary of State
that its defence to the petition was being withdrawn ,it was made clear by the
Secretary of State's solicitors that a personal costs order against Mr Richards
would be sought.
(8) The hearing of the petition and of the applications for costs took place
and the two judgments were given in the circumstances already described.
Conclusion
In my judgment the judge took the wrong approach to the costs application. In
the circumstances outlined above justice requires that orders be made that Mr
Richards personally pays both the Secretary of State's costs and the Company's
costs of the winding up proceedings and that none of the Company's costs should
be paid directly or indirectly out of the Company's assets until after the
Company's unsecured creditors have been paid in full.
The legal position is as follows.
(1) The scheme operated by the Company was a swindle. That has been found as
a fact on the petition. It was not appealed. The judge came to this conclusion
on the evidence of the Secretary of State. The fact that this was denied in
the evidence filed by Mr Richards on behalf of the Company, which then withdrew
its defence, and that Mr Richards asserted and believed that it was not a
swindle and that the business was conducted in good faith is irrelevant in
view of that finding.
(2) As Mr Richards was the sole director and shareholder of the Company, it
was he who was operating the swindle through the Company. He was the
controlling force behind the Company's opposition to the winding up order. He
cannot be heard to say that he was resisting the winding up order in the
interests of the public, who were liable to be swindled; or in the interests of
the creditors, who had been swindled; or in the interests of the Company, which
he was using to operate the swindle. The proceedings were contested by the
Company from June 1998 to mid-May 1999 because Mr Richards, as controller and
owner of the Company, conceived it to be in his own interests to do so.
(3) Mr Richards is not entitled in those circumstances to distance himself
from the judge's decision on the winding up petition and contend that the
findings of fact were made against the Company in proceedings to which he was
not a party and that they are not binding on him. I reject Mr Greenwood's
submission that the Secretary of State failed to adduce evidence to the judge
sufficient either to prove his case against Mr Richards or sufficient to
"obligate" Mr Richards to adduce evidence in order to avoid adverse findings of
fact. Mr Richards knew what was alleged. He had ample opportunity to answer it.
He swore evidence in opposition to the petition. He then decided not to oppose
it.
(4) The effect of the order made by the judge is that the burden of costs of
proceedings successfully brought in the public interest to put an end to a
swindle operated by Mr Richards through the Company are borne not by Mr
Richards but by the assets of the Company, which has been found to be
insolvent. In effect Mr Richards is able to throw the costs of the proceedings
onto the general public and onto the creditors of the Company who are the very
people who have been or were liable to be swindled. This does not seem to me to
be just.
(5) I doubt whether the judge in fact thought that this was a just result in
the light of his findings on the winding up petition. The reason that we do not
know for certain what the judge thought on the justice of the outcome on costs
is that the judge did not ask himself the correct question, that is whether it
was just to make the costs order against Mr Richards. That is the flaw
in his approach to the costs application.
(6) In his detailed judgment the judge proceeded on the basis that the
winding up order was made "in default of defence and no more" and that it was
not appropriate to make "an extraordinary order" against Mr Richards "by a
summary process" (a) without evidence from the Secretary of State against him
of mala fides, abuse of process, procedural manipulation or improper defence of
the petition by Mr Richards, known by him to be hopeless and "for the sole
reason of avoiding a finding of dishonesty against himself" and (b) without
reference to "the extensive evidence" put in by the Company on the petition.
That is not the correct approach. First, the winding up order was not made "in
default of defence." It was not a default order. The order was made after a
trial of the merits of the petition in which Mr Richards elected not to take
part and on the basis of facts which the judge held were established from the
Secretary of State's evidence. The fact that on the eve of the trial Mr
Richards deliberately chose not to argue the merits and not to rely on his own
evidence to oppose the making of the order does not make the order a "default"
order. Nor does it diminish the force of the judge's findings of fact by which
Mr Richards, as the alter ego of the Company, is bound unless and until that
order is set aside. He must take the consequences of electing not to rely on
the extensive evidence put in by him on behalf of the Company.
Secondly, as already explained, the power to order a non-party to pay the
costs of legal proceedings is not limited to cases of bad faith, abuse of
process, impropriety or procedural manipulation. The power can be exercised if,
in all the circumstances, it is just to do so.
In this case it is just to order Mr Richards to pay all the costs personally,
both of the Secretary of State, who has presented and successfully pursued this
petition for the protection of the public, and of the Company, whose assets
should be preserved for the benefit of the creditors of the Company and should
not be available for the personal benefit of Mr Richards, who, for his own
reasons, made the decision to oppose and then the decision not to oppose the
petition. It would have been appropriate to make such an order at a "summary
hearing" of the kind which took place before the judge on 28 May 1999 following
on his earlier decision to put the Company into liquidation on public interest
grounds. It was, in the words of Laddie J in Robertson Research
International Limited v. ABG Exploration BV (unreported
13 October 1999) "a plain and straightforward case", fit for summary
treatment.
I would not exclude from those costs, as Mr Greenwood submitted should be
done, the costs of the petition, of the preparation of the evidence in support,
of the application for the appointment of the provisional liquidator and of the
first hearing of the petition. It was argued that it had not been demonstrated
that Mr Richards, by causing the Company to defend the petition, had caused the
Secretary of State to incur those costs. They would have been incurred anyway.
I disagree. All those costs (and more) were caused by Mr Richards operating the
Company against the public interest by perpetrating swindles which led to the
presentation of the petition by the Secretary of State and to the incurring of
costs, which would not otherwise have been incurred.
This is also a case in which none of the Company's assets should be used to
pay any of the costs of the petition until after all the unsecured creditors of
the Company have been paid. Following the presentation of the petition no order
was made authorising the disposition of the Company's assets for the purpose of
funding the opposition to the making of a winding up order. In those
circumstances the interests of the unsecured creditors of the Company should be
protected.
For those reasons I would allow this appeal. Lord Justice
Schiemann :
- For the reasons set out by Mummery LJ I agree that this appeal should be
allowed. Lord Justice Simon Brown :
- I also agree
Order: appeal allowed. Orders made as per draft minute of order.
Application for permission to appeal to the House of Lords refused.
(Order does not form part of approved judgment.)
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