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Non-party costs order granted against sole director and shareholder

30 September 2014

In Deutsche Bank AG v Sebastian Holdings Inc [2014] EWHC 2073 (Comm), 24 June 2014, a non-party costs order was imposed on a sole director and shareholder of a defaulting judgment debtor. The individual concerned had been instrumental in asset stripping the defendant so as to ensure the defendant was unable to pay the judgment debt and costs, and stood to benefit from success in the litigation.

Background

In November 2013 the claimant had obtained a judgment against the defendant for USD 236 million in respect of foreign exchange transactions, and had been awarded 85% of its costs on an indemnity basis. When the defendant failed to pay the judgment debt and costs, the claimant obtained, inter alia, permission to apply for a non-party costs order against Mr Vik, the sole director and shareholder of the defendant. This article focusses purely on the non-party costs application. The judgment also deals with jurisdiction issues, which are not considered here.

Costs order against non-parties: the law

CPR 46.2 details the relevant jurisdiction under which the court can make a non-party costs order. Section 51 Senior Costs Act 1981 prescribes the procedure that must be adopted. In essence, whenever the court is making such an order it must join the person against whom such an order is contemplated, as a party, and provide an opportunity for that person to attend court when the costs order is considered.

The seminal case on non-party costs orders is Symphony Group Plc v Hodgson [1994] QB 179, in which the claimant obtained injunctive relief against the defendant, who had left his employment to join Halvanto, a competitor of Symphony, in breach of a restrictive covenant in his contract of employment.  The claimant neither added Halvanto as a defendant, nor initiated proceedings against it, nor told it that it might seek to make it liable for costs. The defendant was protected against any costs liability to the claimant by a Legal Aid Certificate. As a result, the claimant sought and successfully obtained an order that Halvanto should pay its costs of the action.

However, on appeal, the Court of Appeal overturned this judgment and emphasised that:

  • an order for payment of costs by a non-party should only be permitted in exceptional circumstances, even more so where the claimant had cause of action against the non-party and could have joined it as a party to the original proceedings; and

  • even where good reasons could be shown for not joining the non-party, natural justice requires that the non-party should be warned at the earliest possible moment that a costs order might be sought against it, thus giving it the opportunity to apply to be joined to the action.

Since Symphony had a cause of action in tort against Halvanto but had never warned Halvanto of the possibility of a costs order being sought against it, and since the judge's findings of fact in Symphony's action against Mr Hodgson would not be admissible as evidence against Halvanto if Symphony's claim against Halvanto were the subject of an action, it would be a wrongful exercise of the discretion conferred by s51 of the 1981 Act for Halvanto to be ordered to pay Symphony's costs.

Court makes a non-party costs order

Cooke J felt that the following factors justified the making of a non-party costs order for the full amount of the costs against Mr Vik because he:

  • was responsible for the transfer of approximately USD 900 million of assets from SHI in October 2008 with the object of impeding recovery by DBAG of sums due to it. His conduct therefore caused or contributed to SHI's failure to meet the costs order made by the court;

  • controlled the conduct of SHI's case in the litigation;

  • acted with impropriety in the conduct of the litigation which resulted in huge elements of additional costs;

  • caused the costs to be incurred in the litigation, even if some of those costs were incurred in successful or reasonable pursuit of some defences. Large elements of costs were additionally incurred in pursuing defences and cross-claims on a dishonest basis or in unreasonably running arguments;

  • stood to benefit from the pursuit of the defences and cross-claims in the litigation. If SHI had succeeded in its counterclaim, substantial sums running into billions of USD would have accrued to SHI and the value of Mr Vik's shareholding in SHI would have been correspondingly substantially increased; and

  • in effect funded the litigation.

Comment: In circumstances where an entity or individual controls, maintains or influences an action to which it is not a party, and where that entity or individual seeks to benefit from the litigation, it is possible to ask the court to grant a non-party costs order against it. This may be particularly appropriate if the named litigant against which costs are sought is impecunious. The onus is upon the successful party to provide the non-party with proper and timely notice that a non-party costs order might be sought against it. In this case the individual concerned was a sole director and shareholder, and acted with impropriety. This was therefore perhaps at one end of the spectrum of conduct that could attract such an order. However, whether they are joined to proceedings or not, a director of a company in financial difficulties should take note of Rix LJ's ruling in Goodwood Recoveries Ltd v Breen Goodwood Recoveries v Breen [2006] 2 All ER 533 that: "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".

In the event that there is a suspicion that a party is being funded by a third party, the solicitors acting for the opposing litigant should initially be asked whether there is any third party funding taking place. In the absence of a response it is possible to apply to the court for disclosure. However, any application will not be granted unless there is convincing evidence in support of the suspicions.