UK: Insolvency Litigation: Recent Cases And Issues In October 2017

In our update this month we take a look at a case in which a non-party costs order was made against a major shareholder in the insolvent claimant company. The court found that the shareholder was the real party to the litigation; it funded the litigation, it was exercising control over the litigation and it would have been the main beneficiary had the litigation succeeded. We cover this, and other issues affecting the insolvency and fraud industry:

Montpelier Business Reorganisation Ltd v Jones & Others (2017)

Background

The dispute concerned an Asset Purchase Agreement (APA) entered into between the claimant (Montpelier) and the first to fifth defendants. Under the APA, Montpelier agreed to purchase the business and assets of the first and second defendants. Montpelier subsequently sued for breach of contract. It asserted that it was not required to make the final payment of £250,000 due under the APA and claimed damages in excess of £1 million.

At the substantive hearing, the court rejected Montpelier's assertions and found that it was required to pay the final instalment under the APA. However, the defendants had breached the APA as well and were found to be liable to Montpelier for almost £200,000 as a result. Montpelier was entitled to set this sum off against the final payment due under the APA and the net result was that Montpelier still had to pay the defendants more than £50,000.

Both parties had some success but the judgment favoured the defendants. The third, fourth and fifth defendants were awarded their costs (being the parties who had taken an active part in the litigation). By that stage, Montpelier was insolvent and therefore unable to discharge its liabilities under the court order.

An application was made to add the sixth, seventh and eighth defendants to the proceedings, to allow a non-party costs order to be made, if deemed appropriate by the court.

The defendants to the main proceedings sought non-party costs orders against the sixth defendant, Montpelier Professional (Leeds) Limited (MP Leeds) and the seventh defendant, Montpelier Professional Limited (MPL). MP Leeds was a subsidiary of MPL, which in turn was a 50% shareholder in Montpelier. The eighth defendant, Montpelier Group Ltd LLC (LLC) was the ultimate parent company of MPL. Evidence had been given that both MP Leeds and MPL had assisted in the funding of the action. A non-party costs application was also made in respect of the eighth defendant, but that claim was subsequently stayed at the request of the fourth defendant on the basis it would be inappropriate to pursue it at that stage.

Decision

The court held that it was appropriate to make a non-party costs order against MPL, but not against MP Leeds.

An order against MPL was appropriate for the following reasons:

  1. MPL was clearly the vehicle through which the litigation was funded. The litigation was funded by means of an unsecured interest free loan from MPL; it was not funded on commercial terms.
  2. MPL had much to gain if the litigation was successful. The APA provided that MPL guaranteed and indemnified the defendants against any breach by the claimant. If the claimant had been successful MPL would cease to be vulnerable for the payment of the £250,000 due under the APA. There would also be the prospect of significant additional payments being made by the defendants in damages for the alleged breaches of contract; some £600,000 could have become available to MPL. The court was therefore satisfied that MPL was the real party to the litigation.
  3. There was clear evidence that MPL was exercising control over the litigation. However, even if no such evidence was available, existing case law supported an order being made where it could be established that the non-party had promoted or funded proceedings by an insolvent company solely or substantively for its own benefit.
  4. A shareholding does not give rise to the same special rules that apply to directors funding litigation; the status of directors and shareholders is very different. The fact that there was no impropriety is not an issue when a non-party costs order is made against a shareholder.
  5. MPL was the real party in the litigation. Montpelier was a dormant company and it was MPL that would benefit from any success. It could not realistically be said that MPL was acting in the interests of the claimant when it funded the litigation.
  6. While non-party costs orders are exceptional, it only means they are outside the usual run of costs orders made.
  7. The application was based primarily on funding and not on the fact that MPL controlled the litigation. If control is absent it will not prevent an order being made where it would otherwise be just to do so. However, if funding and control are established, justice will normally require a non-party costs order to be made. Both elements were established here.
  8. The fact no application for security for costs has been made will not be fatal to an application for a non-party costs order. It would be wrong to make a security for costs application a prerequisite of a successful non-party costs order.
  9. A non-party costs order was not disproportionate here. The case involved a significant claim for over £1million and the costs were substantial.
  10. It was just and fair that MPL, the prominent (if not only) funder who had much to gain if the litigation had been successful, should be responsible for the costs incurred by the defendants in defending it.

The court held that a non-party costs order would not, however, be appropriate in respect of MP Leeds. In summary:

  1. The court was not satisfied it was a real party to the litigation. There was no evidence that MP Leeds' contribution to the funding was meaningful in any way or that MP Leeds exerted control over the litigation.
  2. MP Leeds may have gained from a successful outcome. MPL would have been in receipt of funds and it could have used those funds to reduce its debt to MP Leeds. However, MP Leeds had no control over how MPL spent its money, MPL could have reduced its indebtedness to MP Leeds but it could also have chosen not to.
  3. It was not sufficient for a non-party costs order to be made on the basis that MP Leeds funded one group company for the benefit of another group company.
  4. The court will not normally make an order against an entity because there is a chance another party may take steps to avoid satisfaction of a judgment. If the group operated to ensure the group company in question was unable to satisfy the judgment, the company would no doubt be wound up and its activities investigated by a liquidator.
  5. It would not be right in principle to make an order against MP Leeds simply because it was a group company.
  6. A partial costs order would only be appropriate if the court had concluded that at least to some extent MP Leeds was a real party to the litigation and it was just to make such an order. That was not the case here.

Comment

This case is a helpful reminder of the key factors that must be considered when an application for a non-party costs order is made and provides helpful guidance on the requirements of a successful application. It also stresses the discretionary nature of such orders and the fact that every decision will be fact-specific.

Whether an order will be appropriate depends on if it can be shown that the non-party is the real party to the litigation. That will be established by looking at whether the non-party has funded the litigation, the extent to which the non-party stood to benefit from the litigation and the degree of control exercised by it.

The case will be of interest to insolvency practitioners and litigators. It provides an example of a non-party costs order being made against a funder who was in the same group of companies as the claimant, in circumstances where the funder was the real party to the litigation and would directly benefit if it succeeded. At the same time it confirms that an order will not be made against a funder simply because it is in the same group of companies as the claimant. In addition, the fact that a security for costs application is not made in the substantive action will not prevent a successful non-party costs order.

New court proposed for fraud and cyber-crime offences

Fraud and cyber-crime offences have increased dramatically in recent years. The announcement that a new court focussing on fraud, economic and cyber-crime is being planned should therefore come as no surprise. The court will be based in London, in close proximity to the Rolls Building and to the Old Bailey.

The proposed 18 court complex will deal primarily with fraud, economic and cyber-crime offences but it will also hear some civil and criminal cases that would have been dealt with by other City courts, such as the City of London Magistrates' Court and the Mayor's and City of London Court.

It is hoped that a court concentrating on fraud and cyber-crime offences will help to reinforce the message that London is a great place to do business and to resolve disputes before a focussed judiciary.

Dominic Raab, the Justice Minister, has stated that court "will build on UK legal services' unique comparative advantage, by leading the drive to tackle fraud and crack down on cyber-crime", adding that "by reinforcing the City's world-leading reputation as the number one place to do business and resolve disputes, it's a terrific advert for post-Brexit Britain."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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