Non-party costs orders

Client costs, costs exposure and liability for costs constitute a key part of any solicitor’s practice. They are matters of prime importance to clients and, as a claim progresses, the focus can shift increasingly to costs. Exposure to costs is not limited to parties to litigation. If the circumstances are appropriate, the courts will not shy away from exercising their power to make non-party costs orders (NPCOs) including against directors of companies. Asprey Capital Ltd v Rediresi Ltd and Mr Anuuj Gupta [2023] EWHC 28 (Comm) has provided guidance on how courts approach applications for NPCOs against company directors and the relationship between the two alternative paths to an NPCO set out in Goknur v Aytacil [2021] EWCA Civ 1037.

The court’s jurisdiction to make an NPCO comes from section 51 of the Senior Courts Act 1981, which provides that the High Court ‘shall have full power to determine by whom and to what extent the costs are to be paid’.

Every application is fact-specific. In Asprey, Gupta was joined to proceedings for the purposes of making an NPCO. He was the sole director and with his wife owned 100% of the defendant company, Rediresi, against which indemnity costs had been awarded after it failed to beat a Part 36 offer. Rediresi did not pay the costs and entered into compulsory liquidation shortly after judgment. The trial judgment criticised Rediresi’s defence and the evidence given by Gupta, who had been its sole witness. The evidence before the trial judge indicated that Rediresi ‘has at all times been in a negative asset position’.  

The judge summarised the guidance from Goknur about when an NPCO would be made, namely:

a)    in exceptional cases, only if it is just in all the circumstances (Dymocks Franchise Systems (NSW) Pty Ltd v Todd and Ors [2004] UKPC 39, Threlfall v ECD Insight and Anor [2015] EWCA Civ 144);

b)    where the director/non-party can fairly be described as ‘the real party to the litigation’ (Threlfall);

c)    where an insolvent company is concerned ‘to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes’ (North West Holdings Plc (In Liquidation) (Costs) [2001] EWCA CIV 67). Such an order ‘does not impinge on the principle of limited liability’ (Dymocks);

d)    if the director controlled or funded the company’s litigation and, more importantly, if s/he was seeking to benefit (financially or otherwise) from it personally (North West Holdings); and

e)    if there is some form of impropriety or bad faith on behalf of the director (Symphony Group plc v Hodgson [1994] QB 179), usually of a serious nature ‘causatively linked to the applicant unnecessarily incurring costs in the litigation’.

The judge considered the summary nature of the decision she was being asked to make and concluded that ‘the court does not approach the matter as if it were an application for summary judgment’ (Grecoair Inc v Tokoph [2009] EWHC 115 (QB) [45] per Burton J). Rather, the court must balance considerations of proportionality and justice, bearing in mind that this is a form of satellite litigation which should not be allowed to expand beyond reasonable bounds.

‘In most cases, justice is adequately served by the court doing the best it can to resolve disputed matters on the documents, which it does on a balance of probability (Centrehigh Ltd v Amen [2013] EWHC 625 (Ch) at [41]-[42]; Grecoair at [45]).’

She acknowledged that neither of the parties had challenged her ability to take into account the views expressed by the trial judge about Gupta and his conduct, and then considered the interaction between two of the bases for an NPCO from Goknur, namely that the director was the ‘real party’ to the litigation or had acted improperly. The judge concluded that: ‘While impropriety can be a separate and independent basis for making an NPCO, on the facts of this case the issues relating to Mr Gupta’s conduct overlap to a significant degree with the question of whether he was “the real party”. That is because a relevant factor is the reasonableness of defending the claim and whether in controlling the conduct of that defence in the way that he did Mr Gupta is to be taken to have been discharging his duties as director, rather than pursuing his own interests.’

The judge did not have available to her the advice Gupta had received as a director of Rediresi which might have had a bearing on her decision. Issues of privilege and the ability to waive that privilege were noted.

Interestingly, the judge also said that: ‘The absence of a warning that a party intended to seek an NPCO, given while the litigation was still in progress, is capable of being a relevant factor pointing against making an order, if an earlier warning might have altered the way the non-party conducted themselves in ways relevant to the exercise of discretion. If, however, the non-party is, objectively, “the real party” to the litigation, “the absence of a warning may be of little consequence” Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23 at [32] and [37].’

Takeaway points from the case are that:

• The court takes its power to make NPCOs seriously and will make such an order where it deems it fair and just in all the circumstances;
• The factors to take into consideration are fact-dependent and often overlap;
• Directors of companies and their solicitors should be mindful of the advice on merits and the effects thereof on non-parties, particularly in cases where there are concerns about a company’s solvency; and
• Although not fatal to an application for an NPCO, consideration should be given to warning the other party during litigation of any intentions to apply for an NPCO should they think an application might be necessary in due course.

Sophia Purkis is a committee member of the London Solicitors Litigation Association