Third-party costs order – Receivers – Claim against appellant by company in receivership – Appellant awarded costs against company – Third party costs order against receivers refused – Whether exceptional circumstances existing to justify making of third party costs order – Relevance of remedy for security for costs – Appeal dismissed
The respondents were receivers appointed by a bank, pursuant to a charge, in respect of a property consisting of a new development of flats that was owned by an insolvent company. The company brought proceedings against the appellant, at the instigation of the respondents, for specific performance of an agreement for the sale of a long lease of one of the flats. Dismissing the claim, the judge accepted the appellant’s argument that the agreement was unenforceable and awarded costs against the company in his favour. The respondents took the position that the appellant was only an unsecured creditor of the company in respect of those costs, and refused to pay them out of the receivership funds.
The appellant applied to the court for a third party costs order against the receivers in the sum of £60,000, pursuant to section 51(3) of the Supreme Court Act 1981. He gave evidence that although he had known that the company was insolvent, he had also known that substantial sums had been realised in the receivership, and it had been assumed that any costs order would be met by the respondents as an expense of the receivership; this accounted for his solicitor’s failure to make any application for security for costs in the course of the proceedings. He contended that the receivers had brought the claim at the request of the bank, which alone had a financial interest in the claim, and which had funded and directed the proceedings, such that it would be unjust if he were required to bear his own costs.
Refusing the application, the judge held that there were no exceptional circumstances in the case of the kind required to justify a third party costs order. He held that an allegation of impropriety or unreasonableness had not been made in the initiation and prosecution of the claim and that, in the absence of any winding-up, the company was the real party to the proceedings; by virtue of both section 109(2) of the Law of Property Act 1925 and the terms of the charge, the receivers were simply agents of the company, for whose acts and defaults it was solely responsible. He observed that the hardship caused to the appellant by his inability to recover his costs could have been avoided had he pursued his remedy of security for costs. The appellant appealed.
Held: The appeal was dismissed.
The proper test for making a third party costs order was whether there were “exceptional circumstances” arose in the sense that the action was out of the ordinary run of cases and it was just to make the order sought: Aiden Shipping Co Ltd v Interbulk [1986] AC 965 applied. The judge had correctly applied that test and found that the case before him was an entirely normal case of receivers seeking to enforce a contractual right forming part of the security. It was not exceptional or unreasonable for an impecunious claimant to bring proceedings that were otherwise proper while lacking the means to pay the defendant’s costs should they fail. A defendant’s remedy in such cases was to apply for security for costs and have the proceedings dismissed should the claimant fail to provide whatever security was ordered: Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 considered. Where the action was brought in the name of a company by a receiver, security for costs would normally be available to the defendant. The availability of such security was an important factor in the exercise of the discretion to make a third party costs order. There was no justification for the creation of a substantive rule that receivers should generally be personally responsible for the costs of a successful party: Dymocks Franchise Systems (NWS) Pty v Todd (Costs) [2004] UKPC 39; [2004] 1 WLR 2807 and Anderson v Hyde (t/a Hyde Property Services) [1996] 2 BCLC 144 considered.
Neither the respondents nor the bank could be regarded as the “real party” to the proceedings. The respondents had acted without the direction or interference of the bank and the proceedings by the company had been funded entirely from the realisations in the receivership; the respondents had neither funded the claim nor had any interest in its outcome. Moreover, the judge had properly taken into account the fact that, under the 1925 Act and the charge, the company was solely responsible for the receivers’ acts and defaults.
There was no requirement to show impropriety or unreasonableness before a costs order could be made against a liquidator or receiver. This was merely an element to be considered in the exercise of the discretion: Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414; [2006] 1 WLR 2723 applied; Metalloy distinguished. Although the judge had raised the absence of impropriety or unreasonableness as confirming his conclusion, he had not erred by treating it as a precondition to the exercise of the discretion.
Gabriel Moss QC and Michael Kennedy (instructed by Magrath & Co) appeared for the appellant; William Trower QC and Barry Isaacs (instructed by DLA Piper UK LLP) appeared for the respondents.
Sally Dobson, barrister