Re North West Holdings Plc

This Court confirmed that a court may order a non-party director to pay the costs of litigation in exceptional circumstances where the director has caused the company to be used and defended proceedings for predominantly personal motives.

Directors who genuinely believe there is an arguable defence and that defending is in the company's interests should not ordinarily be personally liable for costs.

Public interest winding-up petitions may make costs orders against non-parties more likely, but each case depends on its facts.

The appeals arose from two public interest winding-up petitions presented by the Secretary of State under Insolvency Act 1986 ss 124 and 124A against North West Holdings plc and North West Holdings Ltd. Hart J ordered the companies wound up and, on applications under Supreme Court Act 1981 s 51, ordered the controlling individual to pay the Secretary of State's costs. The controller (the respondent) appealed against the personal costs orders. Leave to appeal was granted to the Court of Appeal. The central issue was whether the judge had rightly exercised his discretion to order a non-party to pay costs where the companies had been used as the director's trading alter ego.

1. Disposition: Appeal dismissed. The Court of Appeal (Aldous LJ (lead), Mance LJ and Charles J) upheld Hart J's orders that the controlling individual pay the Secretary of State's costs.
2. Principal ratio: A court has a wide discretion under Supreme Court Act 1981 s 51 to order a non-party to pay costs when justice so requires. That discretion must be exercised with caution, but it may be exercised where a director has caused a company to be used and defended proceedings for primarily personal reasons rather than the company's interests. (Per Aldous LJ)
3. Bona fide defence principle: Ordinarily a director who genuinely believes there is an arguable defence and that it is in the company's interests to defend should not be personally liable for costs. The court must ask whether the director held a bona fide belief both that a defence existed and that it was in the company's interests to advance it. If that belief is shown, personal liability will normally be inappropriate. The appellants' authorities recognising this principle were accepted but found not dispositive on these facts. (Per Aldous LJ)
4. Application to facts: The judge's factual findings that the companies were operated as alter egos and that the director financed and pursued the defence for primarily personal motives were open on the evidence. Those findings provided a sound basis for ordering personal liability for costs, including costs incurred before presentation of the petitions, where those costs were caused by the director's conduct. The absence of an early warning about a possible costs application did not, on these facts, justify depriving the Secretary of State of the costs order. (Per Aldous LJ; affirmed by Mance LJ and Charles J)
5. Public interest petitions: Such petitions often rest on regulatory investigations and allegations that the privilege of limited liability has been abused. Those features make non-party costs orders more likely, but not automatic; each case requires careful assessment of relevant circumstances, including the director's motives, the nature of the alleged abuse and any explanation of bona fides. (Per Charles J and Mance LJ)
6. Practical guidance: Directors should consider with advisers whether a defence is arguable and whether defending is in the company's interests. If a director claims to act in good faith on advice, the court will expect an explanation of the basis of that advice and the substance of the defence when assessing whether personal liability is just. (Per Mance LJ)
7. Order: Appeal dismissed. Costs in the Court of Appeal were awarded against the appellant; the earlier orders for costs against the respondent (Hart J) were upheld.

• Chancery Division, Companies Court (Hart J): Presented petitions under Insolvency Act 1986 ss 124 and 124A; winding-up orders made and Hart J ordered the controlling individual to pay the Secretary of State's costs (order dated 19 October 1999).
• Court of Appeal (Civil Division): Permission to appeal granted on paper; appeal heard before Aldous LJ, Mance LJ and Charles J who dismissed the appeal and upheld the costs orders (26 January 2001).