Secretary Of State For Trade and Industry v Backhouse (In the matter of North West Holdings plc & North West Holdings Ltd)

A controlling director should not ordinarily bear a company’s litigation costs merely because the company is insolvent or unable to satisfy an adverse order. Protection normally depends upon a bona fide belief that the company has an arguable defence and that advancing it serves the company’s interests.

The court may order the director to pay costs under Supreme Court Act 1981 section 51 where the company was treated as the director’s alter ego and the defence was pursued for personal purposes without sufficient regard to the company or its creditors. Conscious dishonesty is unnecessary. The order may cover costs incurred before proceedings were presented where the director’s conduct caused those costs. Although a potential non-party payer should receive the earliest practicable warning, delayed warning does not invariably defeat the application.

The Secretary of State presented public interest petitions under sections 124 and 124A of the Insolvency Act 1986 to wind up North West Holdings plc and an associated Alderney company. Hart J made the winding-up orders and subsequently ordered their controller, Mr Backhouse, to pay the Secretary of State’s costs personally under section 51 of the Supreme Court Act 1981.

The judge found that Mr Backhouse had treated the companies as extensions of himself and had financed their opposition principally to protect his business, reputation and personal position. He nevertheless accepted that Mr Backhouse had received advice that the petitions were reasonably arguable and made no finding of conscious dishonesty.

Mr Backhouse appealed, contending that the non-party costs orders improperly invaded limited liability, that the circumstances were insufficiently exceptional and that he could not be liable for costs incurred before presentation of the petitions.

1. Appeal dismissed unanimously. Aldous LJ held that Hart J had a sound evidential basis for ordering Mr Backhouse to pay the Secretary of State’s costs personally. Mance LJ and Charles J agreed.

2. Under section 51 of the Supreme Court Act 1981, a controlling director is not ordinarily liable for the company’s costs merely because the director caused it to defend proceedings or knew that it might be unable to meet an adverse order. A crucial inquiry is whether the director bona fide believed both that the company had an arguable defence and that advancing the defence was in the company’s interests. Subject to special circumstances, satisfaction of both requirements protects the principle of limited liability. The decision must be reconsidered if circumstances change materially before or during the hearing.

3. Although Mr Backhouse had been advised that there was a reasonable prospect of defeating the petitions, Hart J found that he gave no serious consideration to the interests of the companies or their creditors. He had treated the companies and their receipts as his own and caused the petitions to be resisted principally to protect his savings scheme, reputation and personal position. Those findings made it just to impose personal liability notwithstanding the absence of conscious dishonesty.

4. The order properly included costs incurred before the petitions were presented. Drafting the petitions and supporting evidence had been caused by Mr Backhouse’s operation of the companies as fronts for his business and his failure to co-operate with the statutory investigation. The order did not include the costs of the investigation itself under section 447 of the Companies Act 1985.

5. The warning that a non-party costs order might be sought should have been given at the earliest opportunity. Its absence until after judgment was concerning but, viewed in context, did not justify depriving the Secretary of State of the order. Charles J added that, in public interest petitions, notice should generally be given as soon as practicable, often when or shortly after the petition is served.

6. Charles J further explained that exceptional circumstances are not a jurisdictional precondition. The governing question is whether an order is just in all the circumstances. In a public interest petition the court may consider the public risks created by the company’s activities, any abuse of limited liability and the proposed payer’s participation. A bare assertion that lawyers advised that a defence was arguable will not ordinarily establish the required bona fide belief without an explanation of the defence and why advancing it served the company.

• Court of Appeal (Civil Division): The appeal was dismissed by [2001] EWCA Civ 67. Mr Backhouse remained personally liable for the Secretary of State’s costs, with £7,000 plus VAT ordered as an interim payment.
• Chancery Division, Companies Court: Hart J made the public interest winding-up orders and later ordered Mr Backhouse, a non-party, to pay the Secretary of State’s costs of both petitions under section 51 of the Supreme Court Act 1981. No citation for the lower decision is stated.
• Earlier Court of Appeal proceedings: An appeal from the refusal to discharge the provisional liquidator was unsuccessful. No citation is stated.