BE Studios Ltd. v Smith & Williamson Ltd.

A director who funds and controls litigation brought by an insolvent company may be ordered to pay the successful defendant’s costs under section 51(3) of the Supreme Court Act 1981. Proof of impropriety or bad faith is not essential. The question is whether, in all the circumstances, justice requires the order. Relevant considerations include personal financial benefit, control of the proceedings, the company’s inability to pay, and whether the litigation was speculative.

The claimant company’s substantive claim against the defendant had been dismissed. The company was insolvent and unable to pay the costs order made against it. The defendant applied under section 51(3) of the Supreme Court Act 1981 for Mr Dickens, the company’s director, shareholder and principal loan creditor, to pay those costs. He was joined for the application under CPR 48.2.

The central issue was whether the court should exercise its discretion against a director who had funded and controlled litigation brought by his company and who stood to benefit if it succeeded.

1. Application granted. Mr Dickens was ordered to pay four-fifths of the defendant’s costs, assessed on the standard basis, to the extent that those costs were not paid by BES.
2. The jurisdiction under section 51(3) is fact-sensitive. The ultimate question is whether, in all the circumstances, it is just to make the order. The principles stated in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, and applied in Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, mean that impropriety or bad faith is not a necessary precondition where a director has funded and controlled the litigation.
3. A pure funder without personal interest or control will generally not be liable. The position differs where the non-party substantially controls and funds litigation for personal financial benefit. Such a person may be regarded as the real party to the litigation.
4. Mr Dickens funded and controlled the proceedings. BES had no realistic prospect of revival or profitable exploitation of its assets and could not pay the costs. The only realistic prospect of recovery was repayment of the loan creditors, of whom Mr Dickens was the largest. BES could not realistically be regarded as the real party interested in the result.
5. The claim was speculative. The underlying tax-relief claim had been inappropriately prepared and grossly exaggerated. Even if the relief had been recoverable, there was no reasonable prospect of damages producing a significant surplus for distribution.

First-instance decision. The judgment records that the substantive claim had previously been dismissed and that the present application concerned the defendant’s unrecovered costs.