Mills v Birchall & Anor

A receiver who conducts litigation in an insolvent company’s name is not ordinarily liable for the successful opponent’s costs merely because the company cannot pay them. Under section 51(3) of the Supreme Court Act 1981, the controlling question is whether an order against the non-party is just in all the circumstances.

Impropriety is relevant but is not a prerequisite. Material considerations include whether the case falls outside ordinary party-funded litigation, whether the receiver or secured creditor is the real party, the receiver’s agency for the company, and the availability of security for costs. A defendant who knows of the company’s insolvency will normally be expected to seek security promptly.

Receivers appointed under a bank charge caused an insolvent company to bring proceedings against its sole director. The company’s claim failed because its contract was unenforceable under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Although the director obtained his costs, the company could not pay them and he had not sought security for costs.

The Chancellor refused to order the receivers to pay those costs under section 51(3) of the Supreme Court Act 1981. The director appealed. The central issue was whether the receivers’ control of litigation conducted for the benefit of secured assets made it just to impose non-party costs liability upon them.

1. Appeal dismissed. The Chancellor had applied the correct legal principles and had made no error justifying appellate interference with his discretion under section 51(3) of the Supreme Court Act 1981.

2. A non-party costs order is exceptional only in the sense that the case lies outside the ordinary run of litigation pursued or defended by parties for their own benefit and at their own expense. The ultimate question remains whether an order is just in all the circumstances. The present litigation was an ordinary exercise by receivers of a contractual right forming part of their security.

3. Impropriety or unreasonable conduct may support a non-party costs order, but neither is an indispensable condition. Metalloy Supplies Ltd v MA (UK) Ltd was concerned with the particular position of a liquidator facing personal liability. It did not conflict with the principle in Dymocks Franchise Systems (NSW) Pty v Todd (No 2) that the absence of impropriety does not preclude an order. Nevertheless, the absence of impropriety was a relevant consideration here.

4. The receivers were not the real parties. They directed the proceedings as agents of the company, using receivership realisations, but neither funded the claim from their own property nor possessed a financial interest in its outcome. The bank neither funded the proceedings through further facilities nor controlled or directed them. A receiver’s professional fees and prospect of future instructions do not, without more, make the receiver the real party.

5. Under section 109(2) of the Law of Property Act 1925 and the charge, the company was solely responsible for the receivers’ acts and defaults. As with directors and liquidators who cause companies to litigate, some additional element is required before personal costs liability is imposed. The court declined to create a general rule making receivers responsible for an opponent’s costs whenever an insolvent company litigates unsuccessfully.

6. The availability of security for costs was an important discretionary factor. The director knew that the company could not pay unsecured creditors, yet did not seek security. An application might have affected the conduct or settlement of the claim. Any resulting injustice was therefore largely attributable to that omission.

7. Where receivers can provide security from realisations or secured-creditor funding, courts should assess security robustly and may order the full estimated standard costs. Such an order would not stifle a claim when the required funds are available. The court left open the position where receivers unsuccessfully defend proceedings and security is unavailable.

1. Court of Appeal (Civil Division): The appeal was dismissed by [2008] EWCA Civ 385. The Chancellor had exercised the section 51(3) discretion on correct principles.
2. High Court, Chancery Division: On 17 May 2007 the Chancellor refused the appellant’s application for a non-party costs order against the receivers. No neutral or report citation is stated.
3. High Court, Chancery Division: In April 2006 a deputy High Court judge dismissed the company’s underlying contractual claim and ordered it to pay the appellant’s costs. No citation is stated.