Carlisle & Cumbria United Independent Supporters' Society Ltd v C.U.F.C. Holdings Ltd & Ors

After a derivative action is compromised, costs should be assessed by reference to the compromise and common ground, without turning a short costs application into a trial of the merits. Where defendants agree additional protections, the court should ordinarily treat them as properly sought and within the action.

A defaulting director may be ordered to pay costs incurred by the company because of his conduct, including sums the company paid towards his defence. A director’s indemnity under the company’s articles extends only to expenditure reasonably and properly incurred. The usual order against a defaulting director is on the standard basis. Costs may be reduced for excessive correspondence or an unnecessary relisting.

A shareholder trust brought a derivative action on behalf of a football club, seeking to restrain a proposed disposal of land for no consideration connected with an arrangement involving the club’s director. The proceedings were compromised by a Tomlin order, but the parties left costs for determination.

Peter Smith J awarded the Trust costs against the director on the standard basis and against the Companies on the indemnity basis up to 16 January 2008, ordered the Trust to pay the director’s later costs, and did not determine costs between the Companies and the director. The Trust appealed against the cut-off and sought an order requiring the director to pay the Companies’ costs, including costs they had paid on his behalf.

Appeal allowed in part. Lady Justice Arden gave the reasons, with Lord Justice Patten and Mr Justice Briggs agreeing.

1. The judge was entitled to restrict the costs hearing to the terms of the compromise and matters common ground. Given the early stage of the proceedings, it would have been disproportionate to conduct a full inquiry into the merits of the derivative action.
2. Where defendants agree further settlement protections, the court should, absent good reason, proceed on the basis that those matters were properly sought and fell within the scope of the action. It should not impose its own view of which terms were necessary merely to make further litigation pointless. The cut-off date therefore represented an error of principle and was set aside.
3. A shareholder bringing a derivative action may ordinarily expect proper costs from the company on an indemnity basis if the action proceeds: Wallersteiner v Moir (No 2) [1975] QB 373. A company may incur costs in limited circumstances in a derivative action, but that does not prevent recovery from the person whose conduct caused those costs.
4. The usual basis for costs payable by a defaulting trustee is the standard basis, and there is a close analogy with a defaulting director: Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515. In principle, a director defending a derivative claim should not have recourse to company funds, subject to consequences arising from the distinction between derivative and personal claims. Article 21 of the Club’s articles was limited to expenditure reasonably and properly incurred. It could not protect the director where the compromise admitted that the proposed transaction would have involved a material breach of duty.
5. The director was therefore ordered to reimburse the totality of the costs paid by either Company towards his defence.
6. On the Trust’s costs, the court used a broad assessment. The Trust was awarded its costs against the director on the standard basis and against the Companies on the indemnity basis, excluding 70% of the correspondence costs from 16 January 2008 to the Tomlin order and costs of the relisted application incurred on or after 20 February 2008 to the extent that they exceeded the costs of a straightforward approval application. A Minute of Order was to be settled by counsel.

1. Court of Appeal (Civil Division) Allowed the appeal to the extent set out in the judgment, set aside the costs cut-off, re-exercised the costs discretion, and ordered the director to reimburse the Companies’ payments towards his defence costs.
2. High Court of Justice (Chancery Division) Peter Smith J’s order dated 27 July 2008 imposed a 16 January 2008 cut-off for the Trust’s recoverable costs, ordered costs thereafter against the Trust, and did not determine the Companies’ costs against the director.