Threlfall v ECD Insight Ltd & Anor

An exceptional costs order may be made against a company director where a fact-sensitive and objective assessment shows that the director was the real party to the litigation, seeking a personal benefit and controlling or funding it. Control and funding are alternatives; both need not be established.

Such an order does not pierce the corporate veil or impose substantive liability for the company’s wrongs. It is a discretionary costs order which permits the court to consider economic realities. Where a judge fails to address a costs application advanced by analogy with a non-party costs order, the exercise of discretion is vitiated and an appellate court may exercise it afresh.

The claimant succeeded at trial in substantial parts of his employment-contract claim against ECD Insight Ltd. He elected payment rather than shares. The High Court entered judgment against ECD, awarded it nominal damages on its counterclaim for breach of fidelity, and dismissed the remaining claims and counterclaims. Its judgment was [2012] EWHC 3543 (QB).

ECD entered insolvent liquidation shortly afterwards. The appeal concerned only costs. The claimant contended that ECD’s sole director and shareholder, Mr Whitney, should also be liable because he had controlled litigation pursued for his own financial benefit. The central issue was whether it was just to make that exceptional order by analogy with a non-party costs order.

1. Appeal allowed. The judge had addressed whether Mr Whitney had substantive liability for ECD’s breach of contract, but had not addressed the distinct basis on which costs were sought. The application had been put by analogy with a non-party costs order under section 51 of the Senior Courts Act 1981. A non-party costs order is made against a person with no substantive liability. The omission therefore vitiated the exercise of discretion, allowing the Court of Appeal to exercise it afresh.

2. The ultimate question was whether an exceptional costs order was just. The court applied the approach in Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414: a director who is the real party, seeking personal benefit and controlling and/or funding litigation, may be liable after a fact-sensitive and objective assessment. As explained in Systemcare UK Ltd v Services Design Tech Ltd [2011] EWCA Civ 546, control and funding are alternatives, not cumulative requirements.

3. An order of this kind does not pierce or lift the corporate veil. It leaves substantive rights and obligations unchanged, but permits the court to consider economic realities. Mr Whitney was ECD’s sole shareholder and director, exercised absolute control, had made and sought to resile from the agreement to protect his own financial interests, and caused ECD to advance a defence he knew to be false. The counterclaim and defence also sought to protect the value of his shareholding. Taken cumulatively, those factors made it just to order Mr Whitney to pay the claimant’s costs.

• Court of Appeal (Civil Division): Allowed the appeal in [2013] EWCA Civ 1444 and exercised the costs discretion afresh, ordering Mr Whitney to pay the claimant’s costs.

• High Court (Queen’s Bench Division): Lang J held that the employment contract had been varied and entered judgment against ECD, but declined to make Mr Whitney liable for costs: [2012] EWHC 3543 (QB).