Re Sherlock Holmes International Society Ltd

The court considered an application for costs and a claim for breach of warranty of authority against solicitors who had purported to act for a company in resisting a winding-up petition and an appeal. The judge treated the solicitor's warranty as an implied no-fault warranty that the solicitor has a client against whom costs may be recovered and applied established principles from Yonge v Toynbee and related authorities. The court held that the solicitors gave a warranty of authority only for the period before the respondent was put on notice (16 October 2015) that the purported director's appointment might have ended, and that ostensible authority and section 161 of the Companies Act 2006 provided a defence for the period before discovery. The court also held that damages for breach of warranty could not put the claimant in a better position than if the warranty had been true, so wasted-costs assessments would commonly be limited where the supposed principal was insolvent or unable to pay. Applying those principles, the court declined to exercise its supervisory jurisdiction to order the solicitors to pay the petitioner’s costs, added the solicitors as a party and dismissed the claim against them; but ordered that the two individuals who had controlled the company be jointly and severally liable for 60% of the petitioner’s costs of the application dated 27 October 2015 and directed interim payments.

Background and parties. The petitioner presented a winding-up petition against The Sherlock Holmes International Society Limited. Ms Decoteau and Mr Riley were the persons in de facto control of the company; Ms Decoteau had retained Pinder Reaux & Associates to resist the petition and to bring a counterclaim. Mr Riley was appointed director but his appointment expired on 31 December 2014; the expiry was not noticed and Pinder Reaux continued to act for the company. Registrar Derrett ordered the company wound up; Pinder Reaux (on instructions said to come from Ms Decoteau and Mr Riley) pursued an appeal. The petitioner (Mr Aidiniantz) challenged Mr Riley’s status and issued an application (27 October 2015) seeking a declaration about the validity/expiry of the appointment. This hearing addressed costs and an application that Pinder Reaux be added as a party and ordered to pay costs.

Nature of relief sought. The petitioner sought (i) an order that Pinder Reaux pay his costs for the period from 1 January 2015 onwards (claiming breach of warranty of authority), and alternatively orders against Ms Decoteau and Mr Riley; and (ii) various interim payments and costs directions.

Issues framed. The court identified the principal issues as: (1) what warranty (if any) the solicitors had given and for what period; (2) whether that warranty was breached; (3) whether ostensible authority or section 161 Companies Act 2006 defeat liability; (4) the proper measure of damages for breach of warranty and whether damages may put a claimant in a better position than if the warranty had been true; (5) whether the court should exercise its supervisory jurisdiction summarily; and (6) quantification and apportionment of costs between the parties.

Reasoning and findings. The judge held that solicitors warrant they are instructed by a client who can bear an order for costs, but that the warranty is narrowly confined to that no-fault protection. The solicitors had warranted the company’s authority to pursue the appeal until the petitioner put them on notice on 16 October 2015. After that date the solicitors were not to be taken as warranting the correctness of the position they were advancing in contentious litigation. Ostensible authority and section 161 CA 2006 (which validates acts by a person acting as a director despite later discovery that he had ceased to hold office) operated to validate the solicitors’ apparent authority for the period before discovery and thus provided a defence to a claim for breach of warranty in that period. The judge accepted the analysis in Skylight Maritime that damages for breach of warranty cannot put the claimant in a better position than if the warranty had been true (so an insolvent principal will ordinarily limit recoverable loss). The judge concluded that he would not exercise the court’s supervisory jurisdiction to order Pinder Reaux to pay the petitioner’s costs and dismissed the claim against them, but found that the real respondents to the 27 October application were Mr Riley and Ms Decoteau and ordered them jointly and severally to pay 60% of the petitioner’s costs of and occasioned by that application, to be assessed on the standard basis, with an interim payment of £60,000. The petitioner was ordered to pay Pinder Reaux’s costs of his application against them, with an interim payment on account.

Procedural posture. The decision was given by Mr Justice Mark Anderson QC sitting in the Chancery Division on appeal from Registrar Derrett; it dealt with costs following the principal judgment ([2016] EWHC 1076 (Ch)).

This was a first-instance (High Court on appeal from a Registrar) costs decision. The court dismissed the petitioner’s claim against Pinder Reaux and declined to exercise its supervisory jurisdiction to order them to pay his costs because (i) the solicitors had warranted authority only until the petitioner put them on notice (16 October 2015), and (ii) ostensible authority and section 161 Companies Act 2006 validated their position for the period before discovery; further, damages cannot place a claimant in a better position than if the warranty had been true. The court added Pinder Reaux as a party and made a separate costs order against Ms Decoteau and Mr Riley: they were ordered jointly and severally to pay 60% of the petitioner’s costs of and occasioned by his application dated 27 October 2015 (to be assessed on the standard basis) and to make an interim payment of £60,000; the petitioner was ordered to pay Pinder Reaux’s costs of his application against them (interim payment on account ordered). The orders were founded on the narrow no-fault warranty of authority, considerations of ostensible authority, section 161 and CPR 44.2 factors.

On appeal from Registrar Derrett (Registrar's decision leading to the company being wound up). This judgment follows and implements findings in the principal judgment reported at [2016] EWHC 1076 (Ch).