Malmsten v Bohinc

Key principles and decision: The court allowed the appeal in part, finding that the costs judge (Master Whalan) erred by failing to distinguish costs that were properly the costs "of" the section 306 Companies Act 2006 application from costs incurred in relation to wider company advice and other matters. The Master also erred in his exercise of the proportionality discretion by declining to make any further reduction to a plainly excessive net figure of £47,500 for the s.306 application. The court reduced the recoverable figure for the section 306 application to £15,000 plus VAT.

The court applied the CPR costs regime, in particular the proportionality requirement in CPR 44.3(2)(a) read with CPR 44.3(5), and confirmed that VAT and the costs of drawing the bill are properly excluded when applying the proportionality test. The court emphasised appellate restraint in reviewing detailed assessments but found legal error where the Master failed to give effect to the Registrar's order limiting recovery to the costs of the application and incidental costs.

Background and procedural posture:

• The appellant, Mr Malmsten (40% shareholder and director), and the respondent, Ms Bohinc (60% shareholder and director), were in dispute about the management and future of a small online jewellery company. Ms Bohinc issued an application under section 306 of the Companies Act 2006 seeking an order for a shareholders' meeting with a quorum of one. The application arose after Mr Malmsten failed to attend a convened meeting.
• The application was heard before Mr Registrar Briggs on 3 August 2017. The Registrar ordered that Mr Malmsten pay the applicant's costs, "to be assessed if not agreed"; the sealed order used the wording "the costs of and incidental to this application".
• Costs were subsequently the subject of a detailed assessment before Master Whalan. The master allowed a substantial net figure (rounded to £47,500 net of VAT) in respect of the s.306 application and produced a final certificate which, including other items, amounted to a larger sum. Master Whalan refused permission to appeal; permission was later granted by Nugee J on 15 January 2019.

Nature of the claim/application and issues:

• Nature of relief sought: an order under section 306 Companies Act 2006 for a shareholders' meeting with a quorum of one.
• Issues on appeal: whether the master wrongly allowed recovery of costs not properly the costs of or incidental to the s.306 application (including pre-issue work and advice on alternative remedies under the Companies Act such as s.168 and ss.292-293), whether he exercised his discretions wrongly in allowing time, counsel's fees and process-server costs, whether VAT and bill-drawing costs may be excluded from proportionality assessment, and whether the master misapplied the proportionality test under CPR 44.

Court's reasoning and conclusions:

• The Court reviewed the applicable costs regime and appellate approach to costs assessments, stressing that an appeal is not a rehearing and that appellate intervention requires error of principle or unfair balancing.
• The Court held that the Registrar's order limited recovery to the costs of and incidental to the s.306 application; the master failed to distinguish adequately between costs attributable to the s.306 application and costs relating to wider advice and other possible remedies. Those non-s.306 costs should not have been allowed.
• The Court accepted that the words "and incidental to" extend recoverable costs only to subordinate costs properly incidental to the application and rejected the submission that substantial other proceedings costs could be treated as incidental.
• On proportionality, the Court explained that under the current rules (CPR 44.3(2)(a) and 44.3(5)) the assessor should first consider reasonableness item by item and then, as a further step, "stand back" and apply a global proportionality test to the assessed figure. VAT and the costs of drawing the bill are to be excluded from that proportionality assessment as distorting factors.
• The Master was held to have erred in concluding no further proportionality reduction was necessary: the net figure of £47,500 was prima facie disproportionate for a narrow Part 8 s.306 application concluded in a short hearing. The Court therefore reduced the recoverable sum for the s.306 application to £15,000 plus VAT without remitting the matter for a further detailed assessment.
• The Court left open a live challenge by the appellant to the form of the Registrar's order (deletion of the words "and incidental to"). That challenge may affect the ultimate incidence of costs arising from the detailed assessment and was not determined in the appeal.

Appeal allowed in part. The court held that the Master erred by failing to distinguish costs properly attributable to the section 306 Companies Act 2006 application from wider pre-issue company advice and other work, and by failing to apply the proportionality test correctly. VAT and costs of drawing the bill should be excluded when applying proportionality. The recoverable costs in respect of the section 306 application were reduced to £15,000 plus VAT. The appellant's separate challenge to the form of the Registrar's order remained live and was not determined.

Appeal from the costs certificate and detailed assessment of Master Whalan dated 11 October 2018 (Senior Courts Costs Office, SCCO case no. 1706 655). Permission to appeal was refused by Master Whalan and later granted by Mr Justice Nugee by order dated 15 January 2019. The original application (Part 8) was heard by Mr Registrar Briggs on 3 August 2017, who ordered that the respondent's costs be paid by the appellant, to be assessed if not agreed (order sealed 3 August 2017).