Dolphin Quays Development Ltd v Mills (aka Mills v Birchall)

JurisdictionEngland & Wales
JudgeLord Justice Lawrence Collins,Mr Justice Munby,Lord Justice Mummery
Judgment Date18 April 2008
Neutral Citation[2008] EWCA Civ 385
Docket NumberCase No: A3/2007/1191
CourtCourt of Appeal (Civil Division)
Date18 April 2008
Between:
Peter Mills
Appellant/Applicant
and
(1) Robert William Birchall
(2) Barry Gordon Gilbertson
Respondents

[2008] EWCA Civ 385

Before:

Lord Justice Mummery

Lord Justice Lawrence Collins and

Mr Justice Munby

Case No: A3/2007/1191

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM HIGH COURT OF JUSTICE

CHANCERY DIVISION

SIR ANDREW MORRITT, C

HC04C03670

Mr Gabriel Moss QC and Mr Michael Kennedy (instructed by Magrath & Co) for the Appellant

Mr William Trower QC and Mr Barry Isaacs (instructed by DLA Piper UK LLP) for the Respondents

Hearing date : February 27, 2008

Lord Justice Lawrence Collins

I Introduction

1

This is an appeal from a judgment of the Chancellor given on May 17, 2007 on an application by the appellant, Mr Mills, for an order that the respondents (“the Receivers”) should pay Mr Mills' costs of an unsuccessful action brought by Dolphin Quays Developments Ltd (“the Company”) against Mr Mills at their direction. In substance the appeal raises the question whether, when a receiver appointed under a bank charge causes an insolvent company to sue, the action is unsuccessful and the successful party is unable to recover costs against the company, the successful party may recover the costs from the receiver under the jurisdiction in section 51 of the Supreme Court Act 1981 to award costs against a non-party.

2

The Receivers are partners in PriceWaterhouseCoopers. They are receivers of a property of the Company which is subject to a charge, and one of them (Mr Birchall) is a joint administrative receiver (with Mr Lomas, another partner), under a debenture given by the Company to the Bank. The Receivers were not parties to the action by the Company against Mr Mills, and Mr Mills' application was pursuant to the jurisdiction under section 51(3) of the Supreme Court Act 1981 to order non-parties to pay costs, which has been the subject of many decisions since Aiden Shipping Company Ltd v Interbulk Ltd [1986] AC 965 directed this court to lay down principles for the exercise of the discretion in accordance with “reason and justice” (at 980).

3

The Chancellor exercised his discretion against the application, and this appeal is brought by permission of this court. The amount of costs which Mr Mills claimed was some £60,000, and the combined costs of the application and of this appeal are far in excess of that sum.

II Background

4

In 2001 Orb Estates plc agreed to sell to Mr Mills a long lease of Flat 78, Dolphin Quays, Poole, Dorset, then in course of development, for £650,000. It had also been agreed between them that the purchase price should be paid by set-off against the debt of £1.85m due by Orb Estates plc to Mr Mills but this was not recorded in the written agreement. In August 2002 Orb Estates plc sold its interest in Dolphin Quays, together with the benefit of the agreement with Mr Mills, to the Company, and on the same day the Company charged all the property so acquired to the Bank as security for all liabilities of any kind and in any currency due by the Company to the Bank.

5

In June 2003 the Bank appointed the Receivers as Law of Property Act 1925 receivers of the property subject to the Charge and Messrs Birchall and Lomas as joint administrative receivers under a debenture given by the Company to the Bank. All three were partners in PwC. Mr Mills was the sole director of the Company, had executed the Charge and the debenture on its behalf and sworn the affidavit verifying the statement of affairs as at the date of the appointment of the administrative receivers.

6

In November 2004 the Company, by the Receivers, instituted proceedings against Mr Mills for specific performance of the contract for the sale of the long lease of Flat 78. When the claim came before Mr Peter Leaver QC, sitting as a deputy High Court judge of the Chancery Division, in March 2006 it was for damages for breach of contract equal to the balance of the purchase price, namely £155,000. In a judgment handed down in April 2006 Mr Peter Leaver QC rejected this claim. He concluded that the set-off agreement had been an integral part of the contract for the sale of the lease and, not having been included in that document, the contract was unenforceable under the Law of Property (Miscellaneous Provisions) Act 1989, section 2.

7

No application had been made by Mr Mills for security for costs. While Mr Mills knew that the Company was insolvent, he also knew that substantial sums had been realised in the receivership. His evidence was that he believed throughout that, if his defence succeeded, his costs would be paid from realisations held by the Receivers. It did not occur to his solicitor or to counsel to advise Mr Mills to make such an application because they believed throughout that the real parties were the Receivers who would honour any order for costs made against the Company from funds in the receivership. The solicitor's evidence was that it never occurred to him that chartered accountants of the eminence of PwC, or the Bank, would seek to shelter behind the insolvency of the Company. The Receivers' evidence (which was not accepted by Mr Mills) was that if Mr Mills had applied for security for costs, that might well have had an effect on the Receivers' conduct of the proceedings. The success or failure of such an application might have increased the prospects of settlement.

8

Mr Mills relied on the fact that after Mr Peter Leaver QC handed down his judgment in draft counsel for the Company sought time to consider applying for leave to appeal and disputing its liability as the loser for all Mr Mills' costs. It is said on his behalf on this appeal that this shows that, at the time of judgment, the Receivers and the Company's legal advisers considered that Mr Mills' costs would be met by the Receivers as an expense of the receivership (as were the Receivers' own costs). Mr Mills and his advisers also assumed throughout that would be the case. It was not until June 13, 2006 that the Company's solicitors wrote, on the instructions of the Receivers, stating that Mr Mills was only an unsecured creditor of the Company for his costs and making clear that the Receivers would not pay them. This is a very substantial receivership and ample funds are available to pay Mr Mills' costs.

9

On May 3, 2006 the solicitors for Mr Mills indicated that he would accept a little over £60,000 in respect of his costs. After obtaining instructions from their clients the solicitors for the Company indicated that in their view there was no point in seeking to agree Mr Mills' costs or proceeding to a detailed assessment because “our client is in Receivership and as such your client is an unsecured creditor”. On August 17, 2006 they said: “The receivers acted at all times as agents of the Company and have a statutory right of indemnity from the Company's assets in respect of costs incurred.”

III The application

10

The grounds on which Mr Mills sought an order that the Receivers should pay his costs were that (1) the Receivers brought the claim at the request of the Bank; (2) the Bank alone had any financial interest in the claim; (3) the Bank had funded and directed the proceedings throughout; and (4) it would be a grave injustice to Mr Mills, a man of modest means, if he had to bear his own costs, especially as he was a substantial creditor of Orb Estates plc, the parent of the Company.

11

Mr Mills' case was that for him to bear his own costs was a manifest injustice. Although the unsuccessful action was brought in the name of the Company, it was brought by the Receivers for the benefit of the secured creditor, the Bank. The Receivers were engaged, in bringing the action, in realising mortgaged property which in equity belonged to the secured creditor and not to the Company. There was no realistic prospect of any surplus for the Company or its unsecured creditors or shareholders, so that the equity of redemption was valueless and the Company had no economic interest in the action brought in its name.

12

The Receivers throughout had an indemnity out of the monies realised for the benefit of the secured creditor. If the Receivers had succeeded they would have recovered the costs of the action from Mr Mills. The Receivers knew that if they lost the action there was no money for unsecured creditors and that the Company itself would not be able to pay Mr Mills' costs. The Receivers had realised funds more than sufficient to pay Mr Mills' costs as an expense of the receivership. The financial effect on the receivership, and on the Bank, would be minimal.

13

It was submitted on behalf of Mr Mills (in reliance on what the High Court of Australia said in Knight v F.P. Special Assets Ltd (1992) 174 CLR 178, at 192–193, to which I shall revert) that there was a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who was not a party to the litigation. That category of case consisted of circumstances where the party to the litigation was an insolvent person or man of straw, where the non-party had played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she was acting or by whom he or she had been appointed, had an interest in the subject of the litigation. Where the circumstances of a case fell within that category, an order for costs should be made against the non-party if the interests of justice required that it be made.

14

Reliance was also placed on that decision for the proposition that the...

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