Systemcare (UK) Ltd v Services Design Technology Ltd and Another

Hearing date: 18 April 2011

Systemcare (UK) Ltd ("Systemcare") brought a claim in the county court against its customer Services Design Technology Ltd ("SDT") for £1,856 relating to six monthly bills for telephone line rentals, calls and services for the telecommunications system it had supplied. The claim followed SDT's cancellation of a direct debit. It should have been a simple one. SDT was a company of which Mr Sharif was the managing director and 90 per cent shareholder. HH Judge Reid QC described him as "the moving spirit" of SDT. The remaining 10 per cent was owned by his wife. Mr Sharif signed a statement of truth appended to a defence and counterclaim dated 12 August 2005. The defence and counterclaim was not prepared by lawyers; and was the work of Mr Sharif himself. SDT disputed the claim on the grounds of fraudulent misrepresentation, lack of functionality and negligence. In consequence the case was allocated to the multi-track and proceeded to trial. It was also necessary for experts to be instructed and called. SDT's main witness of fact was Mr Sharif himself. It was he who had negotiated the deal with Systemcare; and therefore he who gave evidence about what it was and what had been said to him to induce SDT to enter into it. The judge rejected his evidence wholesale. He said that Mr Sharif was not in general reliable (§ 6). He was unable to accept Mr Sharif's allegation that there had been trickery or skulduggery in inducing him to sign the agreement (§ 25). He rejected Mr Sharif's account of the installation process (§§ 34, 35). He found that a fax bearing the date of 6 January 2005 which Mr Sharif had exhibited to his second witness statement was never sent (§ 40). Although he does not say so in terms, it is implicit in his findings that Mr Sharif concocted that document after the event. Mr Sharif produced further faxes which the judge likewise concluded had never been sent (§ 40). He found that when Mr Sharif cancelled SDT's direct debit in favour of Systemcare the reason he gave for having done so "was false" (§ 45). In the result the judge found that none of SDT's complaints were made out; and he dismissed the counterclaim. In his second judgment which forms the subject of this appeal he said that Mr Sharif's explanation of his actions was false; that "in evidence [he] chose to give a false explanation as to why he acted as he did"; and that if "he [had] not acted in this dishonest fashion" the claim would not have been made (§ 24). In the judgment under appeal he described the loss alleged in the counterclaim as "at best fanciful" (§ 25). His overall conclusion in that judgment was that Systemcare were "locked into litigation without merit and without justification by [SDT] acting through Mr Sharif" (§ 29).

The trial of the underlying claim took place on 16 and 17 August 2007. The judge gave judgment on 2 November 2007. He entered judgment for Systemcare for £2,199.26 (inclusive of interest). He dismissed SDT's counterclaim. He ordered SDT to pay Systemcare's costs on the standard basis until 20 July 2007; and thereafter on the indemnity basis. He ordered an interim payment of £20,000. But the judge was plainly concerned about the level of costs that Systemcare had incurred because his order said:

"In making the detailed assessment the District Judge shall have particular regard to (1) the principle of proportionality (2) the excessively voluminous nature of the trial bundles and (3) the duplicated claim for counsel's brief fee …"

According to SDT's most recent accounts available during the pendency of the case it had net current assets of over £1 million; and a surplus of £334,000 of assets over liabilities. However, less than three weeks after the judgment, on 21 November 2007 Mr Armstrong of Turpin Baker Armstrong, insolvency practitioners who had been instructed by Mr Sharif, wrote to Systemcare to say that SDT was insolvent. It had also changed its name. In January 2008 Systemcare served its bill of costs in order to begin the process of assessment. SDT did not raise any points of objection. That was not surprising because SDT went into liquidation almost immediately afterwards; and there was no prospect of any dividend for unsecured creditors. Thus on 23 January 2008 Systemcare applied for a default costs certificate, which was issued on 30 January 2008. That certificate quantified the costs at £49,364.29. Although the certificate created a liability on the part of SDT to pay that amount, no assessment of costs had actually taken place. Apart from Systemcare, SDT's main creditors were Mr Sharif and his wife; and another company called Webb Estate Property Services Ltd (WEPS), which Mr Sharif also controlled. Mr and Mrs Sharif were owed £84,000-odd and WEPS were owed just under £75,000.

On 5 August 2009 Systemcare applied to join Mr Sharif as a party to the action for the purpose of seeking a non-party costs order against him under section 51 of the Senior Courts Act 1981. Why there was such a long delay is unexplained. In his witness statement supporting the application Mr Bennett, Systemcare's solicitor, said that there had been no satisfactory explanation of what had happened to SDT's assets so as to transform net assets of over £1 million into an insolvent liquidation in which the liquidator had said that there was no prospect of any dividend for unsecured creditors. What he seemed to be suggesting was that there had been some degree of asset stripping during the course of the litigation. He said:

"… having regard to how the claim was instigated by Mr Sharif reversing direct debits of [SDT] to [Systemcare] and by then making a baseless and large counterclaim against [Systemcare] … Mr Sharif should be personally liable for the costs of the action of [Systemcare] as ordered by this court."

In support of the application for joinder Mr Fullerton, counsel for Systemcare, prepared a skeleton argument. He submitted that:

".. based upon the judgment, it is clear that [Mr Sharif] was the real party interested in the outcome of litigation, was responsible for causing the instigation of proceedings, that the counterclaim was brought in bad faith or for an ulterior purpose and that other conduct, referred to in the judgment, makes it just and reasonable for such an order."

In his skeleton argument in opposition Mr Falkowski, counsel for Mr Sharif, referred to Symphony Group plc v Hodgson [1994] QB 179 in which Balcombe LJ had summarised under a number of categories the cases in which the court had made non-party costs orders. He complained that Systemcare had not identified the category of case into which its application fell. On 4 March 2010 HH Judge Reid QC ordered Mr Sharif to be joined. He also gave directions for further evidence. No doubt this was done partly to meet the complaint made by counsel for Mr Sharif.

Mr Bennett made another witness statement on 31 March 2010. He in turn complained that Systemcare had not been given adequate information. He said that it was Systemcare's case that:

"… proper disclosure of the affairs of [SDT] will show that it had the ability to pay costs Orders and that its voluntary liquidation was a decision by Mr Sharif to avoid payment to [Systemcare] of the monies and costs due under Court Orders."

Thus Systemcare's case was put on the additional basis that SDT was solvent during the pendency of the proceedings, and that Mr Sharif had engineered the liquidation. Mr Sharif filed his own evidence on 6 May 2010. Among the points that he made were the following:

i) He prepared the initial defence and counterclaim in good faith on behalf of SDT, believing that it was in the interests of the company to bring the case, and that it would result in an order for compensation in its favour. He believed that SDT would win. He believed that SDT was well able to fund the costs of the litigation. But because he did not expect SDT to lose, he did "not spare much thought" to the risk that it might incur a substantial costs liability (§ 9).

ii) During most of the period of litigation SDT seemed to him to be "in healthy financial shape and able to fund the costs as required" (§ 10).

iii) SDT's finances declined in 2006 and deteriorated more sharply in the first half of 2007 (§ 15).

iv) In August and September 2007 he procured inputs of funds for SDT from WEPS. These inputs amounted to some £33,000 (§ 16). When judgment was given Mr Sharif procured a further £22,000 from WEPS with a view to meeting the costs liability, but was advised that that payment might be a preference (§ 19).

Mr Sharif's case was also supported by SDT's accountant Mr Martin and by Mr Armstrong, both of whom made witness statements also dated 6 May 2010. Mr Martin said that SDT was not insolvent and continued to pay its debts as they fell due during the autumn of 2007. He said that SDT became insolvent as a result of the judgment and its costs consequences. Mr Armstrong also said that SDT could pay its debts as they fell due. He was able to say this because the debts owed to WEPS (£75,000) and Mr and Mrs Sharif themselves (£84,000) were payable on demand; and no demand had been made. Thus Mr Armstrong dealt only with SDT's solvency on a cashflow basis. He did not address the question whether SDT was...