Court of Appeal reviews key principles to consider when making a non-party costs order

Under section 51(1) Senior Courts Act 1981 (SCA 1981) the English courts have the discretion to make a non-party costs order (NPCO), that is an order for a person/entity who was not a party to proceedings to pay all of or contribute towards the costs of and incidental to the litigation.

In Goknur Gida Maddeleri Eneji Imalet Ithalat Ihracat Ticaret Ve Sanayi As v Cengiz Aytacli [2021] EWCA  Civ 1037 the Court of Appeal recently considered whether an NPCO should be made against a director or shareholder of a company that had become insolvent during the course of litigation and faced was subject to adverse costs orders.

The facts

The appellant, Goknur, is a company based in Turkey that manufactures and supplies fruit juice. The respondent to the appeal, Mr Aytacli, was until his resignation in 2016, the director of Organic Village, one of Goknur’s UK sellers.

Organic Village contracted to sell Goknur’s juice on the basis that it would be not from concentrate. In 2011 Organic Village rejected some stock and stopped payment of the same, arguing that the juice supplied was in breach of the contract. Goknur issued a claim against Organic Village in respect of the unpaid stock and Organic Village bought a counterclaim for the losses it had suffered as a result of Goknur’s breach of contract. The resulting litigation was a lengthy and costly exercise for both parties during which Goknur’s claim was struck out and various costs orders were made against it, on account of which it paid £185,300. Organic Village’s counterclaim concluded in a trial that saw Organic Village awarded nominal damages of £2, with both parties incurring significant costs in the process. Organic Village ceased trading during the period of extensive litigation between 2011 and 2018 and subsequently failed to comply with an order to commence a detailed assessment of its costs as it had insufficient funds to do so.

Goknur made an application for an NPCO against Mr Aytacli in the sum of £249,605.43, made up of (1) the £185,300 Goknur had paid on account of costs and (2) £64,305.43 due to it under a costs order made in its favour regarding Organic Village’s counterclaim. The application was refused and Goknur appealed.

The Court of Appeal dismissed the appeal. In doing so, it considered and summarised the applicable principles when determining whether an NCPO should be made against a director or shareholder of an insolvent company which incurs a costs liability in litigation.  

Key Principles

• An NPCO should be exceptional and only made if it is just to do so in all circumstances.
• The touchstone is whether a director can fairly be described as the “real party to the litigation” by funding and controlling or being set to benefit in any way from the proceedings.
• When an insolvent company is involved in litigation that results in a costs liability that it cannot pay, a director of that company may be subject to an NPCO. Such instances will be rare but, when made, will help avoid the injustice of directors hiding behind the corporate veil and engaging in risk-free litigation for their own benefit. In such circumstances, an NPCO does not infringe the principle of limited liability.
• A director controlling/funding the litigation on behalf of the company, and any alleged personal benefit of the director doing so, are helpful indicators for a court when considering whether to make an NPCO, but should only act as guiding factors and not a checklist to use in every case.
• If litigation is pursued or maintained for the benefit of the company, then a party seeking an NPCO against a director will need to show something more and demonstrate why it is just for an NPCO to be made. “Something more” will typically involve some form of impropriety or bad faith by the director in connection with the litigation.
• Such impropriety or bad faith will need to be sufficiently serious in nature and will need to be linked to causing the party applying for the order to unnecessarily incur costs in the litigation. Examples include where a director deliberately pursues a false claim or defence, or where a director swears false evidence in support of the company’s claim or defence with the intention of misleading the court.

In dismissing Goknur’s appeal, the court concluded that the litigation between Goknur and Organic Village was not for Mr Aytacli’s own benefit, nor was there any bad faith or impropriety on his part, and an NPCO against Mr Aytacli would not be in the interests of justice. Regarding the two separate amounts of £185,300 and £64,205.43, the court held that the reality was that Goknur was liable to Organic Village for the former (since Organic Village’s liability arose because of its inability to afford to fund detailed assessment proceedings) and an NPCO against Mr Aytacli would have been “absurdly unjust”. With regards to the latter, the court acknowledged that the same argument didn’t apply but that it would still be unjust to make an order because of the lack of personal benefit to Mr Aytacli and absence of bad faith or impropriety on his part.

In summary, a party applying for an NPCO will need to persuade the court that either the director was seeking to personally benefit from the company’s pursuit of and/or position in the litigation, or that they were guilty of impropriety or bad faith. Without one or the other it will be difficult, if not impossible, for the applying party to persuade the court that an NPCO is just.