Non parties – costs orders and indemnity pitfalls

The recent judgment in the case of Montpelier (Trust and Corporate) Services Ltd (in liquidation) (“MTCSL”) demonstrates again the court’s wide ranging powers when considering costs, and in particular, conduct of the parties relevant to awarding indemnity costs, even where the paying party is not (or claims not to be) a named party to proceedings. It also gives some clarity to circumstances where a non party will be deemed to be sufficiently embroiled so as to be subject to costs orders.

The substantive issue before the court was fairly complex and long running. Simply put, on or around the time a Receiver and Manager was appointed to MTCSL by the Court, its directors entered into a business sale and purchase agreement (“BSPA”) with a third party (“the Third Party”) for the sale of its client book, made up mostly of trust structures which it administered. The Joint Liquidators of MTCSL sought directions by way of application from the Court (“the Application”) on the following issues:

i) Should the Commercial Trusts of which MTCSL is a Trustee be transferred to the third party (irrespective of the terms of the BSPA);

ii) What is the mechanism by which the Trusts can be transferred en bloc to the third party; and

iii) Is the BSPA valid or void pursuant to section 167 of Companies Act 1931, and depending on the answer, what consequences flow from that?

iv) If void, will the court validate the BSPA.

Although not named on Application (as it was made in extant proceedings relating to the winding up of MTCSL) the Third Party took part in proceedings, was noticed and made a number of (what the Court characterised as 11^th hour) cross applications, including for disclosure of documents, cross examination of persons not parties to the proceedings (and who had not given evidence in respect thereof) and for validation of the BSPA. The court decided (by reference to the paragraphs above) that:

1. the Trusts could be transferred to the third party;
2. the mechanism by which this could be done is to be found in sections 41 to 43 of the Trustee Act 1961;
3. the BSPA was void and
4. the application for the validation was refused

The applications for disclosure and cross examination were withdrawn by the Third Party at the hearing and so the court was not forced to trouble itself with those.

As to costs, it was argued by the Joint Liquidators of MTCSL, and its Receiver/Manager, that the Third Party should be liable due to the fact that its positions as to the Application, and/or those cross applications which it made, were either withdrawn, or found against it. For its part, the Third Party claimed that it was not a party to proceedings and so no costs order should be made against it, relying on section 53 of the High Court Act 1991 which it said, for example, required it to be added as a party if a costs order was to be made against it (and in circumstances where there was no such application). His Honour Deemster Khamisa found:

…although [the Third Party] is not named as a party…when taken together, the entirety of their conduct throughout these proceedings has been as a party fully participating in every aspect of the two directions hearings that I have conducted. It has behaved in this way because it has a very significant commercial interest… in my judgement [section 53 High Court Act 1991 is] designed for non-parties in the sense of individuals or entities who have not actively participated in court proceedings but are nevertheless held to be culpable by a court on the question of costs because of their conduct in, for example, obstructing or failing to provide relevant documentation or cooperating with other parties in the litigation which has led to unnecessary costs being incurred…

His Honour then summarised a number of factors militating against what he termed “the facile submission… that [the Third Party] is not a party…” including its previous appearance at an interlocutory hearing, its representation by counsel with a temporary advocates licence, its correspondence with other parties, its drafting suggestions as to material documents and the fact that:

“…[they] were full participants and built into the timetable their own role in making submissions as well as conducting cross examination if so required. They gave no indication at the earlier proceedings that they were not a fully engaged participant acting as a party in the proceedings, nor was any point raised by any of the other parties against [the Third Party] participating in this way.”

Having determined that the Third Party was in fact a party to proceedings against which a costs order could be made, the court turned its mind to the question of the basis on which to award costs. Deemster Khamisa applied the well trodden Manx judgment of Clucas Food Service Limited v Ice Mann Limited (15 December 2005) and found as to the cross applications made by the Third Party referred to above:

These three late applications all of which were pursued without any regard to the rules in relation to notice or service, lacked precision, relevance or in any way designed to assist the court demonstrated the most appalling conduct... By reference to paragraph 41 of Clucas, I find as a fact the following:

i) The applications were pursued in an utterly unreasonable way;

ii) They were doomed to fail;

iii) The applications was completely un-meritorious from beginning to end;

iv) The applications were bound to be unsuccessful but were brought in my judgement to put undue pressure on the other side;

v) The applications were brought with an ulterior motive of running proper or collateral purpose, namely disclosure of material for the mounting of a potential claim at some future date against the Receivers and Joint Liquidators. It had the hallmarks of a hostility towards Mr Wilson in particular;

vi) The applications involved behaviour which was over and above the usual cut and thrust of litigation;

vii) I find as a fact that this was an abuse of process of the court because it is rare and exceptional circumstances that applications of this sort are made at the eleventh hour let alone for the cross-examination of witnesses at a directions hearing, those witnesses not having been given any warning or having made statements;

viii) Directions that I had given on 27th October 2021 had not been complied with nor had these applications been mentioned or raised previously to the parties or the court until a few days before this hearing; and

ix) [The Third Party] had failed to focus on the main issues between the parties in the directions hearings and these applications were a distraction, time-consuming, costly and unnecessary.

Commenting further on conduct generally His Honour remarked:

The conduct of [The Third Party’s] case throughout the hearing was riddled with allegations, assertions, mudslinging and innuendos levelled at the Receiver and the Joint Liquidators but in relation to which no cogent evidence was placed before me. On one occasion at least the sanctity of confidential and privileged discussions between the parties in relation to a potential settlement were referred to by counsel for [the Third Party] in open court as part of his submissions. This style of advocacy is to be deprecated and is most unhelpful in trying to resolve difficult and complex issues before the court.

The upshot was that the Court found that on the part of the Third Party:

The hurdle of exceptionality required for imposing indemnity costs in relation to the entire case has been crossed.

The moral of the story is perhaps to be careful what you wish for. Non parties to proceedings wishing to take an active role and have their voice heard must still act within the realms of what is considered reasonable. They cannot use a sword of unreasonable behaviour whilst professing to hide behind a cloak of anonymity, claiming they are not part of the game and so cannot be held subject to its rules.

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances.

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