IP’s Susceptible to Non-Party Costs Orders

The High Court has made a non-party costs order against an insolvency practitioner firm, requiring it to pay the legal costs of unsuccessful proceedings brought by one of its partners.

The principles concerning non-party costs orders are well established. Such orders are typically made where the non-party not merely funds proceedings (facilitating access to justice) but substantially controls or benefits from them.

In Burnden Holdings (UK) Ltd and another v Fielding and another the High Court considered whether a firm (in which the Claimant liquidator was a partner and which had provided funding for the proceedings) should be liable to pay any of the Defendants’ costs of the action on the grounds that it was a third-party funder.

The case concerned an alleged unlawful distribution made by Burnden Holdings (UK) Ltd (BHUK) of its shareholding in a trading subsidiary, prior to formal insolvency procedures commencing. Following the appointment of the liquidator, Mr Stephen Hunt, proceedings were issued by BHUK and Mr Hunt against some of its directors for alleged breaches of their statutory and fiduciary duties and an alleged transaction defrauding creditors. At this time, the company’s only asset was the claim against the directors and so it was unable to fund the litigation.

The directors successfully defended the claim and the Court ordered the Claimants to pay the costs of the action. Agreements were reached with the Claimants and another third party funder, Project Appledene PC (Appledene), as to their liability for costs, leaving only the question of whether Mr Hunt’s firm, Griffins, should be liable for any part of the Defendants’ costs.

Mr Justice Zacaroli considered the essential question to be whether Griffins had done more than merely facilitate access to justice and become a “real party” to the litigation. Although the judge rejected the assertion that Griffins controlled the litigation, he found that Griffins was not a pure funder facilitating access to justice due to the following circumstances:

1. Mr Hunt sought his appointment and commenced the action knowing that the only asset in the liquidation was the claim against the directors.
2. At the time of seeking funding from Griffins, there was no further funding from the creditors, for whose benefit the litigation was ostensibly being brought.
3. Mr Hunt already had a vested interest in the litigation succeeding, because the only source of funding for his fees would be the recoveries in the action.
4. Mr Hunt’s vested interest was substantially increased by the terms of his entitlement to remuneration as liquidator (Mr Hunt was entitled to a 50% share of net recoveries).
5. Griffins stood to gain financially from Mr Hunt’s remuneration, as he was one of two equity partners of Griffins (although a distinction was made between Mr Hunt and Griffins).
6. Griffins also had a direct interest in the litigation succeeding because it would receive an uplift of 2.25 times the funding it had advanced.

Having determined that Griffins were liable for the costs of the action, the Court then considered whether limitations should be applied to the firm’s liability: (1) with reference to the period it had funded the claim; and (2) the Arkin Cap. As to this:

1. The Court found that Griffins’ liability should be limited to the period it had funded the claim (i.e. up to Appledene’s funding commencing) on the basis that Griffins’ funding had not caused the action to continue and the Defendants’ to incur further costs, this was caused by the new funding provided by Appledene.
2. The Court found that it was just in all the circumstances to apply the Arkin cap, limiting Griffins’ liability to the amount which it had funded.

The decision highlights the risks presented to insolvency practitioner firms (and other professional firms) that fund litigation. Such firms should be careful not to control or have a vested interest in the outcome of litigation or go beyond the role of a pure funder generally. Firms should ensure that funding is provided at arm’s length to reduce the risk of being caught by such an order.