Burnden Holdings v Fielding (2019)
Summary
Where a liquidator had taken office in order to pursue a claim against the company's directors at a time when there were no other material assets in the company, and the firm in which he was a partner had funded an early stage of that claim, the firm could not be regarded as a pure funder facilitating access to justice when it came to establishing costs liability after the claim failed. Although the appointment of liquidator was a personal one, his firm stood to gain financially from the liquidator's remuneration and from the uplift it had negotiated. Accordingly, the firm had a sufficient interest in the proceedings to warrant characterisation as a commercial funder and a real party for the purposes of the third-party costs jurisdiction.
Facts
Following the dismissal of claims brought by a company and its liquidator against its two majority directors, the court had to determine the costs liabilities of the liquidator and a third-party funder.
The liquidator put himself forward for appointment at a time when the company's only material assets were the claims against the directors, which were struck out on a limitation issue. In May 2015, the liquidator's firm, in which he was a partner, advanced funds interest-free to appeal that decision on the basis that it would be repaid out of a costs order if the claim were restored. Commercial litigation funders would then be approached to take the proceedings forward. The appeal against the strike-out decision succeeded. The total amount of funding provided by the liquidator's firm at that time was £478,365, of which £300,000 had been used to fund interlocutory costs orders in favour of the directors and £70,000 had been used to provide security for costs. In August 2017, the claimants entered into a funding agreement with the third-party funder, which advanced funds to pursue the proceedings to the end of the trial. The firm extended additional funding until 29 August 2018 under an arrangement which potentially entitled it to recover 2.25 times the amount advanced. Following the dismissal of the claims, the company was ordered to pay the directors' costs of the action and to make a payment of £1.2 million on account of that liability, which was made by the third-party funder.
The directors submitted that the liquidator's firm should be regarded as a commercial funder and held liable on a joint and several basis with the claimants for all the directors' costs incurred from May 2015.
Held
Third-party costs orders: jurisdiction - The jurisdiction to award costs against a third party was found in the general power to award costs in the Senior Courts Act 1981 s.51. Where a non-party not merely funded the litigation but also substantially controlled it or benefited from it, justice ordinarily required that they would pay the successful party's costs should the proceedings fail. The non-party in such a case was seeking to gain access to justice for their own purposes, not for the benefit of the funded party, Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39 applied (see paras 5-6 of judgment).
Third-party costs orders: limitations - The two potential limitations on an award of costs against a third-party funder were, first, that where a person funded litigation for a specific period which was less than the whole period of the action, that person should not be made liable for the other party's costs incurred during any other period, Hamilton v Al-Fayed (Costs) [2002] EWCA Civ 665 followed, Davey v Money [2019] EWHC 997 (Ch) applied. The directors disputed that that limitation applied to costs incurred after a funder had ceased to fund the litigation. The second limitation was derived from Arkin v Borchard Lines Ltd (Costs Order) [2005] EWCA Civ 655, whereby a professional funder who financed part of a claimant's litigation costs should be potentially liable for the opponent's costs to the extent of the funding provided (the Arkin Cap). Thus, if the funding was provided on a contingency basis of recovery, the funder would receive a greater share of the recovery in the event that the claim succeeded, Arkin followed. The third party submitted that funding which had been used to discharge interlocutory costs orders should be excluded for the purposes of calculating the level of the Arkin cap (paras 8-9, 11-12, 19).
Was the liquidator's firm a commercial funder? The question was whether it had done more than merely facilitate the company's access to justice for the benefit of its creditors and had become a "real party" to the litigation. Since the appointment of a liquidator was personal to the individual, it was wrong to characterise his firm as asserting control over the liquidation merely by reason of the fact that the individual was a partner in that firm. However, the firm could not be regarded as a pure funder facilitating access to justice, given that the liquidator had commenced the action knowing that the only assets were the claims and the only source of funding for his own fees was recovery in the action. Notwithstanding the distinction between the liquidator and his firm, the fact remained that the latter stood to gain financially from the former's remuneration and from the uplift it had negotiated. Accordingly, the firm had a sufficient interest in the proceedings to warrant characterisation as a commercial funder and a real party for the purposes of the third-party costs jurisdiction (paras 41-46, 48-49).
Limitation: period of funding - The fact that the firm maintained its potential upside after the funding was provided by the third party in August 2017 did not cause either the continuation of the proceedings or the incurring of any further costs by the directors. The predominant cause of action after that date was the funding by the third party (para.51).
Limitation: Arkin cap - The return on investment that the liquidator's firm had bargained for was a fair reflection of the credit risk it took in advancing funds on an interest-free basis. In all the circumstances, it was just to apply a cap on the firm's liability equal to the amount of funding it contributed. The funding stood to benefit the creditors and had been made for the limited purpose of restoring the action so that funding could be obtained from a professional funder, which had been successful. However, apart from the sums used to fund costs awards and security for costs, the firm had expended in the region of only £100,000 on the claimants' costs of pursing the action. Striking a balance between the entitlement of the directors, as the successful party, to be paid their costs and the risk of discouraging funding which facilitated access to justice, the just approach was to order the firm to pay costs limited to the amount of its funding (paras 57, 60).
Costs determined
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