(1) Total Spares &Supplies Limited (2) Antares Limited v (1) Antares SRL (2) European Plumb Direct Limited (3) Barclays Bank PLC (4) Francesco Gargani (5) Antares for Water and Fire SRL [2006] EWHC 1537 (Ch)

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
[2006] EWHC 1537 (Ch)Case No Case No: HC02C02765Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Between
(1) Total Spares &Supplies Limited (2) Antares LimitedClaimants(1) Antares SRL (2) European Plumb Direct Limited (3) Barclays Bank PLC (4) Francesco Gargani (5) Antares for Water and Fire SRLDefendants
Before
Mr Justice David RichardsRomie Tager QC (instructed by Charles Russell LLP) for the Second ClaimantMatthew Collings (instructed by Berwin Leighton Paisner LLP) for the Fifth DefendantHearing dates: 27 and 28 March 2006
[1]The Honourable Mr Justice David Richards: This is an application pursuant to section 5l(3) of the Supreme Court Act 1981 for third party costs orders.[2]The application is made by the second claimant, Antares Limited (the claimant), in an action which was brought against three defendants, including principally an Italian company, Antares SRL (Antares). The action related to a long-term franchise agreement between Antares as franchisor and the first claimant, Total Spares & Supplies Limited (TSS) as franchisee for the sale and distribution in the United Kingdom of wholesale plumbing parts supplied by Antares. The claim was for substantial damages, of the order of £1.5 million, against Antares for wrongful termination of the agreement. Antares defended and relied on a substantial number of alleged breaches to justify the termination. It also advanced a counterclaim but this was not a significant element at the trial.[3]The action was commenced in late September 2002. The trial started before me on 6 May 2004 and continued over 22 days in May, June and the beginning of July 2004. I handed down judgment on 16 November 2004. I held that TSS had committed some of the alleged breaches of the agreement, but none of them entitled Antares to terminate the agreement without notice. I held that those breaches entitled Antares to terminate the agreement on six months' notice and that it would have exercised that right. Accordingly, I held Antares liable for six months' loss of profit, amounting to just over £13,300. I held that if Antares had not been entitled to give any notice of termination, the claimant's damages would have been £348,950.[4]I heard argument on costs on 13 December 2004 and ordered Antares to pay 55% of the claimant's costs of the action, to be assessed on the standard basis, with an interim payment of £125,000 to be paid into court by 14 January 2005 pending the determination of any appeal. I refused permission to appeal. Antares applied to the Court of Appeal for permission. On 11 February 2005 Clarke LJ gave permission to appeal, but imposed the condition that the interim costs payment of £125,000 be made into court by 25 February 2005, failing which the application for permission to appeal would stand refused without further order of the court. The condition was not complied with and accordingly there was no permission to appeal.[5]Ninety per cent of the shares of Antares were indirectly owned by Mr Fransesco Gargani, who managed its business. Although he was not formally a director, I found that he controlled the company. His wife, Dr Enrica Mattolini, was a director. She had a limited involvement in the financial matters of Antares but no involvement in the company's trading activities. Others involved with the company included Mr Gargani's son by a previous marriage, Maurizio Gargani, and Mr Roberto Piccione who was engaged as a consultant.[6]Mr Gargani was the principal witness for Antares at the trial. I found his evidence on one significant issue to be untruthful. The issue concerned the establishment of the second defendant, an English company then called European Plumb Direct Limited (EPD). I rejected the evidence of Mr Gargani that EPD was established at the instigation and for the benefit of two employees, and found that it was set up at the instigation of Mr Gargani and for the benefit of Antares.[7]In the circumstances set out below, the claimant has recovered nothing of the costs order in its favour. The costs were allowed, in default of any points of dispute, in the sum of £328,376.07.[8]On or about 21 April 2004, about two weeks before the start of the trial, Antares transferred its distribution business, and related assets and liabilities, to an Italian company called Antares for Water and Fire SRL (AWF). AWF had been incorporated on 29 March 2004. The transfer was made pursuant to an agreement in writing made on 21 April 2004 and registered with the relevant Italian authorities in May 2004. According to the agreement, it was made between Antares acting by Dr Mattolini and AWF acting by Mr Piccione.[9]The agreement provided for the transfer of the assets of the "Business Branch", described as "a property complex, organised and functioning to operate in the wholesale and retail trade of hydraulic plant accessories." The assets to be transferred included a specified property at which Antares carried on business; furniture, machinery, equipment and plant "used to conduct the activities of the Business Branch"; the products, raw materials and goods set out in a list; the hardware and software "currently used in the Business Branch"; the trademark "Antares for Water and Fire" and, "all distinguishing signs assessed by the transferor and used by the latter in conducting the activities related to the Business Branch"; "all the contracts arranged to conduct the activities relating to the Business Branch, including those with clients, suppliers and distributors" and a leasing contract for machinery for the manufacture of parts; and amounts receivable arising before 22 April 2004. The total value attributed to the transferred assets in the agreement was €4,621,176. AWF assumed liabilities amounting to €4,603,176, leaving a net asset value of €1 8,000 to be paid in cash. The assets included goodwill, to which a value of €150,000 was attributed.[10]The relevant companies registry in Italy showed that the shares of AWF were held equally by Dr Mattolini and Maurizio Gargani and that they, together with Mr Piccione, were the directors.[11]The defendants and their witnesses made no mention of the business transfer or of the existence of AWF during the trial. As well as Mr Gargani, Dr Mattolini and Mr Piccione both gave evidence. There was nothing to indicate that the business was not still being conducted by Antares and, so far as known to the claimants and to the court, this was the case.[12]In early July 2004, just after the end of the trial, the claimants became aware of the incorporation of AWF and that it was apparently carrying on the plumbing spares sales and distribution business from the former business premises of Antares. It appeared from documents filed at the registry that Antares' address had been changed to other premises which, from an external inspection, appeared to be deserted. The business transfer agreement of April 2004 was not known to the claimants until September 2004.[13]In July 2004, the claimant's solicitors wrote to Antares' solicitors. They stated the facts as then known and concluded that it appeared clear that the business and assets of Antares had been transferred to AWF. By way of response, they received a copy of a letter dated 16 July 2004 from Dr Mattolini on behalf of Antares to its solicitors. She wrote (in translation):
"3. To expand its business and to find a more spacious building to do this, SRL had for some time considered the acquisition of part of buildings belonging to LPF & T SPA located in Sorbano, Via Delta Chiesa, Lucca and in anticipation of the acquisition, which happened in 2003, used the building on the basis of a letting contract.. . 4. In March 2004 after having completed adaptation works for more urgent and important activities of the aforementioned buildings, Antares SRL transferred its registered office near to the buildings, by now its head office. The certifying body, DNV -Sincert, named the new registered office as the main address of the address for the branch at via Ingrillini.. . 5. In the early months of 2004 SRL has increased its net worth through new investments to strengthen some of its production functions and in this way to date, as at the time of testifying in Court, SRL is operating and expanding in the market of metal components and continues to sell in the Italian market and abroad. It is not correct that SRL had ceased its activities, on the contrary it is making important investments to increase its production capacity particularly in Eastern European countries, where it is acquiring, a factory for the construction of boilers. 6. The business slogan "
ANTARES for water and fire" is used on the website. Due to Italian terminology, this has a different meaning to the definition of the corporate name. 7. In reply to the allegations from [the claimant's solicitors] we assert that we have never lied to the Court neither have we been given the opportunity to illustrate the business developments and adaptation of the commercial strategies of SRL."[14]According to evidence filed on this application by the solicitors for AWF, on the basis of information provided by Dr Mattolini, what was sold to AWF was that part of Antares' business activities which related to distribution and sales. It is said that Antares retained a manufacturing and production business.[15]At the hearing on 13 December 2004, Antares submitted that the date for payment of £125,000 on account of costs should be fixed for 15 March 2005, which I refused in favour of 14 January 2005. An application was issued in the name of Antares on 15 February 2005 for an extension. In a witness statement of the same date, Mr Gargani described himself as a director of Antares (re-named Inda SRL) and stated that he was authorised to make the statement on its behalf. He set out the steps which, he said, Antares had taken to raise the funds needed for the payment. He stated:
"Initially, my analysis of the First Defendant's financial position, which was supported by its accounts department, indicated that the quickest way to obtain the necessary finances was to intervene in the ordinary financial cycles of the First Defendant's business, so as to avoid making urgent "disinvestments" that can often have a negative impact on the normal management of the business (for example, I did consider selling some of the First Defendant's machinery, but I concluded that this would substantially affect production). I refer to the First Defendant's management accounts for 2004 as at 30 November 2004, together with a translation, at pages 3 1 to 37 of the bundle of correspondence and documents exhibited hereto and marked "
FGI". The other option was to seek a loan or credit line from a bank. I believed that these were the most appropriate solutions in the context of the First Defendant's business activities. I also considered that it would be easier to obtain a credit line from a bank by way of an advance on credits due from our customers."[16]He stated that Antares had pursued both of these routes, but emphasised that a sum of £125,000 represented a significant financial burden for the company. He described how Antares' purchasing manager wrote on 20 December 2004 to 36 important suppliers requesting an extension of credit terms, so as to give priority to the costs payment. There was some success with this, so that, Mr Gargani said, Antares would be able to use its receipts in February 2005 to pay all or some of the costs order by the middle of March 2005. Antares was also pursuing a credit application to its bank. At a hearing on 25 February 2005 I refused to extend the date for payment. As previously mentioned, Antares failed to pay the interim costs of £125,000 into court and accordingly the permission to appeal granted by Clarke LJ lapsed.[17]Following a letter from Antares' solicitors formally withdrawing the appeal, the claimants applied for an order for the immediate payment to it of the sum of £125,000. I made the order on 8 March 2005.[18]Italian lawyers instructed by the claimant with a view to enforcement of the order undertook company searches from which the following further facts emerged. On 16 December 2004, the shareholders of Antares sold their shares to a Romanian company called AZ Ceramice SRL. On 20 December 2004 Antares passed a resolution to merge with AZ Ceramice, which was registered on 27 December 2004. The merger completed on 28 January 2005. On 31 January 2005 Antares ceased trading and applied to be "cancelled". he cancellation occurred on 18 February 2005, which is the equivalent of a company being struck off the register of companies in England and Wales. The Italian lawyers advised that the process had been rushed through, with important steps required by Italian law not being taken. Notice should have been given to creditors, who should either consent to the merger or have their debts secured by a deposit of the sums due to them. Notwithstanding the failure to comply with these steps, the Italian lawyers advised that following registration of the merger on 28 January 2005, creditors could not prevent or reverse it.[19]It is against the background set out in the preceding paragraphs that the claimant seeks third party costs orders against Mr Gargani and AWF. I gave leave for them to be joined and served. Both were served. Mr Gargani has not acknowledged service and has played no part in this application. AWF instructed solicitors and was represented by counsel at the hearing.[20]The grounds of the application as stated in the application notice are as follows:
"Francesco Gargani was the alter ego of the First and Second Defendants and was the controlling force behind the Defendant's involvement in the proceedings and all events since judgment. In particular Mr Gargani has, since the date of judgment sought to make the Defendant's assets unavailable and render enforcement of the judgment and costs orders by the Second Claimant impossible. Signor Gargani is also the mind and will of Antares for Water and Fire SRL, which is his alter ego, and to whom various assets have been transferred by Signor Gargani at an undervalue to render enforcement of the judgment and costs orders impossible."
[21]I shall first consider the issues of fact which arise on this application.[22]Regardless of whether Mr Gargani is properly described as having been the alter ego of Antares, he was the beneficial owner of 90% of its share capital, and, as I found, controlled it and managed its business (para 6 of my judgment in the action), although he was not named as a director. I have no doubt that he took all decisions in relation to the conduct of the defence and counterclaim: the solicitors instructed for Antares after judgment confirmed in a letter dated 13 April 2005 that they had always taken instructions from him. Equally I have no doubt that he procured the transfer to AWF in April 2004, and the merger with AZ Cerarnice in December 2004. Counsel for AWF acknowledged and asserted that both steps had been procured by Mr Gargani. He must have known that his witness statement of 15 February 2005 was untrue and, in my judgment, it was designed by him to mislead the court as to the true facts.[23]The transfer to AWF raises the following issues. First, was it intended to insulate the distribution business from an adverse result in the proceedings as to damages and/or costs and thereby render more difficult execution of any order? Secondly, was the transfer made at an undervalue? Thirdly, did Mr Gargani control AWF?[24]The timing of the transfer very strongly suggests that it was designed to protect the distribution business. The earliest indication in the evidence that a transfer was contemplated are the minutes of a series of meetings held between 7 April and 20 April 2004 between the accountants appointed to determine transfer values. On 15 March 2004 Dr Mattolini had made a witness statement in opposition to an application for security for costs in respect of the counterclaim. She made no mention of any intended transfer by &tares but relied on the totality of its assets as shown in its 2002 accounts to demonstrate its ability to meet any costs liability. Unless this witness statement was deliberately misleading, for which there is no evidence, the transfer cannot then have been in contemplation, at least to Dr Mattolini's knowledge.[25]There is no evidence from Mr Gargani as to his reasons for procuring the transfer. Neither Dr Mattolini nor any other officer of AWF has given evidence, but instead Mr Robert Maynard, a partner in AWF's solicitors, has done so. By way of explanation of the transfer, he said in his first witness statement, on the basis of information provided by Dr Mattolini:
"15. What was sold to AWF was that part of SRL's business activities which related to distribution and sales: this appears from the transfer agreement exhibited by Mr Gearon, the English translation of which is at page 135 of exhibit "
PDG16". SRL retained its manufacturing and production activities, and these were what formed the basis of SRL's subsequent merger with AZ Ceramice ?which later changed its name to Inda International)...Signor Gargani is an employee of that business and is now based in Romania. 16. Clause 15 of the transfer agreement refers to the transfer price, and how it was arrived at. What is significant is that it was not only assets which were transferred: AWF also took on responsibility for significant liabilities. These liabilities were integral to that part of the business being transferred, namely the sale of heating and plumbing products, and helped to achieve a complete division of SRL's business between sales and distribution on the one hand (which went to AWF) and the manufacturing and production activities on the other (which were retained). 17. This division reflects the fact that Signor Gargani and Enrica Mattolini are now separated. At pages 1 to 7 of "RCAMI", is a copy of the application by Enrica Mattolini to the Civil Court of Lucca for judicial separation from Mr Gargani, made on her behalf by her lawyers, Menchini & Associati, dated 26 September 2005. At pages 8 to 11 of "RCAMI", is a copy of the court document dated 27 September 2005 seeking registration of the application with the Court of Lucca, followed by a copy of the Court's confirmation of the registration. 18. Signor Gargani lives most of the time in Romania in connection with his employment by the merged company, while Enrica Mattolini lives in Lucca, not far from where AWF continues to carry on business. The division of SRL's business also reflects the fact that Signor .Gargani's interests became principally in the technical production and manufacturing side rather than in the commercial side. 19. The Second Claimant asserts that it is suspicious that the transfer occurred shortly before the trial. However, I am told by Enrica Mattolini that this is not what drove the division of STL's business. Moreover, it would appear that the outcome of the trial was not a forgone conclusion, and that there was an earlier application ' by the Claimants for summary judgment strike out in July 2003 at which they did not prevail, the Deputy Master saying in his judgment that, while the matter required investigation at trial, "prima facie it would seem that SRL were justified in seeking to terminate the Franchise Agreement."[26]At first blush, it might be thought from this account that the separation of Mr Gargani and Dr Mattolini was a reason for the transfer. However, Dr Mattolini's application for judicial separation was, as Mr Maynard states, not made until September 2005 and it appears from other evidence that they did not in fact separate until December 2004. In a subsequent witness statement, Mr Maynard confirmed that he was not stating that the separation was "in itself' a reason for the transfer and goes on to refer to his statement that the transfer "also reflects the fact that Mr Gargani's interest became principally in the technical production and manufacturing side rather than in the commercial side". That uses the same vague phrase, "reflects the fact that". It is not a clear statement of the reason for the transfer and, as counsel for AWF accepted, motivation is not dealt with in the evidence.[27]In view of the timing of the transfer, the absence of any evidence that it was in contemplation before April 2004 and the lack of any evidence as to any other reason for the transfer, I am satisfied that it was implemented in order to protect the sales and distribution business from an adverse result in the proceedings and to prevent the claimants from enforcing any judgment for damages or costs against the business and its assets. I am satisfied that this was Mr Gargani's purpose in procuring the transfer and, in the absence of any evidence to the contrary from the directors of AWF, that they knew that this was his purpose. It is almost inconceivable that his wife, his son and Mr Piccione, all of whom worked with him in Antares, did not know the reasons for the transfer.[28]It is important to note that sales and distribution was the major part of Antares' business. It was the business which Mr Gargani had built up and for which Antares was well-known. There was no evidence at the trial that I can recall of a production business or that Mr Gargani had any interest, still less a preference, for production and manufacturing. In his witness statement dated 9 January 2004, Mr Gargani described the business as follows:
"From 1980, SRL has been the franchisor of various European companies operating successfully and profitably in the sale of plumbing and heating products by means of the distribution of a catalogue to installers and retailers in the sector. It is important to outline that SRL's only mode of sales is its catalogues. What has made it a success is the immediate delivery of all goods at low cost and due to an innovative sale method in this sector. In fact the products we deal with are heating and plumbing accessories and spares of a modest value.. .In fact this kind of product is often manufactured by small companies or artisans that due to their small dimensions use sale representatives who propose their products to big companies in this sector.. .SRL's innovative sale formula, done exclusively by catalogue, which eliminates the normal and costly sales circuit, has been applied by SRL all over the European territory through a chain of franchisees"."
I described the business in para 7 of my judgment:
"The business of SRL is the sale of heating and plumbing components and spare parts to installers and retailers under the trade name Antares. Its only mode of sale is by catalogue, which is widely distributed throughout Europe. The components and parts sold by it are sourced from all over the world and warehoused at Lucca. Products are sent directly from Lucca to the customer. The main selling point is that the prices are significantly lower than those of other suppliers."
[29]The second issue is whether the transfer was at an undervalue. The agreement provided for transfer with effect from 22 April 2004. Clause 15 stated €18,000 as the overall price, and listed the values attributed to the various categories of assets and to the liabilities. Mr Maynard, on information provided by Dr Mattolini, states that the price was a true reflection of the net value of the business transferred and was not an undervalue. He states that the financial information underlying the sale, and the details of the assets being transferred, were verified by two independent accountants, one instructed by each party: (In passing, I mention that the accountant appointed by Antares had previously acted for it as a consultant accountant and acted on its behalf in its meetings with banks and others). The accountants held six meetings in April 2004 and prepared a valuation report. As regards the report, Mr Maynard states:
"It records that they have carried out a valuation, as at 31 December 2003, of each of the heads of assets and liabilities being transferred, having carried out the necessary and proper investigations. It records what investigations were carried out, documents considered and the evaluation methodology adopted. The evaluations that they verified were those in the balance sheet (explained in more detail in paragraph 25 below) and are the same as the figures quoted in the Transfer of Business Branch agreement, from which the transfer price was derived. The report summarises the valuation verified by the experts. It states the assets being transferred as totalling €4,469,902 and the liabilities being transferred as totalling €4,603,249. One can see that most of the figures in the report for each of the heads of assets and liabilities being transferred are the same as those in the balance sheet as at 3 1 December 2003. One or two are very slightly different and so the figures in the report are very close to the equivalent figures in the balance sheet and that, accordingly, the independent expert accountants had verified the value of the assets and liabilities being transferred. One can also see that the report concluded that the liabilities were greater than the assets. Only by the inclusion of the sum of €150,000 in relation to goodwill was a positive price for the transfer arrived at. "
[30]Although Mr Maynard exhibited the accountants' report, he provided no translation. If reliance is to be placed on the contents of a document in a foreign language, it should be obvious that it needs to be translated. Despite the lack of a translation, it is clear that the report contains no valuation of goodwill or any explanation as to how the figure of €150,000 was arrived at. Nor does Mr Maynard, on information which might have been provided by Dr Mattolini or Mr Piccione, give any explanation. There was no item for goodwill in the balance sheet; this is to be expected, because only if the goodwill of a business has been purchased, as opposed to being developed by the company, will it feature as an asset in the balance sheet. Goodwill is essentially the profit-earning value of a business, and it is of central importance in determining the value of a business.[31]There is no basis for thinking that the values attributed in the transfer agreement to assets, leaving aside goodwill, were undervalues or that liabilities were overstated. The figure for goodwill and the overall value of the business is however at odds with evidence given by Mr Gargani. In his witness statement dated 29 January 2004 he stated that Antares' net assets were valued at £1.5 million and its profits were approximately £300,000, and that these were figures for Italy only and took no account of the turnover of the franchises in the rest of Europe (most of which were also controlled by Mr Gargani). It is not plausible that the manufacturing business accounts for the difference between these figures and the transfer values. There is no evidence of the size of any manufacturing business or that it was profitable. Comparing the balance sheet as at 31 December 2003 with the balance sheet in the transfer agreement virtually all assets were transferred with the exception of accounts and prepayments, as to which there is no explanation.[32]On the question of the price fixed for the goodwill, and the manner in which it was determined for the purposes of the agreement, AWF, not the claimant has the available information. The claimant has clearly alleged that the transfer was at an undervalue and pointed to the discrepancies and in particular to the lack of any explanation as to how the figure of €150,000 was calculated. It appears to be a very low figure when compared with the evidence given at trial of the success of the business and the importance of its name and goodwill. Antares' counterclaim was originally for loss of profits of £150,000 in the last quarter of 2002. AWF sought to justify the sale price by reliance on the accountants' report, but this contains no valuation of goodwill, or even any reference to it. It has not explained who agreed the figure or by what criteria. AWF has chosen to put forward no explanation in this respect, despite ample opportunity. I am entitled to infer that it is not a figure which is AWF is able to justify. In the context of a transaction, which was not disclosed in the proceedings, was carried out between closely connected persons and was designed to protect the business from an adverse result in the proceedings, it is not at all unlikely that the transaction would be carried out an undervalue. I am satisfied for the purposes of the present application and on the evidence before the court that the transfer was at an undervalue.[33]Even if the sale was not at 'undervalue, its effect was to make enforcement of any costs order against Antares more difficult. Creditors enforce claims against assets, not net assets. The removal of the great bulk of Antares' assets in return for a payment of €18,000, even though liabilities were also transferred, substantially affects the prospects of enforcement and payment. There is no evidence of the assets which were left in Antares. Mr Maynard relies on a comparison of the balance sheet as at 31 December 2003 and the transfer balance sheet to suggest that the transfer resulted in an improvement in Antares' net asset position. However, as already mentioned, the comparison indicates that the principal difference was in accruals and prepayments and the evidence does not demonstrate that after the transfer Antares had the means to meet adverse costs orders.[34]The third issue is whether AWF was, like Antares, controlled and effectively owned by Mr Gargani. As already mentioned, the shares in AWF are registered equally in the names of Dr Mattolini and Maurizio Gargani, and its directors are recorded as Dr Mattolini, Maurizio Gargani0and Mr Piccioni. Mr Maynard states that he is informed by Mr Mattolini that AWF is not the alter ego of Mr Gargani. His statement conveys the impression, but does not state explicitly, that Mr Gargani has never been involved in the management of AWF. He states, on information provided by Dr Mattolini, that Mr Gargani "lives most of the time in Romania in connection with his employment by the merged company."[35]It was clear from the evidence at trial that Mr Gargani controlled Antares in every respect, that he had started and built up its distinctive distribution business and that his expertise lay in that business. In his supplemental statement dated 26 April 2004, he gave evidence of his experience and expertise in this field (but made no similar claim in respect of production and manufacturing) and of his involvement in the wholesale plumbing and heating parts trade since 1969. He states variously:
"...in 1969 I became involved in sales activity for Burners Heating and Plumbing Components", "
In 1980 I published my first sales catalogue for my company called Francesco Gargani for delivery to customers", "Antares SRL has grown and become a reputable company in Italy. I am its commercial manager which in Italian is said as "direttore cornmerciale" and my wife Dott. Enrica Mattolini is its sole administrator. My son Maurizio also works in our company and many of our employees have been with us for over fifteen years". He also states that "using my expertise in the sale of plumbing parts, the company Antares SRL developed a European network dealing with over 11 countries"."[36]If Mr Gargani did not manage the distribution business after its transfer to AWF the question arises, who did? Dr Mattolini was not involved in the commercial side of Antares' business but, at most, with its financial and administrative aspects. On information provided by Dr Mattolini, Mr Maynard says only that she works at AWF. He states that Maurizio Gargani runs its graphics office which produces the sales catalogues, as he did with Antares. As to Mr Piccioni, all that is said is that he was formerly an external consultant and has useful foreign contacts for distribution and sales of products outside the catalogue. There is no further evidence as to how the business was or is being managed.[37]Reliance is placed by AWF on the evidence that Mr Gargani lives most of his time in Romania. However, in his witness statement of 15 February 2005, he gave his address in Lucca. The evidence of service of the present application establishes that it was served on Mr Gargani personally at his address in Lucca on 5 July 2005.[38]If there were the separation of businesses and interests as alleged by AWF, the result would be that the two companies were separately managed from late April 2004. However, it is Dr Mattolini who wrote on behalf of Antares on 16 July 2004 in response to the claimant's questions about the transfer. The facts concerning the second defendant in the action, the English company formerly called European Plumb Direct Ltd, but re-named Antares for Water and Fire Limited (AWF Limited), are striking. Antares' case at trial was that it was established independently by two employees of Antares for their own benefit. However, I disbelieved Mr Gargani's evidence on this, which was supported by Dr Mattolini, and found that it was established at the instigation of Mr Gargani for the benefit of Antares. It was accepted, however, that Antares was by November 2002 the owner of AWF Limited. It was appointed as the United Kingdom franchisee in September 2002 for Antares' sales and distribution business. As such, and if Mr Gargani was from the time of the transfer involved only in the' production business, ownership of AWF Limited should logically have passed to AWF. However, on 10 June 2004, its issued shares were transferred from Antares to Mr Gargani. Notwithstanding this change, Dr Mattolini continued as a director, and she and Mr Gargani signed its annual return as director and secretary respectively on 29 March 2005. The file at Companies House shows Mr Gargani's resignation as secretary, and Maurizio Gargani's appointment in his place, on 23 August 2005. According to a letter from AWF Limited's accounts, Mr Gargani transferred his shares on 12 July 2005 to Valimenta AG of Vaduz, Lichtenstein. Mr Maynard states that he is informed by Dr Mattolini that Valimenta AG is a company entirely controlled by her and in which Mr Gargani has no interest. Mr Maynard asserts that the present ownership and officers of AWF Limited is consistent with AWF's evidence of the transfer of the sales and distribution business to AWF and there was simply a delay in tying up a loose end. Even on its own terms, this is inadequate, because it provides no explanation of the transfer of shares in AWF Limited to Mr Gargani on 10 June 2004, nearly two months after the business transfer to AWF.[39]I am wholly unpersuaded that AWF was independent from Mr Gargani following the transfer. The overwhelming likelihood is that it was controlled by him, just as Antares had been controlled by him. There are several grounds for this conclusion. First, the business was in effect his business which he had built up from scratch and there is no evidence of the involvement of anyone else in AWF with the experience or expertise to manage it. Secondly, although Dr Mattolini was the named director of Antares and Mr Gargani was not a formally-appointed director, he was the controlling mind of Antares. Thirdly, the purpose of the transfer to AWF, as I have found, was to protect it from an adverse result in the proceedings. Fourthly, the facts as regards the ownership of AWF Limited are inconsistent with the alleged division of interests, and are consistent with the continuing involvement of Mr Gargani in the business of AWF. Fifthly, the only source of evidence is Dr Mattolini, but there is no direct evidence from her. In view of the contents of her letter dated 16 July 2004 as well as her evidence at trial in support of the untrue story regarding the establishment of AWF Limited, I do not regard her as a necessarily reliable source of information.[40]I should mention that there is evidence concerning the transfer of the registered trademark Antares for Fire and Water. Antares' evidence at trial emphasised the vital importance of this trademark to its business. There was no transfer of the registration at the European trademark office in Alicante until November 2005, after this was pointed out by the claimant's solicitors in a witness statement. However, the transfer agreement expressly provides for its transfer and there is evidence that a request for a transfer was faxed to the trademark office on 7 May 2004, although none can be found on its file. I do not attach weight to this matter as supporting the claimant's case.[41]Although Mr Gargani was clearly responsible for the merger of Antares with AZ Ceramice SRL in December 2004 and for this court subsequently being misled as to the continued existence of Antares, there is no evidence that Dr Mattolini or Mr Piccione were likewise involved. Dr Mattolini ceased to be the director of Antares on 1 December 2004.[42]The power of the court to order the payment of costs by any person, including a non- party, is cast in wide terms by section 51 of the Supreme Court Act 1981 (as substituted by Section 4 of the Courts and Legal Services Act 1990). It is left to the rule-making authority to control the exercise of the discretion, if it thinks it right to do so, by making rules of court and to the appellate courts to establish principles upon which the discretionary power may be exercised: Aiden Shipping Ltd v Interbulk Ltd [1986] AC 965 at 975 per Lord Goff of Chieverley. At p 981, Lord Goff effectively established a principle, by stating that he could not imagine a case in which an order would be made against a person who has no connection with the proceedings in question.[43]As the controlling mind and 90% owner of Antares and the person who gave instructions to its lawyers, Mr Gargani was closely connected with the proceedings. I consider that AWF was also connected with the proceedings, as the closely- associated transferee of the distribution business in circumstances designed to protect the business from an adverse result in the proceedings and to render the enforcement of any damages or costs against Antares difficult or impossible.[44]I will consider separately the application against AWF and Mr Gargani, taking AWF first.[45]The claimant's case is put on the basis that it is just to make an order for costs against AWF in circumstances where, as transferee of the business with knowledge of the purpose of the transfer, its conduct has been responsible for the claimant's inability to enforce its costs order. It is alleged that AWF was controlled by Mr Gargani, just as Antares was unquestionably 'controlled by him. Although strengthening its case against AWF, this is not essential to it, particularly in circumstances where there is a very close connection between those involved as owners and controllers of the two companies and, moreover, where, as I have found, Mr Gargani continued to be closely involved in the business following its transfer.[46]Mr Tager for the claimant submitted that nothing really changed after the transfer. The business was the same and it was carried on and managed by the same people. The business continued to be presented to the public at large without indication of any change. Not only was no mention of the transfer made at the trial or in Dr Mattolini's letter of 16 July 2004, but the Antares web-site presented it as a continuing business with no change. On 6 July 2004, under the heading "From the Beginning to Today" it stated:
"The business has gained twenty years of experience in the distribution of products for the thermo hydraulic and sanitation sector designed for the specialised installer, companies and wholesalers. Since its beginning Antares for water & fire SRL has demonstrated a continuing rate of growth that in the last year has been accentuated by an even greater penetration in to the European market."
It stated further:
"The development of spares compatible with the originals has added a considerable place to the range of products handled. The increasing activity of our internal production department has helped considerably this development by adding fundamental technical knowledge into the designing of these compatibles and generally to new products and alternative solutions. Thus in this way since the beginning of 1990 the business has had an internal mechanised production system that has increased and improved until by January 1999 it had become an officially recognised branch of our industrial activity in addition to our sales."
These statements are entirely inconsistent with any genuine division of the businesses. The only change was in the legal entities carrying on the businesses and, as it would appear, the differences in ownership of the entities.[47]On behalf of AWF, Mr Collings relied principally on three submissions. First, an application for a third party costs order is a summary procedure, which is not appropriate for the determination of contested issues of fact. Secondly, if, as alleged, the transfer to AWF was made with intent to defeat any order for damages or costs and/or was at an undervalue, the claimant is not without remedy but can bring proceedings under the equivalent in Italian law of section 423 of the Insolvency Act 1986. Factual disputes would appropriately be resolved in such proceedings. Thirdly, and in any event, the transfer of the business was not causative of any of the costs incurred by the claimant, and therefore no third party costs order should be made against AWF. I will take each of these submissions in turn.[48]An application for costs is not an appropriate procedure for the resolution of those factual issues which require a trial for their fair determination. It does not follow that an application can be made only where the facts are not in dispute. Whether the facts can fairly be resolved on the application depends on the nature of the evidence put before the court. Take, for example, the question of the purpose of the transfer. There is strong circumstantial evidence that the purpose was to protect the distribution business of Antares from adverse orders. The transfer was made by Mr Gargani but there is no evidence from him. Mr Maynard's evidence, given on information provided by Dr Mattolini, is that "this is not what drove the division of [Antares] business" but no evidence is given of the true reasons, when clearly it could have been. I do not see why this issue cannot, on this evidence, be determined in a summary way. This issue could properly be determined on an application for summary judgment or on a contested winding-up petition, and there is no reason why it should not also be decided on this application. In each case it is a question of examining the evidence before the court and determining whether it raises an issue requiring a trial. On the evidence put forward by the parties on this application, I have concluded that the issues which I have decided do not require a trial.[49]The availability of an alternative remedy against a third party whereby the costs may be recovered is clearly a relevant factor. If a person transfers assets at an undervalue for the purpose of defeating a claim which is being made or may at some time be made, the court may under section 423 of the Insolvency Act 1986 make such order as it thinks fit for restoring the position or protecting the interests of the victims of the transaction. Where, as here, the transferor has been dissolved, the court could order the transferee to make payment directly to the victim. The evidence of Italian law adduced by AWF is that under article 2901ff of the Civil Code a creditor in such circumstances may bring proceedings to declare ineffective a transfer made in those circumstances. This evidence does not establish any basis in Italian law which, in view of the dissolution of Antares, would provide a remedy against AWF and directly in favour of the claimant. Although Mr Collings suggested that a claim might be made under section 423, proceedings would under the Judgments Regulation have to be brought against AWF in Italy and there is no evidence (and it would seem unlikely) that, under Italian conflicts of laws principles, English substantive law would be applied to the transfer. In any event, the existence of an alternative remedy against the third party does not preclude an order under section 51 of the Supreme Court Act 1981 if the facts can properly be determined at that stage and if, on the basis of the facts and in all the circumstances, it is just to make the order.[50]With respect to causation, Mr Tager accepted that the transfer to AWF had no causative effect on the costs incurred by the claimant. This must, I think, be right. Only if Antares would not have defended the claim but for the transfer could it be said that there was a casual link between the transfer and the claimant's costs. There is no evidence that this was the case and nothing in the circumstances from which to infer it. The claim was for £1.5 million, to which Antares had substantial defences. It is hardly likely that, without the transfer, it would not have defended the claim.[51]The question of causation has been considered in a number of the authorities. Until recently, the unanimous view was that a causal link had to be shown. In Hamilton v Al Fayed [2003] QB 1175 , Simon Brown LJ said at para 54 that:
"...proof of causation is a necessary pre-condition of the making of section 51 order against a non-party -as to which there is ample authority and, as I understand it, no dispute ..."
See also Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 at para 28 per Morritt LJ (Butler-Sloss and Sedley LJJ agreeing), Byrne v Sefion Health Authority [2002] 1 WLR 775 at para 35 per Chadwick LJ (Peter Gibson and Longmore LJJ agreeing), Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414 at para 74 per Rix LJ (May LJ agreeing).[52]The jurisdiction under section 5l(3) has recently been reviewed in two cases, in which some relaxation of this position can be seen. Dymocks Franchise System (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 is a decision of the Privy Council in an appeal from New Zealand, but it is there stated that there is no difference between English and New Zealand law on the applicable principles. At para 20, Lord Brown of Eaton- under-Heywood, giving the judgment of the Board, said:
"Although the position may well be different when a number of non-parties act in concert, their Lordships are content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such non- party's involvement in the proceedings."
(emphasis added)[53]The issue of causation was considered by the Court of Appeal in Arkin v Borchard Lines Ltd [2005] 1 WLR 3055 . All the authorities referred to above, except Byrne v Sefton Health Authority were cited. Lord Phillips of Worth Matravers MR, giving the judgment of the court, said at paras 23-24: "23 "Cost shifting" under which costs usually follow the event is not a universal rule in common law jurisdictions. In particular, it is not a rule that applies in the United States. The main principle that underlines the rule is that if one party causes another unreasonably to incur legal costs he ought as a matter of justice to indemnify that party for the costs incurred. A defendant who has wrongfully injured a claimant and who has refused to pay the compensation due should pay the costs that he has caused the claimant to incur, so that the claimant receives a full indemnity. A claimant who brings an unjustified claim against a defendant so that the defendant is forced to incur legal costs in resisting that claim should indemnify the defendant in respect of the costs he has caused the defendant to incur. Causation is usually a vital factor when considering whether to make an award of costs against a party. 24. Causation is also often a vital factor in leading a court to make a costs order against a non-party. If the non-party is wholly or partly responsible for the fact that litigation has taken place, justice may demand that he indemnify the successful party for the costs he has incurred. There have been various circumstances in which the court has considered making an order for costs against a non-party. We shall confine our attention to those cases where this course has been urged on the ground that the non-party had supported the unsuccessful claimant."[54]In the light of these recent statements, it cannot in my judgment any longer be said that causation is a necessary pre-condition to an order for costs against non-party. Causation will often be a vital factor but there may be cases where, in accordance with principle, it is just to make an order for costs against a non-party who cannot be said to have caused the costs in question. In my judgment the circumstances of this case are such as to make it just to make an order against AWF. The transfer to AWF was intended to render it more difficult for the claimant to recover any damages or costs. AWF, through the individuals who controlled it, knew and intended the transfer to have that purpose. AWF was not an independent third party, but was closely connected with Antares. The true position is that nothing significant changed except that the business or businesses previously conducted through one company, Antares, were (apparently) from 22 April 2004 conducted through two companies, Antares and AWF. These arrangements were not disclosed to the claimant or to the court, who were allowed to continue to understand that the entire business remained in the ownership of Antares. When asked to explain the situation, Dr Mattolini writing in the name of Antares did not give a proper explanation.[55]An order for costs against a non-party is exceptional, in the sense described in Dymocks Franchise Systems (NSW) Pty Ltd v Todd at para 25:
"Although costs orders against non-parties are to be regarded as "exceptional", exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against."
[56]In my judgment the facts of the case are exceptional and overall justify the making of an order against AWF. I will accordingly make the order sought against AWF, that it pay 55% of the claimants' costs incurred after 22 April 2004.[57]As against Mr Gargani, I will make an order that he pay 55% of the entire costs of the claimants. He was directly responsible for the transfer to AWF and, in view of my findings on the evidence at the trial that he completely controlled Antares, I have no doubt that he instigated it. Moreover, he misled the court and the claimant as to the status of Antares after its merger with AZ Cermaice SRL , and concealed the merger from the court. The combination of the transfer, the merger and the dissolution of Antares has deprived the claimant of any realistic opportunity of recovering its costs, unless a third party costs order is made. In these circumstances, it is in my view just that he should be responsible for the costs ordered to be paid by Antares.

Cited in 16 later judgments

and 7 more of the most senior