(1) BARNDEAL LIMITED (2) CHERRYW ALK PROPERTIES LIMITED v LONDON BOROUGH OF RICHMOND-UPON-THAMES [2005] EWHC 1377 (QB)

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
[2005] EWHC 1377 (QB)Case No Case No: H002X02888Venue Royal Courts of Justice, Strand. London. WC2A 2LL
Between
(1) BARNDEAL LIMITED (2) CHERRYW ALK PROPERTIES LIMITEDClaimantsLONDON BOROUGH OF RICHMOND-UPON-THAMESDefendant
Before
Mr Justice NewmanMr Evan ASHFIELD (instructed by Petrou Law Partnership) for the ClaimantsMr Karl KING (instructed by Barlow Lyde Gilbert) for the DefendantHearing date: 5th May 2005Date 30 June 2005
[1]Mr Justice NEWMAN : I have before me an application dated 22 nd March 2005 made in the above proceedings for an order for costs against non-parties to the proceedings. On the 15 th March 2005 I handed down a judgment in this action brought by Barndeal Limited (Barndeal) and Cherrywalk Properties Limited (Cherrywalk) against the London Borough of Richmond upon Thames (RUT) whereby I dismissed the claimants' claim. Further, it was ordered that Barndeal pay the defendant's costs of the action until 29 th October 2003 and that both Cherrywalk and Barndeal pay the defendant's costs of the action from 29 th October 2003. Further, it was ordered that costs were to be paid on an indemnity basis, if not agreed. The proceedings were issued by claim form dated 2 nd September 2002. At that date Cherrywalk had been struck off the register and was not restored until 16 th October 2003.[2]On the occasion when judgment was given, Mr King, counsel for the defendant, indicated, in the broadest terms, that he wished to apply for an order that costs incurred in defending the proceedings should be paid by non-parties. No notice had been given to anyone, including the court, that such an application was to be made. The skeleton argument which had been served the previous day made no mention of the issue. There is no record of the precise terms in which the application was made or foreshadowed, but the court declined to deal with it. It is agreed that the court suggested that whether or not to make such an application required mature consideration. As a result, provision was made in the order for that event. Paragraph 6 of the order reads:
"The defendant shall by 4.00 pm on 23 rd day of March 2005 notify the claimants' solicitors and the court in writing if it intends t~ make any application pursuant to Part 48.2 for an issue to be heard upon an application for an order for costs against either the directors of the first and/or second claimants including the names of each director against whom such application is to be made and specifying the grounds upon which such application is to be made."
[3]It is obvious that if the order is taken as a reflection of the nature and content of the application which was foreshadowed by Mr King, notice was not then given that an application would be made against a non-party to the proceedings who had not been a director of either Cherrywalk or Barndeal at any time material to these proceedings.[4]The notice of application applies for an order against three non-parties, Mr Michael Kay (also known as Michael Angelo), as the manager of Cherrywalk, Mr Elias Demetroudi, a director of Cherrywalk, and Mr Adonakis Orphanou, a director of Barndeal. Mr Demetroudi became a director on 6 th May 1997, but resigned on 17 th October 2003. Mr Orphanou became a director of Barndeal on 30 th April 2002. Mr King, in addressing the objection raised by Mr Ashfield on behalf of the non-parties, was not minded to contend that he had referred to joining any person who was not a director, for example, Mr Kay. Nevertheless, he submitted, that it must have been clear from the. judgment which had been delivered, that the grounds for the intended application turned upon the conduct of Mr Kay. I agree and thus it seems likely that the explanation is that Mr King erroneously treated Mr Kay as a director of one or other of the claimant companies. I shall have to return to the question whether the terms of the order and the late notice to Mr Kay should be given weight in the issues which I have to decide.[5]The judgment in the action must be read with this judgment wherever necessary or in order to amplify any summary of the facts, which the court, for convenience, makes in this judgment. Summary[6]Mr Michael Kay was the principal witness for the claimants in this action. At all material times concerning the events covered by the claim he acted as manager for Cherrywalk. He was very largely responsible for Cherrywalk's business in connection with the provision of accommodation to RUT. He was at pains to avoid acknowledging the extent of his responsibility and the capacity in which he was acting (see judgment paragraph 41). He was directly involved in the negotiation of the contract dated 14 th May 1999 which was the subject of the action. He fabricated a letter dated 4 th May 1999 which falsely claimed that Mr Nayak had agreed that a detailed inventory would not be required (see judgment paragraph 42). He lied to the court about notes which he maintained he had made about the condition of the properties (see judgment paragraph 56). He fabricated letters purporting to be from property owners about the alleged malicious damage (see judgment at paragraphs 63 and 64). The overall conclusion of the court was that, whatever seeds there may have been for a valid claim, the claim, as presented, had been fabricated.[7]The proceedings were issued on 2 nd September 2002 by Barndeal relying upon an assignment dated 14 th July 2002 of what was alleged to be a debt due to Cherrywalk from RUT. RUT launched an application to strike out the action and, in the alternative, to obtain security for costs. The basis of the application to strike out, as it appears from a witness statement of Christopher Warner dated 5 th November 2002, was that, since the agreement between Cherrywalk and RUT came to an end on 14 th May 2000, there could not have been any existing rights capable of being assigned at the date of the assignment. In effect, it was submitted that Cherrywalk had purported to assign "rights or interests" that it did not have during the currency of the agreement.[8]It has been suggested in argument on this application that a material factor in not pursuing the application to strike out was the disclosure of the letter dated 4 th May 1999 relating to the waiver of the need for an inventory (see judgment paragraph 42 and paragraph 6 above). I am not persuaded that the existence of that letter can have had a significant bearing upon the course which was taken at the hearing to strike out when the application was not pursued, but the application for security for costs was successfully made. Security was ordered in the sum of £20,000 and it was subsequently paid. Reliance has been placed upon the presence of Mr Kay at that hearing and an assertion that he was able to give instructions to Cherrywalk's solicitors. It has been submitted that the court should treat this evidence as establishing or going to establish his control of the proceedings.[9]In a letter dated 16 th October 2001, being a letter before action, and at a date prior to the assignment dated 14 th July 2002, Cherrywalk gave notice of the claim for damages, loss of income and interest and particularised the claim by reference to the various invoices which the court concluded had been fabricated for the purpose of the proceedings. It is clear that Mr Kay must have fabricated the documents prior to the dispatch of this letter and it has been submitted that this conclusion points to Mr Kay being the person who controlled the action from the outset.[10]After the assignment, in August 2002 Cherrywalk was struck off the register and was not restored until shortly before it was joined in the action as a claimant. That did not take place until 29 th October 2003. As I have already observed, it is for that reason that costs up to 29 th October 2003 were ordered to be paid by Barndeal and thereafter were ordered to be paid jointly and severally by Barndeal and Cherrywalk. The need to join Cherrywalk arose solely because of the pleaded case that the assignment was invalid. The plea was not abandoned and Buckley J. ordered that Cherrywalk should be joined.[11]Cherrywalk was incorporated on 6 th May 1997 and Mr Demetroudi was appointed a director on 13 th June 1997, but he resigned as a director on 17th October 2003 before Cherrywalk was joined in the action. It seems plain that Cherrywalk was restored to the Register for no other purpose other than being joined in the action and has not carried on business otherwise. He was, therefore, a director at the date of the events the subject matter of the claim, but "did not participate in the day-to-day running of the Cherrywalk companies" (see judgment paragraph 67). He was a director at the date of the letter before action and at the date of the assignment, but his status as a director of Cherrywalk cannot, in itself, avail RUT in pursing this application against him.[12]Barndeal was incorporated on 30 th April 2002 for the principal purpose of taking the benefit of an assignment from Cherrywalk and Mr Orphanou has, at all material times since 15 th June 2002, been the only director of Barndeal. It follows that the decision by Barndeal to commence the action against RUT must have been taken by him acting in his capacity as a director of the company.[13]It will be necessary for me to refer to the law governing applications for costs to be paid by non-parties. It is not disputed that it is an exceptional jurisdiction. The fundamental submission which has been advanced is that the court should regard the case as falling within an exceptional category by reason of the following circumstances:(1) That the nature and extent of the fabricated evidence is extraordinary and amounts to a deliberate attempt to mislead the court into giving judgment in favour of Cherrywalk and Barndeal when there was no entitlement to judgment at all. Implicit in this submission is that each of the three persons named participated in the attempt.(2) The shadowy circumstances of the assignment, had the defendant not challenged its validity, would have enabled unjust enrichment on the part of Barndeal, its directors and shareholders.(3) That the court should conclude that, on the basis of the material before it, that Mr Kay, Mr Demetroudi and Mr Orphanou knew that evidence had been fabricated for the purposes of the claim and that each, with that knowledge, nevertheless was instrumental in the commencement and pursuit of the action. This contention, which underpins the application, amounts to an allegation that each of the three named persons conspired to pervert the course of justice to obtain a judgment, from which they personally intended to benefit by the commencement and pursuit of a fraudulent claim.[14]As Mr King recognised, this amounts to an allegation of the commission by each of the named parties of a very serious criminal offence. If true, it would also provide a cause of action for damages which would include the sums now claimed for costs.[15]Mr Ashfield has appeared for the non-parties on this application and commenced his objections by drawing the attention of the court to a number of procedural deficiencies. I have already referred to the apparent error made in connection with Mr Kay and the likelihood that, when judgment was delivered, he was erroneously regarded as a director. There is force in the complaints made by Mr Ashfield that, despite the period of time which was given by the court to enable the defendants to take a considered view and to prepare for this application, it has come before the court in a less than satisfactory state. Until the very last minute no draft Order was available and RUT had not, as the rules require, stated whether the only matters relied upon were those in the witness statements lodged in support and identified the evidence relied upon. Despite the time which had been made available, no attempt had been made to distinguish between the role of each of the three non-parties.[16]If this application is to be regarded as an application against the non-party directors, it is pointed out that two of the three non-parties, namely Mr Kay and Mr Demetroudi, did not act in the capacity in which they are being pursued whatever their involvement in this case. Next there is the difficulty that so far as the application is addressed against Mr Kay (as a non director), for a significant period of time until Cherrywalk was reinstated, his conduct in the action cannot have been by reason of any continuing ,connection with Cherrywalk, which did not exist as a legal entity. Further until such time as the non-parties drew attention to the point, the defendant local authority was seeking to recover costs against the non-parties, in respect of which they had already received some £35,000 by way of security. Notice[17]It has been established that it will be relevant to the court's exercise of discretion whether to make an order against a non party for it to consider whether the non-party has received notice, before or during the litigation, that he may be made subject to an order for costs. No notice was given to any of the non-parties in this instance because it is obvious that the defendant had not considered making such an application until it received the judgment, which severely criticised the way in which Mr Kay had conducted himself. The citation of cases can be reduced. Reference cap. be made to Balcombe LJ in Symphony Group plc v Hodgson [1993] 4 All ER 143 at page 151 where he set out nine general principles that would apply in an application such as this. It is not necessary to refer to each principle, but they included:(1) that an order for payment of costs by a non-party will always be exceptional;(2) that the non-party should be warned at the earliest opportunity that the applicant may seek to apply for costs against him;(3) that the procedure for determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action .. This departure from basic principles is justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 Lord Brown of Eaton-Under-Heywood summarised the principle as follows:
"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... Generally speaking the discretion will not be exercised against "pure funders" ... Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is the "real party" to the litigation ..... Nor indeed is it necessary that the non-party be the only real party ... provided he is a real party in very important and critical respects."
In Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 (at 1619 H to 1620 D)

Lord Justice Millett said this:

"It is not an abuse of the process of the court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant's costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant's only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered. The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified."
[18]The fundamental difficulty facing RUT is that the principal target for criticism identified in the judgment, and upon which great reliance is placed on this application, is Mr Kay. There is no evidence that he funded this litigation. He has at no material time been a director of Cherrywalk or Barndeal. The case against him is that, according to the findings in the action and because of the misconduct of which he was found guilty in connection with the conduct of the action, it should be concluded that he must have had an interest in the outcome of the proceedings. The court is being asked to infer that, because of his misconduct, it can be concluded that he controlled the proceedings. I have already mentioned the reliance which is placed upon his attendance at a hearing in connection with security for costs. Merely from the fact that he did attend and was able to give instructions to counsel, the court is asked to conclude that he should be regarded as the person who was controlling and funding the proceedings.[19]I recognise that the discretion in the court to award costs against a non-party may be exercised in a wide variety of circumstances. It may be where the third party is considered to be the real party interested in the outcome of the suit or, as

Lord Justice Millett stated:

"It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or that there is some other conduct on his part which makes it just and reasonable to make the order against him."
See Millett LJ in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 at 1619 H to 1620 D. But the court can only act on evidence.[20]Mr Demetroudi did not impress me as a witness. Although I suspect that the business relationship which exists between him, Mr Kay and Mr Orphanou is closer than any of them were prepared to reveal, I am unable to come to any conclusion as to what it amounted to or whether it still subsists. The conclusions to which I came on the credibility of Mr Demetroudi and Mr Orphanou are not probative on the issue of the connection each had to the litigation and whether they were acting in bad faith and for their own purposes and agreed to continue and support the action. That was not a relevant issue in the action. I am satisfied that their conduct might be considered as calling for inquiry and investigation in some court or by some authority, but the evidence required for a proper and fair investigation and inquiry has not been adduced in these proceedings.[21]The grounds for the application, appearing from the Notice, are as follows:- "(i) Mr Michael Kay (also known as Michael Angelo) as the Manager of Cherrywalk Properties Limited, (ii) Mr Elias Demetroudi as Director of Cherrywalk Properties both being in control of Cherrywalk Properties Limited and (iii) Mr Adonakis Orphanou an employee of Cherrywalk Properties Limited and Director of Barndeal Limited being in control of Barn deal Limited improperly caused this action to be brought against the Defendant. Caused the Claimants to adduce and rely upon evidence that was fabricated and therefore they could not and did not have a bona fide belief that the claim was either arguable or legitimate or in the interests of the Claimants. Further they gave directions that the Claimant companies pursue this action when it was known that the Claimants did not have funds to pay for the litigation".[22]The allegation that each of them caused this action to be brought has never been put to any of the non-parties. The allegation that Mr Demetroudi and Mr Orphanou caused the claimants to rely upon fabricated evidence has never been put to them. The alleged "directions" are not in evidence and, save for the assertions made in connection with the security for costs hearing, it is not clear what is being referred to. It would be a denial of the fundamental right of each of them to be heard on such serious allegations if the court was to decide them on this application. Further, since the application is a summary procedure, it is not appropriate for the court to embark upon an inquiry of the type which justice would require. ill the context of these substantial objections to the application, the failings to which I have referred in paragraph 4 above, can only be seen to have exacerbated the position.[23]As to Mr Kay, I am unable to reach a conclusion as to why he acted in the way that he did in the conduct of these proceedings. Of course, I am suspicious because he acted dishonestly. But I am not asked to exercise this exceptional jurisdiction because he has lied and fabricated evidence in proceedings and should be punished for that. It is specifically alleged that he brought the action.[24]As I have observed, it is plain from my judgment that the roles of Mr Demetroudi and Mr Orphanou give rise to suspicion as well. But there is no case against them as directors which would support an order on the grounds that they acted other than in the bona fide interests of the company in bringing the action. Although it is said they did not act in good faith, the knowledge to be imputed to them to support the contention that they acted in bad faith is lacking. Miscellaneous Points[25]I should refer to the question of security for costs and the fact that security was provided. It can be inferred that Mr Orphanou caused the funds to be available so as to enable Barndeal and Cherrywalk to continue the action. RUT could have applied for further security to be provided, but it did not do so. In so far as it is alleged the action was commenced by the non-parties "knowing" that Barndeal could not meet its costs, the allegation cannot be made out. The security was provided.[26]The significance of the May letter to the abandonment of the strike out is overstated. The letter related to the small-capped claim only. The allegation that RUT was misled by the accounts and the lack of candour in connection with the assets of Barndeal on the occasion of the request for security gives rise to questions as to the honesty of Mr Orphanou and Mr Michael, but cannot assist RUT in establishing the basis for the application as set out in the Notice. Conclusion[27]For the reasons I have given, this application against the three named non-parties must be dismissed. The application intimated to the solicitors Petrou Law Partnership has been withdrawn. This judgment should not be taken as amounting to a conclusion that, where misconduct of the nature found to have occurred in this instance can be shown to be causally linked to the control and pursuit of the litigation by any person, the court will be powerless to act. The court has concluded that the facts found in the judgment could well be considered by others, to which the conclusions could be drawn, as worthy of inquiry and investigation.

Cited in 5 later judgments