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Group companies, litigation funding and non-party costs orders

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14/11/2017

In a recent case [1], the High Court has clarified the circumstances in which a non-party costs order may be made against a company that funds litigation brought by one of its group companies or subsidiaries.  Nick Lees explains.

The claimant had been unsuccessful in litigation and costs were awarded to the defendants. However the claimant was insolvent and unable to pay.  Section 51 of the Senior Courts Act 1981 (SCA) gives the court a discretion to determine by whom and to what extent costs are to be paid.  Finding that a major shareholder and group company of the claimant had funded and would have benefitted from a successful outcome to the litigation, the High Court exercised its section 51 SCA jurisdiction and made a non-party costs order against the shareholder.  The court confirmed:

  • Section 51 SCA allows the court to make an order that the costs of any litigation be borne by someone who was not a party if:
    • that person funds the litigation; and
    • substantially controls, and/or stands to benefit from a successful outcome to, the litigation.
  • Generally speaking, the pure funding of litigation will not suffice to found a non-party costs order.
  • Similarly, merely being within the same group of companies will not be enough to trigger section 51 SCA costs exposure.
  • In the case of group companies/shareholders, impropriety in the conduct of proceedings is not required before a non-party costs order will be made.
  • Special considerations may apply to directors (who may have obligations to pursue proceedings to protect a company’s interests if necessary). It may therefore be necessary for impropriety in their conduct to be shown before a non-party costs order will be made against them. However, as officers of the company, directors are in a wholly different position to shareholders/group companies.

WM Comment

The court noted that it will rarely be just for a person or company pursuing its own interests in litigation to be able to do so with no cost risk should the proceedings fail or be discontinued (and that will be the case whether or not the person/company is acting improperly or fraudulently). However that does not mean that groups of companies will tactically be able to avoid paying costs by ensuring that neither the claimant nor the funding company have the means to pay.

The lesson to take from this case is that, when deciding whether to pursue and fund litigation, group companies will be well advised to take potential cost exposure under section 51 SCA into consideration.

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[1] Montpelier Business Reorganisation Ltd v Jones & Ors [2017] EWHC 2273 (QB)

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