Costs News

19 November 2020
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Judge rejects non-party costs order against director who guaranteed, but did not pay, fees

The High Court has refused to make a non-party costs order against a director who controlled a company’s litigation because he would not have benefitted from a successful outcome.

The company, Organic Village, actually had a costs order in its favour that it was unable to take to assessment because of a lack of funds and Matthew Gullick, sitting as a deputy High Court judge, said it would be wrong to penalise Cengiz Aytacli for the company’s inability to pay for Costs Lawyers after its solicitors had stopped acting.

The claim by the claimant company, Goknur, was struck out and it paid £185,300 on account of costs. However, Organic Village’s counterclaim resulted in only nominal damages and the judge ruled that Goknur was the successful party, awarding it a quarter of its costs. Under a default costs certificate, Organic Village was ordered to pay £64,000.

But following the breakdown of negotiations about the costs at the end of 2019, Organic Village did not commence detailed assessment proceedings, even after being made subject to an ‘unless’ order by Master McCloud. As a result, the company has to pay back the £185,300. Mr Gullick said this was because it was unable to fund the instruction of Costs Lawyers, in circumstances where its solicitors had ceased to act shortly after the trial.

It was common ground that Organic Village did not have the means to repay the money, having been balance sheet insolvent for several years, and paid the money directly North London firm Hugh-Jones. Goknur then sought the non-party costs order for both sums – a total just shy of £250,000.

The judge accepted the claimant’s submission that Mr Aytacli controlled Organic Village and the conduct of the litigation, and that he had funded the litigation by means of a personal guarantee of Organic Village's debts to Hugh-Jones and his agreement to enter a charge against his property in respect of some of that debt.

But Mr Gullick said the “type and level of funding provided” – in this situation, not actually paying for the solicitors – was relevant to the exercise of the discretion to make the order, as was the fact that the funding only started approximately halfway through what was a lengthy piece of litigation.

The judge went on to reject the submission that the litigation was being conducted by Mr Aytacli for his own benefit. Had substantial damages and costs been awarded, the beneficiary would have been Organic Village by reducing or extinguishing its indebtedness to its creditors.

“In my judgment, it is not correct – and ignores the separate and primary liability of the company for its debts – to conclude that, in the circumstances of this case, proceedings were pursued solely or substantially for Mr Aytacli's own financial benefit, rather than for the benefit of Organic Village and its creditors.”

He continued: “In my judgment, therefore, applying the principles set out in the authorities to which I have referred, this application for a non-party costs order should be refused. It would not be just to make a non-party costs order against Mr Aytacli in these the circumstances.”

Mr Gullick said there was a further reason not to make the order were he wrong about this. Had Organic Village been able to proceed with the detailed assessment, it was “highly probable” that the overall outcome of the costs proceedings would be a payment from Goknur. An application for a non-party costs order would have been “highly unlikely” to succeed in such circumstances.

He said: “In my judgment, to order Mr Aytacli to pay either or both of the sums now sought by Goknur, because of a situation which has resulted from Organic Village's inability to fund the detailed assessment of its own costs, would be to ignore the reality of this litigation, in which Goknur would (but for Organic Village's impecuniosity and inability to fund the costs of a detailed assessment) have been making a substantial overall net payment of costs to Organic Village…

“Whilst as between Goknur and Organic Village the position is now governed by the orders that have been made by Master McCloud, I do not consider that I am prevented from taking the wider context into account when determining the separate non-party costs application against Mr Aytacli.

“To make Mr Aytacli personally liable under a non-party costs order in these circumstances would, in my judgment, result in an unjust outcome for this separate and additional reason.”

Imran Benson (instructed by Hudson Morgan Williams) for the claimant. Nerin Bilgin, director, represented the first defendant. The second defendant appeared in person

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