Case No: A3/2000/2844; A3/2000/2899
Neutral Citation Number: [2001] EWCA Civ 67
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
COMPANIES COURT
MR JUSTICE HART
Royal Courts of Justice
Strand, London, WC2A 2LL
Friday 26th January 2001

B e f o r e :
LORD JUSTICE ALDOUS
LORD JUSTICE MANCE
and 
MR JUSTICE CHARLES
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IN THE MATTER OF NORTH WEST HOLDINGS PLC (IN LIQUIDATION)
AND IN THE MATTER OF NORTH WEST HOLDINGS LIMITED (REGISTERED IN ALDERNEY)
AND IN THE MATTTER OF THE INSOLVENCY ACT 1986

The Secretary of State For Trade and Industry 
Applicant
and

John Backhouse
Respondent
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Mr A. Elleray QC (instructed by D.P. Hardy & Co for the Appellants)
Mr R. Hildyard QC and Miss B. Lucas (instructed by The Treasury Solicitor for the Respondent)
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Judgment
LORD JUSTICE ALDOUS:
1.  This is an appeal against the orders of Hart J of 19th October 1990 which ordered Mr Backhouse to pay the costs of the Secretary of State for Trade and Industry in two petitions.  

2.  The two petitions were presented by the Secretary of State on 21st April 1998.  They sought the winding up of North West Holdings Plc (Holdings) and North West Holdings Limited (Limited) pursuant to sections 124 and 124A of the Insolvency Act 1986.  

3.  Holdings was incorporated in 1987 and the shares were held by Mr and Mrs Backhouse.  They were the directors until 1993 when Mrs Backhouse resigned.  According to the audited accounts for the years 1993, 1994 and 1995 it did not trade and the balance on the profit and loss account was £999.  The audited accounts for the year ending 31st July 1996 showed that Holdings received an income of £10,000 and incurred expenditure to the same amount.  Thus the balance on the profit and loss account remained at £999.  

4.  Limited was a company registered in Alderney with two companies as its shareholders.  The shares in those two companies were beneficially owned by Mr and Mrs Backhouse.  Thus Limited was in effect a company owned and controlled by Mr and Mrs Backhouse.  

5.  Although the accounts of Holdings showed it to be a dormant company, it operated as a front for the business ventures of Mr Backhouse.  He carried on business as a financial and business adviser.

6.  On 16th June 1997 the Secretary of State authorised Mrs Cropper, pursuant to section 447 of the Companies Act 1985, to require Holdings to produce to her such documents as she might specify.  On 19th June Mrs Cropper wrote to Holdings requiring it to furnish its books and to provide a considerable amount of information.  Having seen the books and obtained replies to her queries from the companies, supplied by Mr Backhouse, the petitions to wind up Holdings and Limited were presented on 21st April 1998 with a return date of 3rd June 1998.  On 22nd April 1998 the Official Receiver was appointed as provisional liquidator.  On 1st June 1998 solicitors acting for the companies informed the Secretary of State that the companies intended to oppose the petitions.  There followed on 3rd June 1998 an application to discharge the provisional liquidator.  It was refused on 23rd July 1998, but the court ordered that the application should come on for hearing with the hearing of the petitions.  That decision was the subject of an unsuccessful appeal to this Court.  

7.  The hearing of the petitions started on 1st September 1998.  Unfortunately during the hearing counsel appearing on behalf of the companies became ill with the result that an adjournment became necessary.  During the time of the adjournment, the companies sought to appeal against the judge’s ruling on the validity of the advertisements.  The application failed.  At that stage counsel advised that the companies should not resist the orders sought as they were insolvent.  The court was informed on 19th October 1998 of the decision not to resist the winding up orders being made, but as they were public interest petitions Hart J decided that the hearing should continue and he gave judgment on the same day.  After judgment counsel on behalf of the Secretary of State intimated that his client would be considering making applications, pursuant to section 51 of the Supreme Court Act 1981, for orders that Mr Backhouse should pay the costs personally.  Such applications were made and were heard on 7th and 8th June 1999.  Hart J in his judgment upheld the applications with the result that Mr Backhouse was ordered to pay the costs of both petitions.  Mr Backhouse was refused leave to appeal by the judge, but leave was granted by me on paper on 2nd May 2000.  

8.  The order granting leave to appeal extended the time for service of the notice of appeal until 4.30 pm on 27th May 2000, but service was not effected until at least 10th August 2000.  Thus Mr Backhouse had to seek an extension of time for service.  That was resisted by the Secretary of State.  

9.  The facts relating to the application for an extension of time were not in dispute.  It seems that the Civil Appeals Office notified the parties by letter of the decision granting permission, as the Treasury Solicitor received such a letter on 18th May 2000.  Mr Hardy, the solicitor acting for Mr Backhouse said that he did not receive a corresponding letter and did not have notice of the decision granting permission and requiring service of the notice within 10 days of the order until he received a letter of 19th June 2000 from the Treasury Solicitor.  Thereafter Mr Hardy appears to have done nothing until applying to the Civil Appeals Office for an extension of time on about 10th August 2000.  

10.  The delay that occurred would normally not be excused, but this case is exceptional in that no prejudice has resulted and the steps needed to be taken were formal in that the draft Notice of Appeal and skeleton were before the Court and the Treasury Solicitor knew at an early stage that permission had been given.  In those exceptional circumstances and in the light of the issues involved, we decided to extend the time and to go on to hear the appeal.  Despite that indulgence there can be no doubt that the inaction of Mr Hardy was not acceptable.  I also deprecate his failure to attend court as the solicitor on the record, particularly as his inaction had put his client’s appeal in jeopardy.

11.  Mr Elleray QC, who appeared on behalf of Mr Backhouse, submitted that the judge had wrongly exercised his discretion when ordering Mr Backhouse to pay the costs of the petitions.  I shall come back to the submissions of Mr Elleray, but in essence he challenged the conclusion of the judge that the circumstances were sufficiently exceptional to result in Mr Backhouse, a person not party to the petitions, being required to pay the costs.  He also drew attention to the fact that Mr Backhouse had been ordered to pay the costs prior to the date when the petitions were presented.  He submitted that could not be right.  If it was then he submitted the controlling shareholder and director of a company would always be liable to pay the costs leading up to presentation of a petition.  

12.  Mr Hildyard QC, counsel for the Secretary of State, supported the conclusion and reasons of the judge.  He submitted that this Court should not interfere with the discretion of the judge.  

13.  At the hearing of the petitions there were three complaints which were at the heart of the case of the Secretary of State.  First, no proper books of account were maintained.  It was conceded that the accounts of Holdings were “fundamentally misleading in suggesting that it was a dormant company”.

14.  Second, the business of Mr Backhouse and the companies were intertwined with Mr Backhouse treating the monies earned as his and his wife’s.  

15.  Third the majority of business carried on, the sale of a flexible savings and protection scheme, involved excessive charges which were so concealed as to be misleading.  The judge said that, stripped of its packaging, the scheme involved the client opening a savings bank account with Carter Allen Bank and the making of regular monthly payments into the account.   At the same time the client signed a standing order drawn on that account in favour of account in the name of Premium Collection Services.  That was an account of Holdings.  The monies paid under the standing order were used by Holdings partly to defray the cost of servicing an insurance policy in the name of the client and in part paying Holdings’ charges under the scheme.  Those charges were said by the judge to be excessive.  The charging structure of the scheme was so designed that, for example, in the first year of the scheme very nearly the whole of the client’s regular payments were swallowed up by the charges.  Thus the financial benefit obtained by the client from the arrangements were, firstly the acquisition of a term of life insurance and, secondly a sum, accumulating over time, in his named bank account.  To that was added the undertaking by Holdings to make available their services, but that obligation was terminable on a month’s notice.  

16.  Having analysed the way that the scheme was promoted the judge came to this conclusion:
“The Secretary of State’s case in relation to the scheme is, first, that charges are not appropriately explained in that or any other document.  That is a question that may strike different minds differently.  It is certainly the case that one has to read the document with care and patience in order to discover exactly how the charges work, both as to obtaining and as to amount and the document is certainly not designed to make that task easy.  The real objection, however, is not only to the obscure way in which charging structure is explained in that document, but to the level of charges which result and to which I have already briefly referred.  The expert evidence which is before me, and which in the case of the company’s expert has been fully tested in cross-examination, agrees that the level of charges allowed for by this document is a very excessive one if one takes the comparison of a ten year endowment scheme and is even excessive by reference to the charges levied on a typical 25 year endowment policy, assuming that to be for any reason an appropriate analogy to take.”	

17.  The judge went on to describe the services to be supplied by Mr Backhouse through Holdings as relatively paltry.  He concluded:
“It seems to me that the Secretary of State has made out the case sought to be made out, that is that this product has so little intrinsic merit that the probabilities that clients who decided to devote monthly savings to it must in some way have been under a misconception, whether or not induced by actual misrepresentation as to what they were getting for their money.  As I have already indicated, what they were getting for their money was no more than first, the promise, by a nominally public limited company which was in fact being operated on the footing that it was dormant, that that public limited company would in future provide services, which it might never be under any obligation to provide, and of uncertain value if it did provide them.  Secondly, a savings account with a bank which the client could easily have provided himself if he chose to devote his savings in that particular form of investment.  Thirdly, a term of life assurance policy for a period of four years, with no particular vice and no particular virtue, again something which the client could provide himself without having to submit himself to the egregious charges which Holdings inserted an entitlement to in the scheme.”			

18.  Having stated his views on the scheme, the judge upheld six further allegations of misconduct.  First, Holdings had never obtained a certificate under section 117 of the Companies Act 1985 notwithstanding that it carried on business.  The explanation given for that fact was said to be advice from a firm of accountants.  However the judge pointed out that no direct evidence, apart from Mr Backhouse’s word, existed that such advice was ever given or what its rationale might have been.  Second, neither of the companies appeared to have maintained or preserved any books or records.  Third, their affairs were intertwined, not only between themselves, but also with those of a business run by Mr Backhouse.  Fourth, the accounts of Holdings were misleading in suggesting it was a dormant company.  Fifth, there had been a failure to co-operate with Mrs Cropper.  Sixth, Limited’s participation in the promotion of the scheme and its receipt of monies under banking arrangement from clients who had invested in the scheme was unsatisfactory given that Limited had not been incorporated under the relevant Guernsey legislation with that object.  He concluded:
“For all those reasons it seems to me that the Secretary of State’s proffered reasons for winding-up both the companies on public interest grounds are fully justified.  Quite apart from the fact that, as it is now common ground, the companies are insolvent, I would have been able to see little in the evidence so far as I have heard it to tip the balance in favour of the Respondents.  I recognise that, so far as part of the companies’ case is concerned, the evidence was not complete in the sense of all of it having been tested by cross-examination, but subject to that comment I should have seen little to place in the balance against the powerful reasons which the Secretary of State has adduced for my making the compulsory winding-up order in this case.”	

19.  The Secretary of State’s request that Mr Backhouse should pay the costs was essentially based upon the fact, found by the judge, that the business generated through the medium of the companies had throughout been treated by Mr Backhouse as being carried on by himself and his wife.  The monies paid into the companies’ respective bank accounts were not retained by either of the companies, but were treated as available for drawing by Mr Backhouse.  It was submitted that Mr Backhouse had conducted his affairs and those of the companies for his own personal benefit.  Having disregarded the basic statutory provisions applicable to the conduct of the business of a company, the costs of and incidental to the petitions should be paid by him personally.  He was the sole director of Holdings and the beneficial owner of Limited and he had caused the companies to oppose the petitions regardless of their interest and the interest of their respective clients and creditors.  Further he must have been aware from the outset that that was the position.  

20.  The judge pointed out in his judgment of 24th September 1999 that Mr Backhouse had conducted the affairs of both companies in the manner objected to.  Having reviewed the authorities, he accepted the submission made on behalf of the Secretary of State that the companies had been operated as if they were mere alter egos of Mr Backhouse and that that took the case out of an ordinary category even of public interest petitions.  He accepted that the companies were separate legal entities to Mr Backhouse, but rejected the submission that an order requiring Mr Backhouse to pay the costs would amount to lifting the corporate veil.  He said:
“The question is whether sufficiently exceptional circumstances exist to justify the court in ordering a non-party to pay costs.  In the present context the fact that, without regard to the requirements of company law or (as I find) any justification by reference to responsible professional advice, Mr Backhouse had simply treated the companies as an extension of himself is a feature capable of taking this case outside the ordinary run of cases where a director has been responsible for causing his company to defend legal proceedings.  I do not say that it is a feature necessarily sufficient in itself to justify the making of a costs order but it is a feature whose presence at the very least requires me to examine very carefully what Mr Backhouse’s motives were in causing the companies to defend the petitions.”

21.  The judge went on to consider Mr Backhouse’s motives.  In doing so he had in mind his evidence, contained in paragraph 6 of his affidavit of 19th February and his cross-examination, that he had acted in the interests of the companies.  He said that that evidence sat oddly with the letter of 12th June 1998 which had been written to his solicitors.  That stated: 
“You advised that you have three objectives in fighting this case:
1.	That you would like to continue with a similar scheme albeit under another company umbrella in the future;
2.	That you wish to avoid proceedings being brought against you to disqualify you as a director and possibly any criminal charges for fraud or false accounting.
3.	That you do not wish your political aspirations to be tainted by proceedings going against you.”

22.  The judge found it impossible to accept that the three motives attributed to Mr Backhouse were not his principal ones in deciding to finance, at considerable expense, the companies’ opposition to the petitions.  The judge said that Mr Backhouse perceived the petitions as being an attack on his personal bona fides and their trial as an appropriate forum within which to vindicate it.  

23.  The judge was not disposed to reject Mr Backhouse’s evidence that, in the light of legal advice, he bona fide believed there was a reasonable prospect of fighting off the petitions.  Mr Backhouse had had to concede more or less from the outset the Companies Act irregularities and the defects in accounting, but those, the judge said, would not have led automatically to an exercise by the court of its discretion to wind up on public interest grounds.  He said:
“The legitimacy of the scheme itself was always likely to be the critical issue, and this was in my judgment a matter in respect of which serious argument could be made on his behalf.  As noted in my judgment, the scheme was defended by one financial services expert (Mr Doney) on the grounds which, although I do not accept them in their entirety, were cogent.  I made, and make, no finding that in devising or promoting it Mr Backhouse was guilty of any conscious dishonesty.  Indeed I should record that I was unable to accept the more lurid allegations made by one of the witnesses tendered by the Secretary of State on the hearing of the petitions.”	

24.  The judge concluded that even though there were reasonable prospects of answering the criticisms made of the scheme, that did not mean that it was in the interests of the companies that large sums should be incurred opposing the petitions.  He concluded “I find it impossible to believe that any serious consideration had been given by Mr Backhouse as to what was in the interest of the companies and their creditors, as opposed to his own individual interest, when making his decision to invest large sums of his own money in financing the companies’ defence of the petition.”  In those circumstances he held that this was one of the exceptional cases in which it was just to order Mr Backhouse to pay the Secretary of State’s costs of the petitions.  

25.  The judge went on to consider whether there should be some limit in time as to when the order for costs should start.  He said that it would be illogical to limit the costs to those incurred directly as the result of the opposition.  In his view a major cause of the presentation of the petitions was the discovery by the Secretary of State that the companies had been operated as mere fronts for Mr Backhouse.  The use by Mr Backhouse of the companies to conduct his own personal business was a major contributing cause of the petitions. 

26.  To support his submission that the judge had exercised his discretion wrongly, Mr Elleray directed our attention to Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 and to the principles laid down by this Court in Symphony Group Plc v Hodgson [1994] QB 179.  

27.  As Lord Goff pointed out in the Aiden Shipping case, section 51 of the Supreme Court Act 1981 is concerned with jurisdiction.  The section is expressed so as to give the Court a wide discretionary jurisdiction “leaving it to the rule making authority to control the exercise of discretion (if it thinks it right to do so) by the making of rules of court, and to the appellate courts to establish principles upon which the discretionary power may, within the framework of the statute and the applicable rules of court, be exercised.”  

28.  The Court of Appeal in the Symphony Group case categorised the cases where the courts had ordered a non-party to pay costs into six groups.  It went on to accede to the suggestion of Lord Goff in Aiden Shipping that the appellate courts should establish principles to be taken into account when considering making a non-party pay costs.  Of those principles listed in the judgment of Balcombe LJ, the first and third are material to this case.  Thus it was incumbent upon the judge to treat with caution the application that Mr Backhouse should pay the costs.  Further Mr Backhouse should have been warned at the earliest opportunity of the possibility that an application would be made for an order that he should pay the costs.  

29.  Mr Elleray submitted the judge had failed properly to take into account the views expressed by Court of Appeal in Taylor v Pace Developments Ltd [1991] BCLC 406.  In that case it was sought to make the managing director and sole beneficial owner of a company liable for the costs of winding-up the company.  Lloyd LJ gave the leading judgment.  He said at page 409:
“The controlling director of a one-man company is inevitably the person who causes the costs to be incurred, in one sense, by causing the company to defend the proceedings.  But it could not be right that in every case he should be made personally liable for costs, even if he knows that the company will not be able to meet the plaintiff’s costs, should the company prove unsuccessful.  That would be far too great an inroad on the principle of limited liability.  I do not say that there may not be cases where a director may not properly be liable for costs.  Thus he might be made liable if the company’s defence is not bona fide, as, for example, where the company has been advised that there is no defence, and the proceedings are defended out of spite, or for the sole purpose of causing the plaintiffs to incur irrevocable costs.  No doubt there will be other cases.  But such cases much necessarily be rare.  In the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs.”	

30.  The present case, Mr Elleray submitted, was like that of Re: Land and Property Trust (No. 4) [1994] BCLC 232.  In that case the directors had the support of experienced insolvency practitioners, solicitors and counsel and there was no evidence that they had acted otherwise than in good faith in what they considered to be the interests of the company.  Upon that evidence the Court concluded that an order making the directors pay the costs was wrong because it pierced the corporate veil in circumstances where the directors believed that  they were acting in the interests of the company.  

31.  Mr Elleray sought to distinguish Secretary of State for Trade and Industry v Aurum Marketing Ltd C.A. unreported 20th July 2000 as that was a case where the directors had operated a swindle through the company.  It followed that it could not have been in the interests of anybody, except the director, for the company to continue to exist.  It had one area of business which was a swindle.  Mr Elleray submitted that in the present case the scheme marketed by Holdings was not a swindle.  True the judge had held the charges made to be so high as to be misleading.  However there was “No finding in that advising or promoting it [the scheme] Mr Backhouse was guilty of any conscious dishonesty.”  On the basis of legal advice “He [Mr Backhouse] bona fide believed that there was a reasonable prospect of fighting off the petitions.  …  The legitimacy of the scheme itself was always likely to be the critical issue, and this was in my judgment a matter in respect of which serious argument could be made on his [Mr Backhouse’s] behalf.”  

32.  Mr Elleray accepted that Mr Backhouse was interested in protecting his personal reputation and position, but that was no doubt the position of the director in Taylor v Pace Development.  But where, as in this case, there was no dishonesty and Mr Backhouse had been advised that there was a reasonable prospect of fighting off the petitions, neither he nor the companies could be criticised for defending.  Both companies were solvent when the petitions were presented and in the light of the advice given it was in their interests to defend the petitions.  Thus the order made by the judge amounted to lifting the corporate veil and was wrong.  

33.  It was made clear in Aiden Shipping that it was for the appeal courts to lay down the principles that need to be taken into account when exercising the jurisdiction given by section 51 of the 1981 Act.  Thus, since Taylor v Pace Developments, it has been clear that it is not the normal rule that directors should be made to pay the costs of the company, even if they know that the company will not be able to pay any costs if the defence fails.  

34.  A crucial question is whether the relevant directors (or director) hold a bona fide belief that (i) the company has an arguable defence, and (ii) it is in the interests of the company for it to advance that defence.  If they do then, (in the absence of special circumstances) to make them pay costs of proceedings in which they are not a party would constitute an unlawful inroad into the principle of limited liability.  It follows that directors of a company which is served with a petition would be well advised to consider with the company’s, or their, legal advisers what defences the company has and, having regard thereto, whether it is in the interests of the company to defend the petition.  If the bona fide decision of the directors (or director) is that it is, (in the absence of special circumstances) the directors (or director) should be able to cause the company to defend without fear of being made liable to pay any costs, unless the position should change materially during the lead up to the hearing, or at the hearing.  If so, the decision would need to be reconsidered.  

35.  I cannot accept Mr Elleray’s submissions that the defence to the petitions was conducted in a belief that it was in the interest of the companies.  Despite the judge accepting that Mr Backhouse had been advised that there was a reasonable chance of defending the petitions, the judge held that Mr Backhouse did not give any serious consideration as to what was in the interests of the companies and their creditors.  The costs were expended for Mr Backhouse’s individual interests as set out in the letter of 12th June 1998.  Such a finding of fact provided a sound basis for the conclusion that it would be just that Mr Backhouse paid the costs of the Secretary of State even though Mr Backhouse was not a party to the proceedings.  Further there was ample evidence upon which the judge could come to that conclusion.  

36.  Until presentation of the petitions, Mr Backhouse believed that Holdings was a dormant company.  Holdings was used as a name for marketing the scheme of Mr Backhouse.  The companies were operated as mere alter egos of Mr Backhouse.  As the judge put it, “Mr Backhouse had simply treated the companies as an extension of himself”, and he treated the money earned as his.  It followed that neither Holdings nor Limited had any interest in defending the petitions which were, in essence, brought to put an end to the business of Mr Backhouse being carried out using the names of the companies as a marketing tool.  Holdings, the “dormant” tool of Mr Backhouse, did not own the scheme and all money received was diverted to Mr Backhouse.  It was therefore not surprising that the judge came to the conclusion he did as to the motive of Mr Backhouse, particularly as the scheme, which involved egregious charges, was the idea and property of Mr Backhouse.  That conclusion was that Mr Backhouse had caused the companies to dispute the appointment of a provisional liquidator and to defend the petitions for his own personal reasons and without any, or sufficient, regard to the interests of the companies.  Those reasons were to defend his business or scheme and what he regarded to be an attack on his bona fides.    

37.  I have been concerned that Mr Backhouse was not warned by the Secretary of State that an application might be made that he should pay the costs until after judgment on the petitions.  The requirement for a warning at the earliest opportunity was clearly laid down in the Symphony Group case.  I doubt whether after judgment was the earliest opportunity; but taking the matter as a whole the absence of an early warning is not, in my view, sufficient ground for depriving the Secretary of State of the order for costs granted by the judge.  

38.  I also believe that the judge was right to reject the submission that Mr Backhouse should not pay any part of the costs prior to presentation of the petitions.  I accept that in some cases that would be appropriate, but this is not such a case.  The costs of drafting the petition and the supporting documents were caused by Mr Backhouse marketing the scheme as he did and by failing to co-operate fully with Mrs Cropper.  The decision of the judge on this matter was a proper exercise of his discretion.  I add that this Court was informed by counsel for the Secretary of State that his client accepted that those costs did not include the costs of the investigation pursuant to section 447 of the Companies Act 1985.  

39.  I would dismiss the appeal.  

MANCE LJ:

40.  I agree with the judgment given by Aldous LJ. It is, as it seems to me, unnecessary to go into the question to what extent public interest petitions may be more likely to throw up circumstances in which orders for costs are made against non-parties. At the end of the day, each case must be examined on its own facts. Equally, it is unnecessary to go into the question whether and when an order for costs may be made against a non-party in circumstances which are not in some way “exceptional”. Such an order is itself necessarily exceptional.

43.  I have no doubt that the circumstances of the present case were, on any view, sufficiently exceptional to justify the judge’s exercise of his discretion, in the manner in which he exercised it as regards both costs incurred before and costs incurred after the presentation of the petitions.  Prior to presentation of the petitions, Mr Backhouse had only his own and his wife’s interests in mind. He viewed, and treated, the companies as cyphers, and all monies that they received as monies of his and his wife’s savings and protection business. Further, when the Secretary of State through Mrs Cropper sought to clarify the situation, there was failure to co-operate by Mr Backhouse.

44.  After the presentation of the petitions, it is said that, on advice, Mr Backhouse reversed and corrected the situation and took steps to re-present relevant accounts, so as to recognise the companies’ involvement as principals in relation to the outside world. But the savings and protection business in relation to which the companies would, on this basis, have had some formal role in relation to the outside world would have remained the business of Mr Backhouse and/or his wife. Any future involvement of the companies could only have been as managers or intermediaries. Since it never occurred, it is speculative whether or how such future involvement would have been any real benefit to the companies. The judges’ conclusion that Mr Backhouse was conducting the defence of the petitions in his own and his wife’s business interests, and not those of the companies, reflected in my view both the evidence (particularly his solicitors’ letter dated 12th June 1998) and the reality.

CHARLES J:

45.  I agree with the judgment of Aldous LJ and that for the reasons he gives this appeal should be dismissed.

46.  During the course of the hearing it was confirmed by counsel for the Secretary of State that applications for costs against directors of a company (or others who control a company) who have caused it to trade and, further or alternatively, to defend a petition to wind it up issued pursuant to section 124A Insolvency Act 1986 (a “public interest petition”) is a recent development.  

47.  In Secretary of State for Trade and Industry v Aurum Marketing Ltd  Mummery L.J. C.A. (unreported 20th July 2000) approved the analysis of the authorities relating to the exercise of the judicial discretion to order a non-party to pay costs made by Hart J in this case.  Those authorities relate to different types of cases.  As Mummery L.J. pointed out they give guidance highlighting various factors relevant to the exercise of the discretion but do not attempt to legislate for its exercise.  He stated that he agreed with the comment of Morritt L.J. in Globe Equities Ltd v Globe Legal Services Ltd (unreported 5 March1999 and cited by Hart J in this case) that “exceptional circumstances” had not been elevated into a precondition to the exercise of the power, nor should they be.

48.  Secretary of State for Trade and Industry v Aurum Marketing Ltd  shows that having regard to the guidance given by the earlier authorities the question for the court in respect of an application that a non-party pay costs in a public interest petition (and other types of proceedings) is whether in all the relevant circumstances it is just to order a non party to pay costs.

49.  In this case Hart J pointed out that public interest petitions are an unusual form of proceedings and this comment was approved by Mummery LJ in his judgment in Secretary of State for Trade and Industry v Aurum Marketing Ltd where he said:
“I agree with Hart J who pointed out in Northwest Holdings (supra) that public interest petitions are themselves an unusual form of proceedings which are more likely to attract orders for costs against non-parties.”

Mummery L.J. went on to cite with approval a passage from the judgment of Hart J concerning the characteristics of public interest winding up petitions which founded this view.

50.  However Hart J found that the fact that the companies had been operated as alter egos for Mr Backhouse (using his trading name – Windsor Insurance Services) took this case out of any ordinary category even of public interest petitions.  That unusual feature, taken together with his finding as to Mr Backhouse’s motives, were important factors in the reasoning behind the decision of Hart J on costs and, in reaching his conclusions he did not need to return to the more general features of public interest petitions that make them an unusual form of proceedings.

51.  The question for the court in respect of a public interest petition is whether it is just and equitable for the company to be wound up having regard to the evidence as a whole and the grounds put forward by the petitioner founded on the public interest (see Walter L Jacob & Co [1989] BCLC 345 at 351g to 354c ).  Features of such a petition that distinguish it from other petitions to wind up (and many other proceedings) and make it an unusual form of proceedings are:
(a)	the petition is based on a conclusion of the Secretary of State that it appears to him to be expedient in the public interest that the company should be wound up,
(b)	that conclusion, and thus the proceedings, are often based on information obtained by the Secretary of State as a result of an investigation instigated by him (or another regulator) pursuant to a statutory power (e.g. section 447 Companies Act), and
(c)	the allegations which found such conclusion of the Secretary of State and the application to wind up will often include allegations that amount to an assertion that the directors (or others who have been in control of the company and caused it to trade) have abused the privilege of trading with limited liability.
Such an abuse can be, but does not have to be, based on allegations of dishonesty.  Certainly it is often not necessary to allege dishonesty to explain why the Secretary of State concluded that it is expedient in the public interest for a company to be wound up and seeks a winding up order on that basis, or to prove dishonesty to show that it is just and equitable that the company be wound up.   

52.  There are a wide range of business activities that can found a public interest petition to wind up a company but the conclusion of the Secretary of State upon which the petition is based means that it will often assert that the activities of the company are such that the members of the public who deal with it are exposed to unacceptable risks which are different in kind to the risks flowing simply from the advantages of limited liability.  

53.  Therefore (as pointed out by Hart J) the petition will often make allegations which are severely critical of the person or persons who controlled the company. Such criticisms can be, or can potentially be, very damaging to the individuals concerned but the fact that they therefore have strong personal motives for causing the company to defend does not mean that the company does not have an arguable defence that it is in its interests to advance.

54.  It is established by Secretary of State for Trade and Industry v Aurum Marketing Ltd that the power to order a non-party to pay costs is not limited to cases of bad faith and in my judgment when the court is invited to exercise that power in a public interest petition it may take into account (a) the nature and extent of the risks to which the public have been exposed by the activities of the company and any abuse of the privilege of trading with limited liability, and (b) the participation therein of the non-parties.

55.  Further it can be expensive and thus onerous, or potentially onerous, for the company (and the individuals who control it) to fund the defence of a public interest petition. Indeed in some cases it may be financially impracticable or imprudent for the relevant individuals to fund such a defence leaving aside the possibility that they might be ordered to pay costs personally.  In my judgment these are also factors that the court may take into account when considering what, if any, order for costs should be made against a non-party in a public interest petition.

56.  But I add that in my view it would normally not be particularly expensive or onerous for the company through the persons who control it to explain why the activities of the company are, or were, bona fide business activities and do not warrant a conclusion that it is expedient in the public interest that the company be wound up or a winding up order being made.  They could do this either during the investigation carried out prior to the issue of the petition or in response to the petition.  In my judgment in the absence of such an explanation allegations that (a) the company has a good defence, (b) the Secretary of State was wrong to conclude that it appeared expedient in the public interest that the company should be wound up, but (c) the company and the relevant individuals cannot afford to defend, would, in the absence of special circumstances, have a hollow ring to them.

57.  It follows in my judgment that an assertion that the company, or the relevant individuals, had been advised by solicitors that there was an arguable defence and believed this to be the case which is not accompanied by an explanation of the basis of that defence (and advice) in the absence of special circumstances would not, of itself, found a conclusion that it would not be just to order those individuals to pay some or all of the costs of the proceedings.  In my judgment this is because, save in exceptional circumstances, such an assertion would not demonstrate by reference to the question identified by Aldous LJ in his judgment that the relevant individuals had a bona fide belief that the company had an arguable defence that it was in its interests to advance.

58.  Finally I add that I agree with Aldous L.J. that in this case the absence of an early warning that he would seek costs against Mr Backhouse is not a ground for depriving the Secretary of State of the order for costs made by the judge.  However in my judgment if the Secretary of State intends to, or may, seek an order for costs of a public interest petition against non-parties he should generally inform them that this is so as soon as is practicable.  It may often be that this will be at, or shortly after, the time that the petition is served. 

ORDER:	Appeal dismissed with costs; £7,000 plus VAT, to be paid to the Respondents as an interim payment, within 21 days.

(Order does not form part of approved Judgment)