Case No: A3/2011/3354
Neutral Citation Number: [2012] EWCA Civ 1570
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
CARDIFF DISTRICT REGISTRY
HIS HONOUR JUDGE CHAMBERS Q.C. 
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 4 December 2012
Before:

LORD JUSTICE THORPE
LORD JUSTICE LLOYD
and
LADY JUSTICE BLACK
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Between:

	ROBERT HUGH THOMAS DAVIES	Claimant
Appellant	
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	IAN WATKINS	Defendant
Respondent	

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(Transcript of the Handed Down Judgment of
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Jonathan Russen Q.C. (instructed by Robert Davies Partnership LLP) for the Appellant
Richard Ascroft (instructed by Acuity Legal Ltd) for the Respondent

Hearing date: 3 October 2012
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Judgment
Lord Justice Lloyd: 
1.	This appeal is brought against an order of His Honour Judge Chambers Q.C. sitting as a Judge of the High Court of Justice, Chancery Division, in Cardiff, made on 2 November 2011.  The appellant is the Claimant, Mr Davies.  The respondent is the First Defendant, Mr Ian Watkins.  Mr Davies is, and brought the proceedings as, the executor of the late Mrs Doreen Watkins, mother of Mr Ian Watkins and of two other sons who were also Defendants but who took no part in the proceedings.  She also had a daughter, Mrs Gaynor Colthart.  The parts of the order which are challenged on the appeal are, first, an order that Mr Davies is not entitled to take his costs of the proceedings out of the estate of Mrs Watkins and, secondly, an order that Mr Davies pay to Mr Ian Watkins, out of his own assets, Mr Ian Watkins’ costs of the hearing of the proceedings on 24 October 2008, and half of Mr Ian Watkins’ costs of the hearing on 2 November 2011.
2.	Mr Davies was represented on the appeal by Mr Jonathan Russen Q.C., replacing Mr Andrew Ayres who had appeared for Mr Davies at various stages in the court below (though not on 2 November 2011) and was to have conducted the appeal, but had been injured shortly before the appeal was due to come on.  Mr Richard Ascroft appeared for Mr Ian Watkins, as he had done below.  Permission for the appeal was given by Lord Justice Patten.
3.	Before I explain the course of the proceedings and how the judge came to make the order as to costs which is challenged, I must describe the background briefly.  Mrs Watkins was the widow of the late Ivor Watkins who died on 25 October 2000.  His estate included one of the two issued shares in a company called Redijo Ltd (the “Company”); the other was held by Mr Ian Watkins.  They had been the directors of the Company; Mr Ian Watkins became and remained the sole director.  The Company had one asset, a long lease of some land in Cardiff which, at any rate from time to time, was seen as having development potential.  Mr Ivor Watkins left his share in the Company to his widow.  She died on 25 May 2005.  Her estate included a house which she left to her daughter, and the single share in the Company which formed part of her residuary estate, which she left to her three sons in equal shares.  
4.	The articles of association of the Company contain no provision which would enable Mr Davies, as executor, to require Mr Ian Watkins to purchase the single share from the estate.  Accordingly, the realisation of the share posed a problem for Mr Davies.  In 2006 the Company’s auditors valued the share at £181,213, applying a discount because of lack of control.  In 2007 Mr Ian Watkins made a without prejudice offer of £125,000 to each of his two brothers for their interest in the share (thereby implying a value of £375,000 for the share) but this was rejected.  In February 2008 HMRC valued the share at £133,853 for inheritance tax purposes as at the date of Mrs Watkins’ death.  From late 2005 until 2008 correspondence passed to and fro between Mr Davies and those acting for Mr Ian Watkins relating to the value of the share.  It is not necessary to go into the details of that.
5.	On 5 June 2008 Mr Davies wrote to Mr Ian Watkins stating his intention to apply to the court for directions.  On 2 July 2008 Mr Davies issued a Part 8 Claim Form seeking such directions, joining as Defendants Mr Ian Watkins and his two brothers, supported by a witness statement.  The proceedings so commenced are those in which this appeal arises.  Because of the nature of the submissions made on the appeal, I need to describe the course of the proceedings in a little detail.
6.	Mr Davies’ letter dated 5 June 2008 started by informing Mr Ian Watkins that Mr Davies intended to apply to the court “for directions about taking legal proceedings against you and [the Company] in order to realise the full value of the estate’s shares in [the Company] either by liquidation or by order requiring you to purchase the estate’s shares at a valuation properly reflective of their true worth”.
7.	By the Claim Form Mr Davies sought “directions as to residuary estate of the deceased and in particular the interest of the estate in the share capital of” the Company.  The claim was said to be brought under the principles in Re Beddoe [1893] 1 Ch 547.  Mr Davies’ witness statement explained that he sought the court’s directions “as to how I should proceed in the light of the impasse which I have now reached in dealing with the only significant asset in the residuary estate of the deceased”, namely the share in the Company.  He described what he knew of the history of the Company, from before the death of Mr Ivor Watkins to date, and his attempts to engage with Mr Ian Watkins since the death of Mrs Watkins about the value of the share and its realisation for the benefit of the estate.  At the end of the witness statement he said that the estate could only realise the true value of the share by approaching the situation in a normal commercial manner, with full and up-to-date information.  He went on: “The only way in which I can do justice and fairness to the interests of the residuary beneficiaries as a whole is to take steps to realise true value for the shares in [the Company] whether by winding-up petition or by unfair prejudice petition”.  He exhibited to his witness statement, first, a bundle of correspondence, secondly instructions to Counsel and enclosures, and thirdly an opinion of Counsel.  Because of the conflict in the position of Mr Ian Watkins, the latter two exhibits were not served on him.  Mr Davies asked for the court’s authorisation to commence appropriate proceedings against Mr Ian Watkins and the Company in order properly to realise the estate’s interest in the share in the Company.  That being the objective of the proceedings, it was appropriate to describe them as brought on the basis of the Court of Appeal’s decision in Re Beddoe.  They have been referred to, accordingly, as the Beddoe proceedings.
8.	Mr Ian Watkins put in a witness statement in answer dated 31 July 2008.  He put in issue a good deal of the history.  More to the point, he asserted that there would be no proper basis for either form of proceeding indicated in Mr Davies’ witness statement, whether a petition for a winding-up on the just and equitable ground, or an unfair prejudice petition under section 994 of the Companies Act 2006.  He complained of the absence of any letter before action in relation to any such proceedings.  Despite that, he made an offer to purchase his brothers’ interests in the share, which can be summarised as follows.  The value of the share would be a pro rata value of the entire share capital of the Company (so without any discount for lack of control); he would pay to each of his brothers one third of the value in return for a transfer to him of the share; the value of the share was to be determined by an independent expert to be identified by agreement if possible, acting as an expert; the costs of the valuation were to be borne equally by himself and the estate, unless the valuation came to less than the figure on which his previous offer to his brothers was based, in which case his brothers would pay the costs; Mr Davies would have a right of access to all information about the Company bearing on the value of the share, and both he and Mr Davies should have the right to make submissions to the valuer, in a form to be decided by the valuer.
9.	Mr Davies made a witness statement in reply on 15 September 2008.  He emphasised that his complaint was about being deprived of access to information about the Company.  He took issue in terms with some of what Mr Ian Watkins had said, but said that the offer made in Mr Ian Watkins’ witness statement was the approach that he had tried to encourage Mr Ian Watkins to adopt for some time past.  In turn Mr Ian Watkins made a further witness statement on 6 October 2008.
10.	In the meantime, Mr Davies had written seeking clarification of the offer on 9 September 2008.  One obvious point was that, since the share was an asset of the estate, and there were liabilities which would need to be discharged, including by way of inheritance tax, the payment would have to be to Mr Davies, not directly to the brothers. Further correspondence ensued.  The application came on for a first hearing before His Honour Judge Graham Jones on 24 October 2008, listed for a day.  It was adjourned part heard.  We were told, and can readily believe, that the judge urged the parties to reach agreement rather than incur further costs by way of contested proceedings.  The correspondence continued, with that encouragement.  Mr Ian Watkins’ solicitors set out a more detailed offer on 11 November 2008, making it clear that it was not intended to deprive the estate of funds by making payment direct to the brothers.  On 24 November Mr Davies replied, taking issue with some of the details of the offer, including that the valuation should be as at the date on which the valuer was instructed.  His position was that the date should be 25 May 2007, two years after the death of Mrs Watkins.  The correspondence continued, the valuation date being one point which remained at issue.  A further hearing before Judge Graham Jones on 3 December 2008 was adjourned for the negotiations to be pursued.  By 12 December the parties had agreed the terms of a draft consent order.  In fact the consent order was not sealed until November 2009, and in the meantime there had been separate proceedings as to whether there had been a binding compromise.  It was held (in favour of Mr Davies and against Mr Ian Watkins) that there had been.  For present purposes the critical feature of the consent order was that the date of the valuation was to be agreed between the parties (but was not to be before June 2007) and in default of agreement was to be determined by the court.  No provision was agreed as to the costs of the proceedings.
11.	Once the consent order had been sealed, the parties instructed an agreed expert, Geoffrey Mesher, to value the share.  Since they had not agreed what the relevant date was, he was asked to provide valuations at two dates: June 2007 and December 2008.  He did so on 18 October 2010.  His figures showed a striking difference: in July 2007, according to him, the Company was worth £712,000, so the share was worth £356,000, whereas as at December 2008 the Company was worth no more than £12,000, and the share accordingly a mere £6,000.
12.	Mr Ian Watkins then issued an application to the court to have the right date determined.  That issue came before Judge Chambers for decision on 9 June 2011.  He gave judgment on 23 August 2011 in favour of Mr Ian Watkins, deciding that the later date was the correct one.  Accordingly, no more than £6,000 was payable by Mr Ian Watkins to Mr Davies as executor for the share.
13.	That then gave rise to a debate as to the proper order for costs in respect of the proceedings.  Mr Davies agreed that he should pay Mr Ian Watkins’ costs of the application to decide which date was relevant.  That was embodied in the judge’s order of 2 November 2011 by consent.  The parties did not agree as to the other outstanding costs.  That was what the judge had to decide, and did so by the parts of his order which are the subject of this appeal.
14.	Unfortunately there is no transcript of the judge’s judgments given on 2 November 2011.  Instead, we have a note prepared by the parties from their notes which has been submitted to and approved by the judge.  He gave two judgments, the first concerned with the question whether Mr Davies should be entitled to recover his costs from the estate of Mrs Watkins, as to which he held that Mr Davies was not so entitled, and the second with Mr Ian Watkins’ application for an order that Mr Davies pay some part of his costs of the proceedings, beyond those of the application about the valuation date.  As to that he held that Mr Davies should pay the costs of the hearing on 24 October 2008 and half the costs of the hearing on 2 November 2011.
15.	According to the note that we have, in the first judgment, given at about 2.15 in the afternoon, he said this:
“This ruling is confined to the question whether it is proper for the claimant to take his costs out of the estate.  There are no real assets in the estate and it may be insolvent: there is undoubtedly a liability to HMRC and the only property of substance has been transferred, so there are no assets in the estate to meet the liability.  There have been extended discussions about the costs but, looking at the correspondence, it is wholly inappropriate for the claimant to get his costs from the estate, even if there were money available.  There is a proper way of doing things and he has overlooked the need to do that.
The White Book demands that there should be a pre-action protocol letter. 
Looking at the letter dated 5th June 2008 from the claimant to the first defendant, I find it wholly inappropriate for the requirements of the protocol.  It should have had details of the basis of the relief clearly set out.  Furthermore, at no stage did he ever serve a draft of the statement of case so it was only after the start of the proceedings that it could finally be said what the first defendant was facing.
On 31st July the first defendant responded at length and in particular made an offer tightly in keeping with the requirements set out by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092, at 1107-8.
In the circumstances it might have been supposed that the response would be a clear engagement with the offer but instead the claimant still felt it necessary to put forward matters relevant to Beddoe application rather than dealing with the offer made in the witness statement.  It is suggested that in some way the first defendant reneged; not so.  The claimant, having chosen to put forward a substantive case instead of dealing with the O’Neill offer, the first defendant was entitled to refute that there was a settlement.  So no one knew who was right or wrong and it went to a hearing when it should not have done and should have settled in the form of the offer.
It is not right that the fund should be called upon to reimburse the claimant who did not carry out the proper procedure.  Therefore, there can be no resort to the estate by way of reimbursement.”
16.	In turn, at about 3pm he gave his second judgment, as follows:
“I am now dealing with the application by the first defendant for Mr Davies to pay the totality of the costs.  It seems to me that this is going too far.  The position is postulated on the supposition that if a proper pre-action protocol letter had been written there would have been a response as is found in paragraph 79 of the statement dated 31st July 2008 and after that things would have proceeded in a smooth fashion with minimal costs until the matter was put to bed.
Unfortunately, the events that one does know about indicate that the contrary would have occurred.  It seems to me that, inevitably, there would have been costs incurred by the first defendant, for which the estate or the claimant would not be liable.  It seems to me that I should take a common sense approach to this matter.  The fact remains that I take the view that the Beddoe application should never have resulted in the hearing of the 24th October 2008.  I take the view that it would have been necessary for a properly prepared letter, which would have incurred costs.  The witness statement of the 31st July was made necessary by the witness statement in support of the application, to which it had to be directed.
It seems to me that, on a rough and ready approach, the claimant should be personally liable for the costs of and incidental to the hearing in October, including the preparation of the first defendant’s evidence in respect of that hearing. 
Having regard to the Part 36 offer, the claimant is to pay one half of the first defendant’s costs of today.”
17.	The judge’s reference to the only asset of substance having been transferred is to the house which Mrs Watkins had owned, which she left by her will to her daughter.  Mr Davies assented to the vesting of this property in Mrs Colthart on 29 August 2008.  (The date was not in the papers but we were told of it by Counsel on instructions.)
18.	Although the issue as to whether Mr Davies is entitled to an indemnity for his costs out of the estate of Mrs Watkins is of theoretical rather than practical importance, for the reason that there is really nothing left in the estate, it is nevertheless appropriate to start an analysis of the issues on the appeal at this point.  As is apparent from the terms of the judge’s judgment, the two issues overlapped considerably in his mind.  
19.	In the case of Re Beddoe itself, a trustee of settled land had resisted, unsuccessfully, an action by the life tenant for delivery up of the title deeds to the settled land.  Judgment was given against him in the Queen’s Bench Division with costs.  The trustee then applied in the Chancery Division for an order that he should recover out of the trust property both his own costs and those that he had been ordered to pay to the life tenant (a total of some £116).  Mr Justice Kekewich made the order sought.  The representative defendant beneficiary appealed against this order to the Court of Appeal.  There was a preliminary point as to whether leave was required for the appeal under the rules as they then stood; that was decided in favour of the appellant.  The point there was that the recovery by a trustee of costs out of the trust fund was not a matter of the court’s ordinary discretion, such as were the costs awarded inter partes in ordinary litigation (for example in the Queen’s Bench action in that case).  At that time an appeal lay, but only with leave, against a costs order which was a matter of the general discretion.  
20.	Then the court turned to the merits of the case.  Both Lord Justice Lindley and Lord Justice Bowen, in trenchant terms, criticised the trustee for having taken the course he did, instead of applying to the Chancery Division for directions as to whether he should defend the life tenant’s action.  They held that Mr Justice Kekewich had been wrong to allow the trustee all his costs out of the estate, including those which he had been ordered to pay to the life tenant in the Queen’s Bench action.  Instead he was to be allowed only those costs that would have been incurred if he had applied to the court for such directions.  Those costs were fixed at £35 for the costs of the action which would have been incurred in any event if an application for directions had been issued, £20 for the trustee’s costs of such an application and £20 for the defendant beneficiary’s costs, so a total of £75 instead of the £116 allowed by Mr Justice Kekewich.
21.	Lord Justice Lindley said this at pages 557-8:
“But a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel’s opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances.  If, indeed, the Judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate.
…
I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally.  The words “properly incurred” in the ordinary form of order are equivalent to “not improperly incurred.”  This view of a right of a trustee to indemnity is in conformity with the settled practice in Chancery and with Turner v. Hancock (1882) 20 Ch D 303, the latest decision on the subject.
But, considering the ease and comparatively small expense with which trustees can obtain the opinion of a Judge of the Chancery Division on the question whether an action should be brought or defended at the expense of the trust estate, I am of opinion that if a trustee brings or defends an action unsuccessfully and without leave, it is for him to shew that the costs so incurred were properly incurred.”
22.	In turn Lord Justice Bowen said this at page 562:
“If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred.  If a trustee is doubtful as to the wisdom of prosecuting or defending a lawsuit, he is provided by the law with an inexpensive method of solving his doubts in the interest of the trust.  He has only to take out an originating summons, state the point under discussion, and ask the Court whether the point is one which should be fought out or abandoned.  To embark in a lawsuit at the risk of the fund without this salutory precaution might often be to speculate in law with money that belongs to other people.”
23.	From that decision has come the label “Beddoe application” for an application to the court for directions as to whether a trustee should bring, continue or defend proceedings as such.  Such an application is, however, only a particular example of the sort of application which trustees can make to the court for guidance if they are in doubt as to what course to take in the execution of the relevant trusts.  Such applications may seek directions, for example, as to whether to accept an offer to purchase a trust asset, or whether to take particular steps to sell such an asset.  Issues on which the court’s directions are sought may often arise where there is a conflict between the positions or interests of two or more beneficiaries on the point.  A paradigm example arises where the defendant to possible proceedings is a beneficiary and other beneficiaries have a different interest in the outcome of the proceedings. 
24.	The conflict of interest on the part of a beneficiary who is a potential defendant to proceedings by the trustee is reflected by the fact that, contrary to the normal rule, not all the evidence will be served on that defendant (as happened here) – so as not to disclose to him privileged material which he would not otherwise be entitled to see – and that defendant may be excluded from part of the hearing at which such material is referred to: see Re Moritz [1960] Ch 251.
25.	If the court directs that the trustee should commence, or continue, proceedings against a defendant beneficiary, then those proceedings would normally be entirely separate (in whatever court they are brought) and would be governed by the normal rules as to hostile litigation, including the applicable costs rules.
26.	As regards the costs of the application for directions, the normal rule is that, absent improper conduct, the costs of the trustee and of the beneficiary defendants will be paid out of the trust fund.  So far as the trustee is concerned, this is a particular example of the general proposition now set out in section 31(1) of the Trustee Act 2000:
“(1)	A trustee—
(a)	is entitled to be reimbursed from the trust funds, or
(b)	may pay out of the trust funds,
expenses properly incurred by him when acting on behalf of the trust.”
27.	By virtue of section 35 of that Act, the same applies to personal representatives.
28.	Just as the Court of Appeal decided, in Re Beddoe, that an appeal lay without leave, because the order under appeal was not an order made in exercise of the court’s general discretion as to costs inter partes, so in the present case the judge’s order as to the costs incurred in 2008 was not (and should not have been) an application of the ordinary rules as to the incidence of costs as between parties to contentious litigation.  It seems to me that the judge in the present case fell into error because he overlooked that feature of the case.
29.	A number of provisions of the CPR and their Practice Directions are now relevant to Beddoe applications and similar proceedings.  Section I of Part 64 of the CPR applies to proceedings for directions, which are within the phrase “claims for the court to determine any question arising in the administration of the estate of a deceased person or the execution of a trust”: see rule 64.2(a).  No particular point arises on the rules.  Practice Direction 64B governs applications to the court by trustees for directions.  In 2008 paragraph 7.2 was in the following terms:
“Applications for directions whether or not to take or defend or pursue litigation should be supported by evidence including the advice of an appropriately qualified lawyer as to the prospects of success and other matters relevant to be taken into account, including a cost estimate for the proceedings and any known facts concerning the means of the opposite party to the proceedings, and a draft of any proposed statement of case.”
30.	In turn paragraph 7.5 was in these terms:
“On an application for directions about actual or possible litigation the evidence should also state whether (i) any relevant Pre-Action Protocol has been followed; and (ii) the trustees have proposed or undertaken, or intend to propose, mediation by ADR, and (in each case) if not why not.”
31.	Both paragraphs have been amended somewhat since then.  The only change on a point relevant to the present application is that paragraph 7.2 no longer refers to a draft statement of case.
32.	Part 48 of the CPR is also relevant, with rule 48.4 which is as follows:
“(1)	This rule applies where –
(a)	a person is or has been a party to any proceedings in the capacity of trustee or personal representative; and
(b)	rule 48.3 does not apply.
(2)	The general rule is that he is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund or estate.
(3)	Where he is entitled to be paid any of those costs out of the fund or estate, those costs will be assessed on the indemnity basis.”
33.	This is amplified by paragraphs 50A.1 and 50A.2 of the Costs Practice Direction, as follows:
“1.	A trustee or personal representative is entitled to an indemnity out of the relevant trust fund or estate for costs properly incurred, which may include costs awarded against the trustee or personal representative in favour of another party.
2.		Whether costs were properly incurred depends on all the circumstances of the case, and may, for example, depend on
(1)	whether the trustee or personal representative obtained directions from the court before bringing or defending the proceedings;
(2)	whether the trustee or personal representative acted in the interests of the fund or estate or in substance for a benefit other than that of the estate, including his own; and
(3)	whether the trustee or personal representative acted in some way unreasonably in bringing or defending, or in the conduct of, the proceedings.”
34.	The position seems to me to be fairly summarised in Lewin on Trusts, 18th ed., paragraph 21-64, as follows:
“The right of a trustee to indemnity in respect of costs extends only to costs properly incurred in the execution of the trust.  By this is meant costs which have been both honestly and reasonably incurred.  A doubt is to be resolved in favour of the trustee, and so the right is sometimes expressed in terms of a double negative, that is the trustee is entitled to costs not improperly incurred.  The right of indemnity can be lost or curtailed by such inequitable conduct on the part of the trustee as amounts to a violation or culpable neglect of his duty as trustee.”
35.	On this basis, it can be seen that, when Mr Davies applied to the court in 2008 for directions as to what he should do as regards the share in the Company which was comprised in the residuary estate, on the one hand he was following the general guidance given consistently by the cases and, on the other hand, he could expect to be entitled to an indemnity for his costs of making the application out of the residuary estate unless he was found not to have acted properly in making the application and thereby incurring the relevant costs.  Correspondingly, although the CPR provisions do not deal with the position expressly, Mr Ian Watkins could expect to be indemnified out of the estate for his costs of participating in the application, so long as the costs were not improperly incurred.
36.	It is also worth noting that, if the proceedings had not been compromised, and if Mr Ian Watkins had been able to persuade the judge that the contemplated proceedings ought not to be brought against him, for example because they stood no chance of success, that would itself have been a positive result, of a kind, for Mr Davies (though not for the other beneficiaries) in that Mr Davies would then have been protected against any suggestion from the others that he ought to have taken such proceedings.
37.	As matters stood in October 2008, Mr Davies held, as executor, one problematic asset, which might have had a substantial value but which he could not readily realise.  There was no realistic possibility of selling it on the open market, and the only likely purchaser, Mr Ian Watkins, was playing hard to get, to say the least, although he had made at least one offer in the past.  Mr Davies had taken advice from Counsel which, we must assume, supported at least to some extent the idea of starting proceedings against Mr Ian Watkins, either under section 994 of the Companies Act 2006 or by way of a winding-up petition on the just and equitable ground.  Mr Davies had therefore commenced proceedings joining the beneficiaries as defendants in which he sought directions from the court as to what he should do.  Mr Ian Watkins had responded to the issue of the proceedings, on the one hand by opposing them on the basis that there was no prospect of the contemplated proceedings being successful but, on the other hand, also by making an offer to purchase the share.  That offer was not at first in satisfactory terms, since it involved payment to the brothers, not to the executor, but it was an improvement on the previous position.  Clearly a negotiated solution was the most desirable, but it had not yet been reached.
38.	In those circumstances, the Beddoe proceedings came on for the first hearing before Judge Graham Jones, and the matter was argued for some time.  He gave judicial endorsement to the idea that negotiations, already under way, should be pursued, and that is what happened, although another hearing date went past, with a limited attendance, before agreement could be reached.  It is therefore said, on behalf of Mr Davies, that at that stage the issue and pursuit of the proceedings was not only reasonable but fully justified in that it was by that means that Mr Ian Watkins was prompted to make an offer that, eventually, led to the consent order.
39.	That is not how the judge saw the case.  The note of his two judgments set out above shows that he had a number of concerns.  He considered that Mr Davies had not gone about the matter in the proper way.  In particular, there had been no adequate pre-action protocol letter, and no draft statement of case.  The letter dated 5 June 2008 had been inadequate.  In turn, when Mr Ian Watkins made the offer set out in his witness statement dated 31 July 2008, Mr Davies did not engage with it properly, instead making points relevant to the proceedings.  The case ought never to have gone to a contested hearing on 24 October 2008; that – and indeed Mr Ian Watkins’ witness statement of 31 July – would have been unnecessary if Mr Davies had sent a properly prepared letter at the outset.  There is an element of confusion in the judge’s reference to Mr Ian Watkins being entitled to refute that there had been a settlement – that related to the position in 2009, after the compromise had been agreed in December 2008.  Not only was Mr Ian Watkins not entitled to dispute that there had been a compromise (as a result of which he lost that litigation and had to pay the costs) but because it came after the compromise it was irrelevant to the issue which the judge had to decide.  Nevertheless it seems to have contributed to the judge’s view that the case ought not to have proceeded to a contested hearing.
40.	Mr Ascroft, for Mr Ian Watkins, does not rely on every point mentioned by the judge.  He concentrated on four points:  the inadequacy of the letter of 5 June 2008 and its non-compliance with the pre-action protocol, the absence of a draft statement of case, Mr Davies’ failure to engage properly with the offer made by Mr Ian Watkins in his witness statement, and the transfer to Mrs Colthart of the house, leaving the estate with no asset other than the share.
41.	As to the first point, there is no pre-action protocol which relates to Beddoe applications, so there was no default on the part of Mr Davies in that regard.  Nor is there a pre-action protocol for unfair prejudice petitions or winding-up petitions on the just and equitable ground.  I note that, in the general Practice Direction as to Pre-Action Conduct, paragraph 2.2(3) provides that the principles set out in the Practice Direction do not apply to “most applications for directions by a trustee or other fiduciary”. As such, therefore, this point is of no relevance to the case.
42.	Mr Ascroft’s real point in this respect was about failure to comply with the Practice Direction supplementing Part 64, as quoted above, with its reference to a Pre-Action Protocol and to a draft statement of case.  As to the first, the trustee’s evidence is not required to do more than state whether any relevant Pre-Action Protocol has been complied with as regards the proposed proceedings for which the trustee seeks directions.  Since there is no relevant Protocol this is again an irrelevance.  
43.	Moreover, looking at the letter dated 5 June 2008 on its own terms, I see nothing to criticise in it as such.  It gave Mr Ian Watkins notice that proceedings were to be started, and explained in general terms the point of the proceedings.  If Mr Ian Watkins had been so minded, he could have put forward an offer at that stage.  The letter does contain a warning that Mr Ian Watkins would be likely to have to pay the costs of the proceedings personally, but that warning refers to the costs, not of the Beddoe application, but of the proposed proceedings relating to the Company.  The warning may have been optimistic, but it was not inaccurate on the premise on which it was based.
44.	As indicated above, paragraph 7.2 of Practice Direction 64B did at that time state that the trustee should put in evidence a draft of any proposed statement of case.  It is true that no such draft was put in evidence, and presumably none had been prepared.  It is well known that the formulation of a draft petition, whether for unfair prejudice or for a just and equitable winding-up, can be a very time-consuming and expensive exercise.  I do not find it in the least surprising, nor a suitable subject of criticism, that Mr Davies had not gone to the expense of having a draft petition prepared when putting the Beddoe application before the court at the outset.  It is a very common experience, in Beddoe cases where the contemplated proceedings are likely to be difficult or expensive, for the court to authorise the trustee to proceed by stages.  Thus, if this case had not been settled, and if Mr Ian Watkins had not been able to persuade the judge that there was no good reason to allow Mr Davies to take the proceedings at all, the judge might have authorised Mr Davies, first, to have a draft petition prepared, and might have deferred the question whether to allow the proceedings to be issued until the court had been able to consider the draft petition, with the benefit, possibly, of more focussed advice as to its likely prospects of success, and other implications such as the costs likely to be incurred.  For myself, therefore, I do not regard the absence of a draft statement of case from the evidence as a legitimate criticism of Mr Davies.  
45.	Some submissions were addressed to us as to whether the terms of paragraph 7.2 of PD64B in this respect were mandatory.  They were not so expressed, with the word “should” rather than “must”.  I do not consider it useful to go into that question.  The circumstances of different Beddoe applications are so many and so various that it would be wrong to regard a provision of this kind as a requirement, such that the application is not properly brought without complying with it.  Often it will be helpful to the court for a draft statement of case to have been prepared and put before the court, if that can be done without disproportionate expense.  In this case it was appropriate not to do so.
46.	Mr Ascroft next criticised Mr Davies for not engaging more promptly with Mr Ian Watkins’ settlement offer, made in his witness statement. He pointed to the fact that it took from 31 July (the date of the witness statement – though we do not know exactly when it was served and when it was first seen by Mr Davies) to 9 September for Mr Davies to respond in correspondence.  As to that, we know nothing as to Mr Davies’ movements or other commitments at that time.  No doubt it would have been better if Mr Davies, supposing that he was free to do so, had reacted to the offer more quickly.  But it does not seem to me that the passage of that time, at that time of year, can be regarded as improper conduct on the part of Mr Davies.  Nor does it seem to me that anything to the point can be gained from a close scrutiny of the exact terms in which Mr Davies responded, then or thereafter.  The fact is that the commencement of the proceedings led Mr Ian Watkins to make a fresh offer which was not at once in an acceptable form, but which led, without unreasonable delay, by way of further negotiation, to a compromise which resolved the problem which had led Mr Davies to bring the proceeding in the first place.  Nothing in this sequence of events seems to me to come anywhere near satisfying the test indicated above, for example in the passage cited from Lewin on Trusts, at paragraph [34] above, for depriving a trustee of his indemnity for costs out of the fund.
47.	It is, of course, true that the outcome was, in the end, unfavourable to the estate, because of the very low valuation figure placed on the Company by the valuer as at the date which the judge held to be applicable.  But absent the compromise, or a court order which would have been difficult and expensive to achieve if not by consent, Mr Davies would not even have had that resolution of his difficulty.
48.	In those circumstances, with respect to the judge, I do not regard his criticism of Mr Davies’ position in relation to the negotiations as justified.  In particular, since Mr Davies had secured the offer by starting the proceedings, it seems to me that he was fully justified, until the offer was brought into acceptable terms, to continue with the proceedings, to put in evidence in reply, and to prepare for the first hearing which had been fixed for late October.  I therefore disagree with the judge’s observation that the Beddoe application should never have got as far as the contested hearing on 24 October 2008.  Of course the hearing could have been adjourned pending negotiation, but it seems to me that it was legitimate for Mr Davies not to be willing to hold back, as regards the Beddoe application, unless and until more progress had been made with the settlement discussions. 
49.	The judge mentioned in passing the fourth point relied on by Mr Ascroft, namely that Mr Davies had parted with the only other (and, as it eventually turned out, the only) valuable asset of the estate, namely the house which had been left to Mrs Colthart.  With hindsight, of course, it is unfortunate that Mr Davies did part with this asset.  However, his having done so did not feature at all in the proceedings as they stood before Judge Graham Jones on 24 October 2008.  There is no mention of it in the witness statements, the exhibits or the skeleton arguments for that hearing.  On behalf of Mr Ian Watkins, Mr Davies was criticised, in the respondent’s skeleton argument for this appeal, for not providing information relating to the estate of Mrs Watkins; Mr Davies responded to that criticism, in a supplemental skeleton argument, by saying that documents relating to the extent of Mrs Watkins’ estate were provided to the court in the confidential material.  That course of action may or may not have been entirely appropriate – it would be futile to enter into a debate about that now.  But given the absence of information about this from the open material before Judge Graham Jones, it seems to me that it is not a matter which could properly form any part of the basis of Judge Chambers’ decision as to the proper manner of dealing with the costs of the proceedings in 2008.
50.	All in all, it seems to me that there is nothing in the points relied on by Mr Ascroft, or by Judge Chambers in his judgments, to justify treating the costs of the Beddoe proceedings, as incurred in 2008, in any different way from the normal order for proceedings of that kind, which is that the trustee is entitled to his costs out of the fund, on the indemnity basis and so, in principle, are the defendant beneficiaries.  In practice, because of how the estate has turned out, there is nothing out of which either Mr Davies or Mr Ian Watkins can be paid, but that is the starting point of the analysis.
51.	Secondly, as regards the position as between Mr Davies and Mr Ian Watkins, I would respectfully reject the judge’s reasons for holding that Mr Davies had exposed himself to a liability for Mr Ian Watkins’ costs of the proceedings.  The judge said that Mr Davies had not gone about the case in the proper way, but, in my judgment, none of his criticisms of Mr Davies’ conduct is justified.  As I see the case, Mr Davies, faced with a serious problem as to what to do about the share in the Company which was a significant asset of the estate, did what fiduciaries are always entitled to do and may often be encouraged to do, namely to ask the court for guidance.  What that guidance would have been in the end, if the case had not been settled, is a matter of speculation.  But Mr Davies’ objective was achieved, in that negotiations did follow and were concluded.
52.	It seems to me that Mr Russen, for the appellant, was justified in his contention that the judge overlooked the special nature of the Beddoe proceedings.  He may have been confused by the fact that, once the Beddoe application had been compromised, the case turned into something much more like ordinary contentious litigation.  Thus, when the dispute about the date came before him earlier in 2011, it was treated as an ordinary civil proceeding, and of course the order for costs in respect of that part of the proceedings was agreed as an ordinary inter partes order, under which the loser was to pay.  To apply that same approach to the proceedings as they stood in 2008, before the compromise, was wrong in principle because of their different nature at that time.  This was not a question of exercising the court’s general discretion as to costs in ordinary litigation.  The court had to start from the special position of an application for directions by a trustee, with the special rules and practice that apply to such proceedings.  The judge overlooked that.  In that respect, as it seems to me, his order was wrong in law and the result of an implicit misdirection.
53.	On Mr Ian Watkins’ behalf a Respondent’s Notice was served, seeking to uphold the judge’s order on other grounds.  The points did not feature substantially in the oral submissions before us.  They do not add anything of real relevance to the points already at issue, with which I have already dealt.
54.	Both because of the misdirection which I have identified, therefore, and because of what seem to me to have been errors in the judge’s reasoning, I would allow the appeal, set aside paragraphs 1 and 2 of the judge’s order and, in their place, declare (for what it may be worth) that the Claimant is entitled to an indemnity out of the estate of the late Mrs Watkins for his costs of the Beddoe application, up to the date of the consent order, and I would make no other order as to the costs of the proceedings in the High Court.
55.	Paragraph 2(2) of the judge’s order gave Mr Ian Watkins half of his costs of the hearing on 2 November 2011.  The judge said that this was because of a Part 36 offer.  We have not seen any offer that could properly be regarded as made under Part 36, though an offer was made which was expressed to be under that Part.  As it seems to me the judge’s order as regards the costs of the hearing on 2 November 2011 must fall with his order against Mr Davies as regards the costs incurred in 2008.  Thus there should be no order as to costs as between Mr Davies and Mr Ian Watkins, other than the specific provision which was included earlier in the judge’s order by consent of both parties.
Lady Justice Black
56.	I agree.
Lord Justice Thorpe
57.	I also agree.