Judgments - Circuit Systems Ltd. (In Liquidation) and Another v. Zuken-Redac (U.K) Ltd. (Formerly Racal-Redac (U.K) Ltd.)
Norglen Ltd. and Others (A.P) (In Liquidation) v. Reeds Rains Prudential Ltd. and Others

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(a) Discretionary refusal

          I do not think it escaped the attention of the Court of Appeal that the rule confers a discretion. But the discretion must be exercised judicially and in my view, once it is accepted that, in spite of the finding that the assignment was a "stratagem or device" to obtain legal aid, it is nevertheless valid, there are no grounds upon which joinder can properly be refused. If the question of whether the assignment is an abuse of legal aid is a matter for the discretion of the Legal Aid Board, it must follow that it should not be a ground for the court refusing to join a plaintiff who has a good title to sue. Otherwise one could have a situation in which the Board decided that in all the circumstances there was no abuse and that legal aid should be granted while the court refused joinder on the ground that the prosecution of the action with legal aid would be an abuse. Sir Thomas Bingham M.R. dealt with the matter shortly and in my respectful opinion correctly when he said:

    "The fact that the company was ineligible for legal aid whereas Mr. and Mrs. Rodgers are prima facie eligible is a matter for consideration by the Legal Aid Board but is not a ground for refusing to substitute Mr. and Mrs. Rodgers as plaintiff."

(b) Conditions as to security for costs

          Mr. Jackson's alternative argument was that the Court of Appeal should have imposed a condition that Norglen give security for costs. He also submitted that although the basis upon which Morritt J. made his order for security against Norglen, namely, that it would continue as sole plaintiff, was no longer valid, the Court of Appeal should have reimposed the order before ordering substitution and left it to take effect against Mr. and Mrs. Rodgers by virtue of R.S.C. Ord. 15, r. 8(4), which provides:

    "where by virtue of the foregoing provision a person becomes a party in substitution for some other party, all things done in the course of the proceedings before the making of the order shall have effect in relation to the new party as they had in relation to the old. . . . "

On the other hand, Mr. Purle, who appeared for Mr. and Mrs. Rodgers, said that the rule could not have the effect of making an order for security, based upon an assessment of the means of a corporate plaintiff, effective against a new individual plaintiff. "All things done" meant steps in the action and no more. I do not think that it is necessary to decide this question because in my view, if it would not be right to make an order for security as a condition of substitution, it would not be right to achieve the same effect in the highly artificial manner suggested by Mr. Jackson.

          The Court of Appeal said that it would not be right to make such an order for the following reasons:

    "Until substitution takes effect there is jurisdiction to make a security order against the original plaintiff but the occasions for making such an order would be rare. This is not one of them. Norglen remains potentially liable for the costs of the action up to the date of substitution. But it has an asset (in the retained land and the benefit of the covenants) which the judge valued at well in excess of the costs potentially due to the defendants after payment of its own costs. It is safe to assume that the liquidator will not dispose of this asset until the potential costs payable by the defendants are determined."

          The Court of Appeal must have had in mind an order with which the original plaintiff had to comply before substitution would be ordered, that is to say, as a condition of substitution. Otherwise there would be no sanction for non-compliance; the normal sanction, namely a stay of the action, could not be enforced against someone who was no longer a party. It therefore assumed that there was a power to impose such a condition but decided as a matter of discretion not to exercise it.

          Mr. Purle submitted that in fact there was no such discretion. He contrasted R.S.C. Ord 15, r. 6(2), which is the general rule dealing with adding parties and says expressly that the court may make such an order "upon such terms as it thinks just," with rule 7(2), which makes no reference to terms or conditions. It is however unusual to confer a discretionary power in such all-or-nothing terms that it cannot be exercised subject to conditions and I do not think that a great deal of weight can be put upon the absence of express language. Mr. Stern also referred us to Freightex Ltd. v. International Express Co. Ltd. (unreported), 15 April 1980; Court of Appeal (Civil Division) Transcript No. of 1980 in which Dunn L.J. said categorically:

    "I do not think that a liquidator or an assignee from a liquidator should be put on terms either by way of security for costs or otherwise as a condition of enforcing an assigned claim."

On the other hand, the other two members of the court (Stephenson L.J. and Sir Stanley Rees) merely thought that it was inappropriate to impose such a condition in that particular case.

          The exercise of the discretion was considered by the Court of Appeal in Eurocross Sales Ltd. v. Cornhill Insurance Plc. [1995] 1 W.L.R. 1517. In that case a company in financial difficulties but not yet in liquidation sold its assets, including a claim against the defendant insurance company, to its principal shareholder Mr. Sood. The company's action against the defendant was proceeding in the county court and it had been ordered by the district judge to give security for costs. Mr. Sood applied under the County Court equivalent of R.S.C. Ord. 15, r. 6 to be joined as an additional plaintiff. The learned judge granted the order subject to a condition that Mr. Sood give security for costs in the sum of £5,000. The reason he gave was that:

    "I think it is important that if the defendant is to be adequately protected here then Mr. Sood should be placed on terms similar to those of the order for security for costs against the plaintiff company. . . Of course if he defaults on that, he does not join as a party to the action."

On appeal, the Court of Appeal (Sir Thomas Bingham M.R., Auld and Ward L.JJ.) discharged the order. The question was whether it was appropriate for the judge to have exercised his discretion so that the defendant:

    "should enjoy the same protection against costs in relation to Mr. Sood as it already enjoyed against the plaintiff company under the unappealed order of the district judge."

Sir Thomas Bingham M.R. thought that this was not a proper ground upon which to exercise the discretion. He said:

    "Cornhill is in no worse position than if the company had sold its business to Mr. Sood before bringing proceedings and he had been the plaintiff from the outset. It is in no worse a position than, instead of being joined, Mr. Sood had commenced a fresh action as a plaintiff. And the potential injustice against which the security order was intended to protect Cornhill no longer exists: the company's action is stayed unless and until it provides the security ordered: but in Mr. Sood it faces a personal plaintiff who is liable to the extent of his available assets to meet any costs order made against him. Depending on his means, he may or may not be able to meet such an order, but the law affords a defendant no protection against costs which may not be paid by impecunious plaintiffs. Had Mr. Sood been ordered to pay, and give security for, the costs occasioned by or thrown away as a result of his joinder, there could in our judgment be no sustainable objection to the order. But we can find no justification for the order in fact made."

          It is therefore a proper exercise of the discretion to impose conditions to ensure that the joinder does not put the defendant in a worse position as to costs than he would have been if the new party had been in the action from the beginning. He may be ordered to pay or give security for additional costs caused by or thrown away as a result of the joinder. But the discretion cannot be used to ensure that joinder does not put the defendants at a greater risk as to costs than they would have been if no joinder had taken place. Having to litigate against an impecunious individual plaintiff is a risk of litigation which has to be accepted.

          This reasoning seems to me to apply equally to a condition imposed on an application for substitution under R.S.C. Ord. 15, r. 7. Nor does it matter that the condition is imposed upon the original plaintiff company rather than the individual plaintiff seeking to be substituted. The latter cannot require the company to comply with the condition and, unless it chooses to do so, he will either have to put up the security himself or be unable to prosecute the action.

          The decision in the Eurocross case therefore suggests that it would be wrong to impose the condition sought by the defendants. It is not however necessary for your Lordships to express a final view on whether this reasoning is correct because, in refusing to order security, the Court of Appeal in Norglen did not rely upon it. As appears from the passage in the judgment which I have quoted, the court exercised its discretion on the ground that Norglen had sufficient assets to be able to meet all the costs for which it could be made liable.

          Mr. Jackson criticised this reasoning on a number of grounds. He said that the court had not taken proper account of the defendant's valuation evidence which said that the covenant was worth a great deal less and, in any case, there was no knowing what it might be worth when costs had to be paid. In my opinion, this was a matter on which the Court of Appeal had to take a broad view and there is nothing to show any basic error.

          Mr. Jackson also said that the Court of Appeal were wrong in assuming that the defendant's claim under an order for costs would rank in priority to the company's other creditors. If it did not, the defendants would receive no more than a dividend. It is in my view clear that the costs ordered to be paid by a company in liquidation to a successful defendant are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs: see In re Pacific Cost Syndicate Ltd. [1913] 2 Ch. 26 and In re Movitex Ltd. [1990] B.C.L.C. 785. In re M.C. Bacon (No.2) (unreported) upon which Mr. Jackson relied, deals with a different question, namely whether costs incurred by a liquidator (either directly or in consequence of being ordered to pay the costs of another party) are "expenses. . . incurred by the. . . liquidator in preserving, realising or getting in any of the assets of the company" within the meaning of rule 4.218(1)(a) of the Insolvency Rules 1986 (S.I. 1986 No. 1925). Millett J. held (rightly or wrongly) that costs incurred in litigation which realised no assets did not qualify for priority under this head. But the right of a successful defendant to an action brought or adopted by a company in liquidation to be paid out of the assets in the hands of the liquidator is not parasitic on the liquidator's right to recover such costs. It is enforceable directly against the company by virtue of the order for costs. I therefore think that the Court of Appeal were correct in assuming that the defendants, if successful, would not have to compete with pre-liquidation creditors for payment of their costs.

          Finally, Mr. Jackson said that such priority would attach only to costs incurred after the date of liquidation. Pre-liquidation costs would be ordinary pre-liquidation debts. I do not think that this is right. If the company in liquidation is liable for any costs at all, as is accepted by the liquidator, it is because it adopted the action: it resisted the order for security for costs, applied for substitution and appeared both in the Court of Appeal and your Lordships' House. And if it adopted the action, there is clear authority, including a decision of your Lordships' House (Boynton v. Boynton (1879) 4 App.Cas. 733 and; In re London Drapery Stores (1898) 2 Ch. 684) for the proposition that the company adopts the action as a whole and makes itself liable for all costs previously incurred.

          I would therefore dismiss the Norglen appeal.


My Lords,

          I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend, Lord Hoffmann. For the reasons which he gives, I would dismiss both of these appeals.


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