Non-party costs order shows court’s willingness to pierce corporate veil

The court took into account its powers under the Senior Courts Act to order that George Frost should pay the government’s costs in respect of the winding-up petitions against the companies, which were used as Frost’s fraudulent vehicles. Frost was previously a director of three of the companies.

The five companies were all involved in a scheme to sell investments to over 100 individuals, in the form of 15-year leases of trees inoculated with truffle spores. During the October 2018 hearing of the winding-up petitions against the companies, the court found that there was no reasonable prospect of the investors achieving a profit on their investment.

The government then applied to join Frost as a party to seek a costs order against him and Insolvency and Company Court Judge Barber agreed to make the order. Judge Barber referred to previous guidance in a similar case, which noted the court’s wide discretion to make non-party costs orders and said: “The power to order a non-party to pay the costs of legal proceedings is not limited to cases of bad faith, abuse of process, impropriety or procedural manipulation. The power can be exercised if, in all the circumstances, it is just to do so.”

Judge Barber said he was satisfied that in the current case it was just to visit the costs of the winding-up proceedings on Frost. He said Frost was the architect of the investment scheme and “deeply involved” in all aspects of it.

The judge added that Frost could not have believed that the companies had an arguable defence to the petitions, and that after Frost pursued the defences in any event, the cost burden should not be borne by the companies themselves.

“He has cynically abused the privileges of limited liability trading and must now stand the cost,” the judge said.

Civil fraud expert Alan Sheeley of Pinsent Masons, the law firm behind Out-Law, said: “This demonstrates that the English courts are willing to stretch the boundaries to make sure the right person pays the costs of court proceedings and where necessary pierce the corporate veil.

“This is brilliant news for victims of fraud. Fraudsters should now be much more wary when trying to hide behind companies and their ‘limited’ status and using them as mere puppets in the hope that it provides them with some protection in the future,” Sheeley said.

Dispute resolution expert Bill Geiringer of Pinsent Masons said: “Section 51 of the Senior Courts Act provides the court with a wide discretion to determine by whom and to what extent costs of proceedings are to be paid.

“Judge Barber’s ruling is a pleasing reminder for claimants that the court will exercise such discretion where it is just for a non-party to bear the costs. Non-party costs orders should therefore be considered as part of any claimant’s litigation strategy, particularly where there is a risk that the main defendants to proceedings have limited assets or have hidden assets to defeat costs liabilities,” Geiringer said.