Introduction

The High Court of England and Wales delivered a pivotal judgment on October 18, 2018, in the case of Hosking & Anor v. Apax Partners LLP & Ors ([2018] EWHC 2732 (Ch)). This litigation revolved around substantial financial disputes involving Hellas Telecommunications (Luxembourg) II SCA ("Hellas II"), a Luxembourg entity under compulsory liquidation. The primary issue at stake was the allocation of legal costs following the discontinuance of a high-profile, multi-jurisdictional lawsuit initiated by Hellas II's Liquidators against prominent private equity firms Apax Partners and TPG.

The Liquidators sought indemnity costs instead of standard costs, arguing that the litigation conduct of Apax and TPG was exceptional and warranted such a departure. The Respondents contended that standard costs were appropriate. The court's determination of whether to award indemnity costs has significant implications for future litigation, particularly in cases involving complex cross-border disputes and high financial stakes.

Summary of the Judgment

The court was tasked with deciding whether the Liquidators should bear the costs of the litigation on an indemnity basis, rather than the standard basis set forth by CPR 38.6(1). The Liquidators had initiated proceedings against Apax and TPG, alleging that a recapitalization transaction involving Hellas II was conducted at an undervalue, thereby prejudicing creditors and leading to the company's financial demise.

After four days of what was intended to be six weeks of trial, the Liquidators opted to discontinue the proceedings. The Respondents argued that this discontinuance, coupled with the manner in which the case was conducted—which involved serious allegations of commercial impropriety, inconsistent pleadings, and substantial public relations campaigns—warranted the award of indemnity costs.

The High Court agreed with the Respondents, determining that the conduct of the Liquidators in pursuing and abruptly abandoning the lawsuit was 'out of the norm.' Consequently, the court ordered the Liquidators to pay Apax and TPG costs on the indemnity basis, reflecting the extraordinary nature of the case.

Analysis

Precedents Cited

The judgment extensively examined several key precedents to underpin the decision to award indemnity costs:

• Digicel (St. Lucia) Ltd and others v Cable and Wireless PLC and others [2010] EWHC 888 (Ch) – Highlighted the need for conduct to be highly unreasonable or inappropriate to warrant indemnity costs.
• Excalibur Ventures v Texas Keystone & Others (No.2) [2017] 1 WLR 2221 – Reinforced that awarding indemnity costs departs from the norm and should be reserved for cases with exceptional circumstances.
• Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 2531 (Comm) – Provided examples of conduct that could justify indemnity costs, such as speculative claims and misuse of the court for settlement pressure.
• Three Rivers District Council v Governor and Company of the Bank of England [2006] 5 Costs LR 714 – Emphasized the court’s discretion in awarding indemnity costs based on the entirety of case circumstances.
• Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm) – Clarified that cases are fact-dependent and guidelines are not rigidly set.

These precedents collectively establish that indemnity costs are exceptional and require the court to perceive the case as significantly deviating from typical litigation norms.

Legal Reasoning

The court employed a comprehensive approach to assess whether the proceedings fell 'out of the norm.' Key considerations included:

• Assessment of Litigation Conduct: The Liquidators pursued the case across multiple jurisdictions, only to discontinue abruptly after minimal progress, indicating potential strategic missteps.
• Allegations of Serious Impropriety: Initial claims involved severe allegations such as fraud and commercial impropriety, which were later abandoned, suggesting a weak factual foundation.
• Publicity and Settlement Pressure: The Liquidators’ efforts to garner public attention and exert commercial pressure prepped for settlement rather than genuine adjudication.
• Inconsistencies and Weak Case Presentation: The case suffered from shifting claims, lack of coherent legal arguments, and reliance on dubious expert evidence, undermining its legitimacy.
• Sudden Discontinuance without Explanation: The unexplained termination of the lawsuit raised suspicions about the underlying strength of the case.

By evaluating these factors, the court determined that the Liquidators' conduct was excessively unreasonable and not in line with standard litigation practices, justifying the shift to indemnity costs.

Impact

This judgment sets a significant precedent in English civil litigation by clarifying the circumstances under which indemnity costs may be awarded, particularly in the context of discontinuance. It underscores the judiciary’s willingness to hold litigants accountable for pursuing cases in an unreasonable or abusive manner. Future litigants engaging in multi-jurisdictional disputes must exercise greater diligence to avoid conduct that could lead to the imposition of indemnity costs, thereby fostering more responsible and proportionate litigation practices.

Complex Concepts Simplified

Standard vs. Indemnity Costs

In English litigation, the prevailing rule is that the losing party pays the winning party's legal costs on a standard basis. This means costs are assessed based on reasonableness and proportionality relative to the issues in the case. However, in exceptional circumstances, costs may be awarded on an indemnity basis, which covers all costs incurred by the winning party, regardless of proportionality or reasonableness, typically due to the losing party's particularly egregious conduct.

CPR 38.6(1)

The Code of Civil Procedure (CPR) 38.6(1) governs the standard basis for costs when a case is discontinued. Under this rule, unless indemnity costs are justified, the discontinuing party must pay the costs incurred by the other party up to that point.

Section 423 of the Insolvency Act 1986

Section 423 allows Liquidators to challenge transactions made by a company prior to insolvency that may have been conducted at an undervalue, thus prejudicing creditors. To succeed, the Liquidators must demonstrate that the transaction was not in the company's best interest and adversely affected its ability to meet debt obligations.

Convertible Preferred Equity Certificate (CPEC)

A CPEC is a financial instrument that combines features of both equity and debt, providing holders the option to convert their holdings into shares under specified conditions. In this case, the redemption of CPECs at undervalue was central to the Liquidators' claims.

Enterprise Value (EV)

Enterprise Value (EV) measures a company's total value, encompassing both equity and debt. It provides a holistic view of a company's financial status, essential for evaluating transactions such as acquisitions or recapitalizations.

Conclusion

The High Court's decision in Hosking & Anor v. Apax Partners LLP & Ors serves as a critical touchstone for the awarding of indemnity costs in English civil litigation. By meticulously evaluating the conduct of the Liquidators—pursuing a high-risk, multi-jurisdictional lawsuit with shifting allegations and abrupt discontinuance—the court affirmed that indemnity costs are justified in cases where litigation deviates significantly from acceptable norms.

This judgment reinforces the judiciary's stance against the misuse of legal processes for strategic settlement pressures or unwarranted commercial allegations. It emphasizes the necessity for litigants to maintain reasonableness and propriety throughout legal proceedings, particularly in complex financial disputes. As a result, legal practitioners must be vigilant in their litigation strategies to avoid the severe financial repercussions associated with indemnity costs, ensuring that their actions within the courtroom adhere to the principles of fairness and judicial economy.