The decision also clarifies the extent to which the court can expect a wealthy third party, such as a parent company or major shareholder, to 'bail out' a party to litigation, according to corporate litigation expert Jonathan Fortnam of Pinsent Masons, the law firm behind Out-Law.com.
The Supreme Court, by a majority of three judges to two, found that the court was not entitled to take into account the financial position of a Turkish airline's wealthy owner when ordering the airline to pay a £3.64 million damages award to the court before permission to appeal would be granted. The correct test was not whether the owner, a Mr Bagana, had the means to make the payment, but rather whether the company was likely to be able to raise that money from the owner.
"When, in response to the claim of a corporate appellant that a condition would stifle its appeal, the respondent suggests that the appellant can raise money from its controlling shareholder, the court needs to be cautious," said Lord Wilson, giving the judgment of the court.
"The shareholder's distinct legal personality (which has always to be respected save where he has sought to abuse the distinction) must remain in the forefront of its analysis. The question should never be: can the shareholder raise the money? The question should always be: can the company raise the money?" he said.
The Court of Appeal had applied the wrong test in this case, the Supreme Court said.
Lord Wilson acknowledged that the application of the test in practice was likely to be "far from simple". The court should not necessarily take claims by the company or its owner that the owner would not make the necessary funds available "at face value", he said.
"It should judge the probable availability of the funds by reference to the underlying realities of the company's financial position; and by reference to all aspects of its relationship with its owner, including, obviously, the extent to which he is directing (and has directed) its affairs and is supporting (and has supported) it in financial terms," he said.
Dissenting judges Lord Clarke and Lord Carnwath would both have dismissed the appeal. In separate judgments, each judge concluded that Lord Justice Patten did not materially mis-state the relevant principles or arrive at the wrong conclusion.
Corporate litigation expert Jonathan Fortnam of Pinsent Masons said that the implication of the Supreme Court's judgment was that, when a wealthy individual had habitually supported a company in the past, the court would be entitled to expect that the individual would 'bail out' the company in order to progress an appeal "in the absence of cogent evidence that the same will not be done on this occasion … but not otherwise".
"In addition to clarifying this area of the law on litigation procedure, the Supreme Court has provided a reminder to 'family' companies that if individuals who stand behind the company use it as their limited liability alter ego, their wealth may be taken into account when deciding to impose conditions on progressing litigation," he said. "Likewise, those who maintain the 'corporate veil' between self and company will likely escape such scrutiny and requirements."
To 'stifle' an appeal refers to imposing a condition which prevents the party from bringing it or continuing it. Doing so where a party has permission to bring an appeal is likely to be a breach of that party's right to a fair hearing under the European Convention on Human Rights.