A case concerning the circumstance when a costs order will be made against a director personally
There are circumstance when the Court can exercise its discretion and award the costs of litigation against a non-party.
In this case a dissolved company (the Claimant) sought a limitation direction in order to recover disputed invoices rendered to the Defendant. The claim was dismissed as the Claimant could not show that the dissolution of the company had caused the claim not to be brought within the usual limitation period. The Defendant sought to bring the only director of the Claimant company into the proceedings in order to pay the Defendant’s costs.
The directors’ involvement in the claim did not go beyond the normal parameters of a company pursuing a claim in good faith, as such the Claim was dismissed.
The Law
As summarised by Judge Matthews:
“The court has jurisdiction to make an order that a nonparty pay the costs of litigation under section 51 of the Senior Courts Act 1981, and CPR rule 46.2. The court’s jurisdiction is to be exercised on the basis of a judicial discretion. This means that it must be exercised justly. It is therefore very fact specific.”
The ‘normal position’ is that where a nonparty funds and benefits from proceedings it is only right that they pay the costs should the action be unsuccessful.
A Director’s Special Position
Following the ‘normal’ position outlined above, it seems sensible that the director(s) of a company are ideal nonparties against whom costs can be ordered, however this is not the case.
While a director often funds and certainly benefits from proceedings pursued by the company, the director cannot be said to be the ‘real’ Claimant. The company is a separate legal entity under company law and to allow costs to be pursued against a director simply as a result of the ‘normal position’ would render the separate liability between director and company irrelevant.
It is not an abuse of process for a limited company to pursue a claim in good faith despite having little or no assets. The separation between the company’s assets and the directors’ assets is simply a feature of the law, allowing business people to take some risks without incurring their own personal liabilities. Any person or body who elects to deal with a limited company does so accepting this legal position.
So when can a director be vulnerable to costs consequences following an unsuccessful claim? Judge Matthews explains:
“In order to make it just to order a director to pay the costs of unsuccessful company litigation, it is necessary to show something more. This might be, for example, that the claim is not made in good faith, or for the benefit of the company, or it might be that the claim has been improperly conducted by the director.”
Conclusion
The protection in place for directors of companies via separate liability is a consequence of the nature of company law. A Judge will not erode a director’s separate legal identity by ordering costs of failed company litigation against them save where the legal action has been pursued/conducted improperly.
The case shows the importance of making an application for security for costs when there is reasonable doubt that the company would be able to pay costs should the lose the claim. If successful such an application would remove the need for a non-party costs order, even if unsuccessful it may sway a judge toward making a non-party costs order at a later date, should it be necessary.