When will a director or shareholder of an insolvent company be held personally liable for costs liabilities incurred by the company in unsuccessful litigation?
16 Jul 2021
The English Court of Appeal, in an important decision in Goknur Gida Maddeleri Enerji Imalet Ithalat Ithracat ve Sanayi AS v Aytacli (2021) EWCA Civ 1037 of 13 July 2021 which will be relevant to other jurisdictions with a regime for imposing liability for litigation costs on non-parties to the litigation (third party costs orders), has identified the guidelines in considering whether such an order should be made against directors (or shareholders) of an insolvent company.
Those factors are that:
- a non-party costs order is exceptional and will only be made where just in all the circumstances;
- the touchstone is whether the non-party can fairly be described as the real party to the litigation;
- in the case of an insolvent company involved in litigation which has resulted in a costs liability that it cannot pay, a director may be made the subject of a non-party order. Such an order may be made to avoid the injustice of a director hiding behind a corporate entity so as to engage in risk-free litigation for his own purposes;
- in assessing whether the director is the real party, the court may consider whether the director controlled or funded the company’s pursuit or defence of the litigation. Of most importance, is likely to be whether the director was seeking to benefit personally from the litigation. If the company’s stance in the litigation was dictated by the real or perceived benefit to the director, whether financial, reputational or otherwise, it might be said that the director was the real party. These are mere indicia as to whether it would be just to make an order, not a checklist; and
- if the litigation was for the benefit of the company, the applicant for the order will need to show some other reason why it would be just to make the order. This will commonly be some form of serious bad faith or impropriety on the part of the director, causatively linked to the applicant unnecessarily incurring costs in the litigation.