Defendant Companys director found liable to pay Claimants legal costs

Everyone in business understands (or should do so) the nature of a limited liability company. In particular they will understand that unless there are certain exceptional circumstances (the classic example being fraud) the Court will not "lift the corporate veil" and impose personal liability upon directors and/or shareholders. A recent case has, however, shown how a director/shareholder was made personally liable for the legal costs incurred by an opposing party in litigation in which the director's company was the substantive Defendant. Of particular interest was that such liability was not based on an application of the principles required to "lift the corporate veil".

In the case there were two Defendants. The First Defendant was a limited company and the Second Defendant was its sole director and Shareholder (who was made a party to the proceedings for purely technical reasons as the substantive claim lay only against the Defendant company).

The Claimant obtained Judgment against the Defendant company and after that Judgment was obtained the Defendant company went into insolvent liquidation without satisfying the judgement debt. The Claimant then applied for an order against the Defendant director/shareholder requiring him to personally pay the Claimants legal costs incurred in the litigation. This was on the basis that the Claimant alleged that the director as the Second Defendant was jointly and severally liable with the company (which was the First Defendant) for the legal costs of the action.

The Judge hearing the original application decided that because the director/shareholder Defendant had not been found to have incurred any substantive liability to the Claimant (i.e. the Judgment was only against the company Defendant) there was no basis upon which the director/shareholder Defendant could be ordered to pay the Claimant's costs.

That decision was, however, overturned on appeal. The Court of Appeal did not base its decision on the status of the director as being the Second Defendant in the action. Rather it decided that where a company is a party to civil proceedings a non-party director can be made liable for the company's costs where he can be characterised as the "real party" controlling the litigation. In such circumstances the Court of Appeal decided there was no requirement to engage the principles that the Court would normally have to consider when deciding whether or not to "lift the corporate veil". In the case in question the economic realities and the manner in which the director/shareholder Defendant had engaged in the proceedings indicated to the Court that he had, in fact, controlled the proceedings and thus, the Court concluded it was just to order him to personally pay the Claimant's legal costs.

This was a Court of Appeal decision and it is therefore of significant importance for directors controlling litigation on behalf of limited companies. In reality however it is likely to be of more importance to small companies which are, merely the trading vehicle of maybe one or two people. In such circumstances the Court could well decide that those who run it should be held liable for the costs of any litigation in which the company is the losing party and liable also to be ordered to pay the other party's legal costs. Directors and shareholders of such companies should not consider they can run litigation protected by the shield of limited liability. On the other hand this case is good news for those who feel blackmailed into settling cases against such companies because they know at the end of the litigation if they win the company concerned will not be good for any money awarded.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.