It is a general rule in litigation that a successful party will be awarded their costs of and incidental to proceedings, to be paid by the loser (‘the loser pays’ rule). However, the court has ultimate discretion in this regard. The discretion of the court is wide, extending to such costs and adverse costs to be paid by parties who are not involved in the litigation.
Consideration for the financial position of a company on the other side of proceedings must be made at the outset of any proceedings. To offset being faced with defending proceedings against a company that may not have the financial standing to cover an order for costs, a court may order security for costs to enable the party to recover these costs. This can involve ring-fencing a fund to cover the likely costs incidental to the proceedings. These applications are often used as a tactical weapon by the defendant to deter proceedings being commenced when faced with the need to fund this risk at the start of proceedings.
Where a company involved in litigation is not able to pay an adverse costs order, such as through reasons of insolvency, the court’s discretion enables it to look behind the company and discover who may have funded the litigation, such parties usually being another member of a group company, the directors, or a third-party funder.
Directors often fund litigation on behalf of a company by either paying the legal costs incurred directly, by making a loan to the company, or by injecting personal finance into the capital of the company for litigation purposes. They often do so on the understanding that the shareholders have limited liability and will not be responsible for the debts of the company (including adverse costs orders made in legal proceedings). However, in recent years, it has become increasingly common for the court to utilise its discretion and make non-party costs orders against directors personally in situations where the director has funded the litigation.
Directors funding litigation on behalf of a company need to be alive to the risks of non-party costs orders in situations where they are funding the litigation personally.
When exercising its discretion, the court will weigh-up various considerations to determine whether such a non-party costs order should be made against a director. Such considerations, in addition to the question of whether a director has funded the litigation, include whether it would be just to do so in the circumstances; the purpose of the director’s involvement; the connection between the director and the litigation; and any benefit or interest the director may have personally. These factors are only guidelines, and the court has made it clear that no exhaustive list of considerations exists in exercising the court’s discretion to make such an order.
Difficulties may arise given the position of directors acting in accordance with their statutory duties to the company, such as by acting in the best interests of the company. Recent case law has determined that it may be necessary to demonstrate something more than just funding in the litigation by the director. For example, if the litigation was made in bad faith, against the interests of the company (instead being the director’s sole benefit) or through improper conduct by the director. The intentions of the director are fundamental, and protection can be afforded to those directors acting in good faith, with the interest of the company at the forefront of the litigation. Directors who fund and substantially control the litigation with an expectation of deriving a benefit in the outcome are at significant risk of becoming personally liable, outside the protection of limited liability of the company. Directors must act in line with what is considered to be the objectively best course of action for the company as a whole. Directors should be alive to the risk that if they act independently of their company in litigation, for the purpose of their own benefit, they are likely to be made personably liable for an adverse costs order.
Our Dispute Resolution team provides advice to companies and directors in disputes of all nature. We are on hand to assist in providing advice to directors faced with the necessity of funding litigation on behalf of their company and to those companies’ facing uncertainty of the financial position of the other side in proceedings. We encourage you to contact our experienced team for specialist advice and assistance, by contacting us here or by email: email@example.com