Counting the Cost: Company Directors and Non-Party Costs Orders

In its judgment in the matter of Housemaker Services Ltd & Another -v- Cole & Another [2017] EWHC 924 (Ch), the High Court has offered what may, in some instances, prove priceless comfort to directors of companies which are confronted by the prospect of litigation.

The Issue

Having dismissed the first claimant’s application for a limitation direction pursuant to s.1028 Companies Act 2006, the Court had ordered the first claimant to pay the defendant’s costs. However, mindful that the first claimant company had been ‘struck off’ the companies register and dissolved, the defendant applied for permission to join the first claimant’s director (a Mr Wayne Williams) to the proceedings so that the defendant could, in turn, apply for a non-party costs order against him.

The Court accepted the defendant’s submissions and joined the first claimant’s director as a second claimant to the proceedings. The Court then invited the parties to prepare written submissions addressing whether or not it should issue a non-party costs order against the director.

The Parties’ Submissions

The defendant argued:

  • The first claimant company was no more than a legal construct for the director’s business;
  • It was the director’s actions which had caused the claimant company to be dissolved;
  • If the company’s claim had proved successful, the true beneficiary would have been the director, not the company;
  • It was the director who not only gave instructions to pursue the claim, but also funded the claim;
  • The claimant company had no assets and it was highly unlikely that it would be pay the costs order made against it.

In defence, the director argued:

  • A non-party costs should was exceptional;
  • The director had been given limited and inadequate warning the defendant’s application;
  • Above all, the first claimant company’s claim had not been brought in bad faith, for an ulterior motive or improperly.

The Court’s Decision

Directors of companies which are engaged in or currently contemplating litigation will be pleased to read that the Court rejected the defendant’s submissions and so refused to grant a non-party costs order.

In doing so, the Court offered the following observations:

  1. The “director of a company is in a special position”, it not being “an abuse of the process for a limited company with no assets to bring a claim in good faith”. After all, an application for security for costs may be made;

 

  1. “The mere fact that a director who controls the company’s litigation also funds the claim is not enough in the ordinary case to justify a non-party costs order against him…”;

 

  1. “…it is not an unusual thing, let alone wrong, that a director who is a shareholder of a company and who funds the company’s claim will ultimately benefit from it if it is successful”.

Of and in themselves, therefore, the issues raised by the defendant [summarised above] did not justify making a non-party costs order against the director. Indeed, the Court noted that if such an order was to be made, “something more” had to be proved.

What could that “something more” be? The Court reasoned: “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.”

Lessons for Directors

Directors can take considerable comfort from this judgment, re-affirming as it does that non-party costs orders are “exceptional”, particularly insofar as concerns the “special position” held by company directors.

So, the fact a director controls and, perhaps, funds the litigation will not immediately expose the director to the risk of cost sanctions, and nor will the fact that the director (who may also be a shareholder) may also benefit from the claim if it is successful.

However, caution is required. In particular, directors must always ensure that their company’s litigation is not only pursued properly, but also undertaken in commercial and factual good faith, and for the well-being of the company. If not, a director may be left counting the cost.

 

If you are a company director and have any queries about company litigation, whether actual or prospective, please do not hesitate to contact our Litigation & Dispute Resolution Team on 01782 646320.