Posted: Monday, 21 March 2016 @ 10:48
Normally a director, or indeed a shareholder, will not have any personal liability for any debt of a limited company, but there are exceptions.
One exception that I will cover in this blog is where an insolvent company is pursuing (or defending) litigation which is unsuccessful, and the company cannot or does not pay any costs orders made against it. In that situation the successful party will look closely to see if it can recover the costs from the directors and shareholders, or indeed any other non-party. So in what circumstances will the directors and shareholders be at personal risk?
In any court proceedings the order for payment of costs is in the discretion of the court, and in certain circumstances the court can and will make an order for a non-party to pay the costs. It is known as a Third Party Costs Order, and the relevant authority is Section 51 of the Senior Courts Act 1981 and Part 46.2 of the Civil Procedure Rules.
Some useful guidance can be found in the case of Dymocks Franchise Systems (NSW) Pty v Todd in 2004.
Although a Third Party Costs order should only be made in exceptional circumstances, this means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. Where a non-party promotes and funds proceedings by an insolvent company solely or substantially for their own financial benefit, they will generally be liable for the costs if their claim, defence, or appeal fails. But an order will not be made if the non-party is acting in the interests of the company rather than his own interests.
So any director or shareholder or any other person should think very carefully before encouraging, sanctioning, and funding any litigation by a company which is in reality insolvent, whether it is a claim or defence of a claim. They may end up with a personal liability for the costs of the successful party.
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
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