Director dodges costs bullet!

Under section 51 of the Senior Courts Act 1981, and governed by CPR rule 46.2, the Court has jurisdiction to exercise its discretion and make an order that a non-party pay the costs of litigation. This wide power to award costs is used only in exceptional circumstances. However, ‘exceptional’ in this context means “no more than outside the ordinary run of cases where parties litigate for their own benefit and at their own expense” (Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs)).The ultimate question in any such exceptional case is whether in all the circumstances it is just to make the order. This is a fact specific jurisdiction.

So, when is it appropriate to make such an order?

In the case of Housemaker Services Ltd v Cole [2017] EWHC 924 the Court considered whether it was appropriate to make such an order against a director personally. The second claimant was the director of the first claimant; a company which had been struck off the register and dissolved. The company was ordered to pay the costs of the claim, however, having no assets it was unable to do so. The defendants sought an order that the second claimant pay the costs that the claimant company was ordered to pay to the defendants. HHJ Paul Mattews (sitting as a High Court Judge) declined to make the order. The factors taken into consideration in coming to such a conclusion included assessing whether and to what extent the director: controlled the conduct of the litigation; benefitted personally from the claim being made; acted improperly in the litigation; or funded the costs of the litigation.  These were some of the key considerations for orders against non-parties as set out in the case of Dymocks. These guidelines were applied by the English Court of Appeal in Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655 at paragraphs 36-37 and is, therefore, now binding on English courts.

A director, given their position within the company, is likely to fund and benefit from proceedings issued by the company. However, as the company is a separate legal entity it does not automatically expose the director to the risk of cost sanctions. “It is not an abuse of process for a limited company to pursue a claim in good faith despite having little or no assets” (Deutsche Bank AG v Sebastian Holdings Inc [2016] 4 WLR 17). At any time, an application for security for costs could have been made. Therefore, even though the director controlled and funded and hoped to benefit from the litigation they did not act improperly and so had the ability to walk away from an insolvent company.

Perhaps directors can seek some comfort from this judgment.