Home Knowledge Dangers of Funding Litigation on Behalf of Insolvent Companies Highlighted

Dangers of Funding Litigation on Behalf of Insolvent Companies Highlighted

Directors, shareholders and even receivers appointed by a creditor who are funding and controlling litigation on behalf of an insolvent company should take note of a recent High Court decision concerning their potential exposure to personal liability for legal costs. 

A number of insolvent companies had unsuccessfully sued a bank.  In the usual way, the successful party, the bank, was awarded its costs against the unsuccessful party, the companies.  Since the companies could not meet those costs, the bank sought to join a director who funded the litigation by those companies with a view to making him personally liable for the bank’s legal costs.  

The director resisted this fairly novel application on a number of grounds including the argument that the companies had a separate legal personality to him as a director.

The Court found that it had the power to make a non-party “funder” liable for the costs of the action.  It identified in broad terms the factors influencing the exercise of that power.  These included (i) the extent to which it might be reasonable to think that the company could meet any costs if it failed in its action; (ii) the degree of possible benefit to the non-party concerned; and (iii) whether the proceedings were pursued in a reasonable fashion.

The Court was persuaded by a number of factors in making the director personally liable for the costs of the proceedings:  

  • The companies were hopelessly insolvent from the outset so that it was clear that the bank would never have recovered its costs if successful
  • The director was the funder and driving force behind the litigation by the companies
  • The director, along with his wife, were the beneficial owners of the companies and would have been the beneficiaries of the litigation if successful
  • The companies had conducted the litigation in a manner which unnecessarily and significantly added to the costs incurred by the bank
  • The bank had at an early stage warned of its intention to seek a costs order against the director concerned

The decision in this case is highly unusual, but not unprecedented.  Ultimately, the Court has a wide discretion in making a costs order.  The Court did see an important policy objective in ensuring that parties do not get a “free ride” in litigation.  In the Court’s view, the director in this case, in the absence of any liability on his part for costs, would have reaped the benefit of success in the case without any personal exposure were the case not to succeed.

Funders of litigation involving insolvent companies (whether the insolvent company is suing or being sued) will need to tread carefully given the confirmation of the existence and extent of the Court’s power to make a non-party liable for costs.     

Contributed by John Aherne.

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