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Directors` Liability for Costs of Litigation When the Company is the Defendant

31 March 2014 #Dispute Resolution


The recent case of Axel Threlfall –v- ECD Insight Limited and Another has opened the door to claims that directors may be responsible for paying Costs Orders of litigation that would more commonly be met by the company. The facts in the case are quite unusual and are therefore worth reciting.

Factual Background

Mr Threlfall was employed by ECD Insight Limited (“ECD”) from 2003 to September 2008. Mr Threlfall alleged that his employment contract had been varied by agreement between him and ECD’s sole director and shareholder, Mr Witney, entitling him to a 20% shareholding in ECD and to various additional payments. Mr Threlfall brought a claim against ECD for breach of this agreement as varied. ECD denied the claim and counterclaimed for losses arising from alleged breaches by Mr Threlfall of his employment contract. 

Mr Witney was joined as a party to the case because any Order in Mr Threlfall’s favour for specific performance of the agreement that Mr Threlfall be given 20% of the equity in ECD would have required Mr Witney to transfer shares to Mr Threlfall or for ECD to issue and allot shares to Mr Threlfall to dilute Mr Witney’s shareholding.

At trial, the Court upheld Mr Threlfall’s claim for 20% of the stake in ECD but did not award him the additional bonus payments. ECD also succeeded on part of its counterclaim for breach of duty of good faith against Mr Thelfall.

ECD subsequently became insolvent and so Mr Threlfall sought an Order that Mr Whitney be jointly and severally liable for his costs of the action. At first instance, the Judge held that since the claim had succeeded against ECD and not Mr Whitney, there was no basis for making Mr Whitney personally liable for ECD’s breach of contract. Mr Threlfall appealed this decision.

The Appeal

On appeal, the Court overturned the decision and therefore made Mr Whitney jointly and severally liable for Mr Threlfall’s costs.

The Court of Appeal decided that the correct approach was to apply the principles of a non-party costs order, even though Mr Whitney was technically a party to the proceedings.

The Court was consequently free to look at the economic realities of the situation and found in favour of Mr Threlfall. In making its decision that a non-party costs Order was, by analogy, appropriate, the Court highlighted the following factors:

  • As sole director and shareholder, Mr Whitney was in complete control of ECD
  • Mr Whitney was entitled to all of ECD’s economic benefits
  • Mr Whitney had been solely responsible for running a false defence in an attempt to resile from the agreement with Mr Threlfall because it was damaging to his and ECD’s financial interests
  • Mr Whitney’s evidence had in part been given in bad faith
  • ECD’s unsuccessful counterclaim was also brought in order to further Mr Whitney’s financial interests
  • The main issue in the case was over the ownership of the shares in ECD, which was irrelevant to ECD but very important to Mr Whitney
  • Mr Whitney had had the opportunity, unlike most respondents in an application for a non-party costs order, to participate fully in the trial as he was actually a party to the proceedings

The Court of Appeal made it clear that in making an order against Mr Whitney, this should not be construed as piercing the corporate veil. The Court was not passing on ECD’s liability because it considered ECD and Mr Whitney to be one and the same; in fact it was quite the opposite. A non-party costs order is an unusual step where the Court exercises a discretion to order that a party that has no substantive liability for costs should nevertheless be ordered to pay the victorious party’s costs.

Conclusions

This is a very unusual case where, for all the reasons identified by the Court of Appeal, a non-party costs order was appropriate. What made this case unusual was that Mr Whitney was a party to the proceedings, albeit with no substantive liability to the Claimant.

In our view, the Court of Appeal’s analysis of the circumstances where a non-party costs order is appropriate must be correct. Even if an individual is a party to proceedings, if that individual has no liability to the Claimant, that individual should be thought of as a non-party for the purposes of determining who pays the costs of the dispute. This case should not be seen as an assault on the corporate veil.  

The Court of Appeal referred several times to the need to do justice. In this case, Mr Whitney had been held to have been solely responsible for ECD running a defence that he knew to be inaccurate. Furthermore, Mr Whitney had run that defence for his own financial benefit. Under the circumstances, it seems entirely appropriate that Mr Whitney should not be allowed to walk away from this case unscathed on a legal technicality.

While many company directors will undoubtedly be very concerned about their potential liability in costs as a result of this judgment, it should be borne in mind that these circumstances are unusual. Non-party costs orders are the exception rather than the rule. It would take some fairly underhanded behaviour of the sort described above, to merit a non-party costs order against a director of a company.

Clarkslegal, specialist Dispute Resolution lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Dispute Resolution matter please contact Clarkslegal's dispute resolution team by email at disputeresolution@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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