Non-party costs orders used ‘sparingly’
Lawyers at Mason Hayes & Curran (MHC) have highlighted a recent English case in which the directors of an insolvent company were made personally liable for both the company’s and the petitioning creditor’s legal costs.
The case in London’s High Court was linked to a successful winding-up petition, after which the court made a non-party costs order.
The court, in Re MPB Developments Limited, found that the two directors had caused the company to unsuccessfully defend the petition.
Directors funded defence
The court held that the directors were the real parties to the litigation, had controlled the board of directors by majority, and had caused the company to instruct its solicitors to defend the petition.
They had also – through a separate company that they owned and controlled – funded the defence of the petition.
The court held that it had “ample evidence” that the directors acted in their own interests and not in the interests of the company by causing the company to defend the petition.
It found that they had acted without any honest belief the company could pay its debts and had sought to position the company to reach a settlement that was in their own personal interest.
Irish courts
In a note on the firm’s website, the MHC lawyers note that, while there are no reported Irish cases addressing the potential for directors to be exposed to non-party costs orders in the context of a winding-up petition, there is “an established line of authority” that empowers Irish courts to make non-party costs orders, generally.
They add that there are also several cases where directors of insolvent companies have been made personally liable for costs incurred by the company in defending proceedings.
MHC cites the Supreme Court’s decision in Moorview Development Ltd v First Active Plc, where the court upheld a non-party costs order made by the High Court against a director of an insolvent company for pursuing claims against First Active on somewhat similar principles to that in Re MPB.
Among the factors listed by the Supreme Court as relevant when making such a non-party costs order were the degree to which the non-party would benefit from the litigation if successful, and the extent to which the non-party was the initiator, funder, and/or controller of, and moving party behind, the litigation.
‘Exceptional’ power
“The power to order non-party costs is an exceptional one that will be exercised sparingly,” the MHC lawyers state.
They add, however, that directors who proceed to cause a company to defend a petition should be cognisant of the factors laid out by the Supreme Court.
“Equally, if a creditor is issuing a winding-up petition and has concerns about the company’s ability to pay its costs if awarded, it may increase pressure and lead to a speedier resolution by notifying the directors in early course of an intention to hold them personally liable for the creditor/company costs at the conclusion of the proceedings, if appropriate,” the lawyers conclude.