It is a commonly held view that directors have no personal liability for costs if their company is unsuccessful in litigation and cannot afford to meet the other side's costs. Generally it is the case that if directors conduct the company's litigation prudently and in the interests of the company, they should be free from personal liability. However, there are circumstances in which if the company cannot afford to meet the winning party's costs, that party will look around to see whether anybody can pick up the tab.
The first danger is that the winning party will put the company into liquidation and appoint a liquidator to determine whether the directors have conducted the litigation in a way that is in breach of their duties as directors so that they should have some personal liability to the company and, hence offer some return to the opposing party.
The courts have also held that the "corporate veil" can be pierced and the directors made a party to the proceedings and ordered to pay the successful party's costs. This was the position in a recent case in the English Court of Appeal between Deutsche Bank and Sebastian Holdings, a company registered in Turks and Caicos and owned and directed by Mr. Alexander Vik. Deutsche Bank sued the company and Sebastian counterclaimed for damages of $8 billion. At trial Deutsche Bank obtained judgment in excess of $243 million and the counterclaim was dismissed. The court ordered Sebastian to pay 85% of the Bank's costs on what is known as an indemnity basis. Given that the company had no means to pay the Bank's very substantial costs, it applied successfully to have Vik added as a party and the same order in relation to the costs was made against him as the company. He was held to have been the guiding hand of the company and had directed the litigation primarily for his benefit rather than that of the company.
If you are a director of a company about to embark on litigation, the lessons to be learnt from this are:
- If there is more than one director, ensure the Board as a whole endorses the decision to sue and that all the directors are kept informed of progress in the case;
- Ensure by taking legal or accountancy advice that the case is in the best interests of the company and not purely, or largely, for the interest of the directors or shareholders independently of the company's interests.
- Avoid, if at all possible, funding the legal costs other than from the company's own resources or from funding from an independent person, such as the third party funders in the market place.
- Take proper legal advice as to the merits of the case at the beginning and as it progresses - you will not be liable for involving the company in proceedings which you have been advised have a reasonable chance of success.