Directors - Danger in Funding Litigation

When a smaller company wishes to undertake litigation, but lacks the funds to do so, it is common for the directors (or one of them) to pay the legal bills for the company.

In such circumstances, it has been usual for directors (unless they have acted improperly or in bad faith) to be protected from having to pay the other side’s costs if the company loses its case. In such circumstances the courts have traditionally looked to see if the action is bona fide and whether the actions of the directors were otherwise so exceptional as to justify making what is termed a ‘non-party costs order’ against them.

This view has modified somewhat over recent years. Now the view is that if a director funds a company’s costs in an unsuccessful action, he should pay the successful party’s costs if:

• he substantially controls the proceedings or will benefit from the action; or
• he funds proceedings by an insolvent company either solely or substantially for his own benefit.

In such cases, the court tries to decide who is the ‘real’ litigant – the director or the company? If the director funding the action is in essence controlling it and it is carried out essentially for his own benefit, then he can be held liable for the other side’s costs if the case is lost. It is no longer necessary for there to be impropriety in order for a director who funds litigation on behalf of a company to be caught for the costs of a lost case.

It is essential to take care when considering litigation, especially if you are funding all or part of the costs from your own pocket. We can advise you on all corporate and litigation matters.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.