Litigation is expensive. In the absence of very deep pockets, or litigation insurance, there is the possibility of directors becoming personally liable for a company’s litigation costs if the company loses the action.
A company with limited liability is often thought to protect the directors from personal liability. Courts have traditionally only ‘pierced the corporate veil’ in limited circumstances.
However, directors who are also owners of limited companies must be careful to distinguish their own personal interests from that of the company. These interests are not necessarily synonymous.
The courts have recently made it clear that where a director conducts the business, or sets the company on a course, for his own personal benefit rather than that of the company, they are prepared to hold the director personally liable or accountable for adverse litigation costs. A recent case demonstrated this point where a company embarked on a substantial piece of litigation primarily for the benefit of the director. The company lost the action, incurring a large liability for the opponent’s legal costs. The company could not afford to pay these costs so the winning party applied to make the director personally liable for the costs order against the company. The winning litigant succeeded
Where there is doubt as to the real beneficiary of the conduct of litigation, a director should take specialist legal advice, both on the merits of the case and the potential exposure of the company to legal costs and its ability to meet them in the event that the litigation fails. If there is a board of directors, the board should approve of the litigation and any changes in circumstances as the case progresses.
Directors, fiduciaries and personal liability
Directors and fiduciaries should also be aware of the possibility of personal liability where there has been a breach of the fiduciary duty to the company over the company’s assets or funds. This duty can be breached where there are no justifiable reasons for the way in which the director or fiduciary has dealt with the assets, either tangible or monetary. A court can make adverse findings where the person in a fiduciary position provides little or no evidence justifying the activities which are being investigated. A possible consequence could be the court ordering the director/fiduciary to repay or compensate the company for the assets or funds misapplied.
This pitfall is not uncommon where directors conflate their own personal interests with that of the company and can be avoided by taking professional advice before deciding on a course of action which could be deleterious to both company and directors.