Are directors of corporate entities involved in litigation shielded from personal cost orders when the corporate entity is unsuccessful? In this article, partner Selina Nutley and lawyer Sarah Sherman discuss the recent Supreme Court of Victoria decision of M C Wholesaling v Che which outlines the court's key considerations when making a non-party costs order against a director.
KEY MESSAGES FOR DIRECTORS
- The court has full discretion to make a costs order against a non-party, including a director, if it is in the interests of justice.
- For a director, something more than just assisting a corporate litigant with conducting litigation is required as the basis of a costs order.
- To limit the possibility of being on the receiving end of a non-party costs order, a director giving instructions on behalf of a corporate party should always act in good faith, not unnecessarily delay proceedings or cause the other party to incur costs, and act reasonably.
M C WHOLESALING CASE
In June 2020, two companies commenced proceedings against a
number of defendants. The companies carried out a powdered milk
wholesaling business. They alleged the defendants had skimmed the
plaintiff's powered milk stocks, sold the products for their
own personal gain, and covered it up with fraudulent invoices. The
companies obtained orders freezing the defendants' assets
without notice to them.
The companies later discontinued the proceedings against most of the defendants. While the plaintiffs accepted they would need to pay those defendants' legal costs, there was disagreement about the basis for calculation of those costs, and whether a costs order should be made against the director of the plaintiffs, Andy. This second issue is the focus of this article.
The judge considered the legal principles which are relevant to making a costs order against a non-party:
- Full, unfettered discretion. The courts have full unfettered discretion to determine by whom and to what extent costs are to be paid based on the interests of justice.
- Exceptional circumstances. Although a non-party costs order should only be made in exceptional circumstances, the threshold for 'exceptional' means outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.
- Insolvent party. A court may be more inclined to make a costs order against a non-party where the party to the litigation is insolvent or a person of straw, and the non-party played an active role and stood to benefit from the litigation.
- Case by case basis. Each case must be considered on its facts.
- More than discharge of director's duty. To warrant a costs order against a company director, their role and conduct must be 'something more' than a director merely assisting a corporate litigant in the conduct of litigation. 'Something more' may include a director giving instructions to pursue a claim or defence which has no real prospects of success, alleging fraud without reasonable grounds, or continuing proceedings on the basis of a 'stubborn and totally unreasonably held' belief.
The judge decided it was appropriate to make a non-party costs order against Andy for the following key reasons:
- Andy was the driving force. It was apparent from Andy's role and conduct in the proceeding that he was the driving force behind the commencement and maintenance of claims of fraud and serious misconduct against the defendants, despite there being no real evidence to support those claims. Also, Andy made some unreasonable decisions, like rejecting a settlement offer and not agreeing to the orders freezing the defendants' assets.
- Andy controlled whether the costs order was paid. Andy owed significant monies to one of the companies by way of unsecured loans. If those loans were repaid, the company would have enough assets to pay a costs order. So, Andy ultimately had control over whether to meet the order, and he may choose not to.
This decision is a good reminder that non-parties to litigation, particularly directors, may find themselves in the firing line of a costs order even if they are not personally named in litigation. Reach out to our Litigation team for more.