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Legal costs
Published August 2007
Company directors and shareholders made personally liable
The UK courts have recently extended the circumstances in which company directors and shareholders can be made personally liable for the other side’s legal costs if their company loses a court case.
UK law says that in certain circumstances the courts can order a person – usually a director or shareholder - to pay the other side’s legal costs if his company loses a court case, even though he isn’t personally a party in the case.
One of the requirements has always been that they must have caused the other side to have incurred their legal costs – i.e. those costs would not have been incurred except for their actions.
A new decision has changed the rules. A UK company won a court case but, when it tried to recover its legal costs from the loser (a company registered in Italy), it found the loser’s assets had been transferred to a new company, and the loser had deregistered, so the costs couldn’t be recovered. There was no credible reason for the transfer except to avoid paying legal costs if the case was lost.
The 90 per cent shareholder of the Italian company was also involved with the company to which the assets had been transferred. He was not a director of the Italian company (though he was involved in managing its business) and he had not funded the litigation personally. Most importantly, it was agreed that his actions had not caused the winner to incur its legal costs.
But the court said that none of that mattered. The shareholder had arranged the transfers to make it more difficult for the winner to recover legal costs if it won (and hadn’t told the court he was doing so), and it was therefore just to make him personally liable for the other side’s legal costs, even though he had not caused them.
Winning litigants may now try to recover their legal costs from directors and/or shareholders of the loser more often – particularly if the directors or shareholders have tried to reduce their business’s exposure to court costs.
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