Tom Simpson: The corporate veil does not provide immunity



Tom Simpson
Tom Simpson

LK Shields consultant Tom Simpson and trainee solicitor Katie Linden consider a recent Supreme Court judgment confirming that non-party funders can be held personally liable for costs.

The Supreme Court has unanimously ruled that the principal shareholder and owner of a construction company is to be held personally liable for the costs of an unsuccessful action by the construction company in the High Court in relation to a dispute over a well-known Dublin pub.

The Supreme Court allowed the defendant’s appeal and found that the Court of Appeal had erred in reversing a costs order made against the principal shareholder and owner, Mr Loughnane, despite the fact that Mr Loughnane was not party to the original proceedings.

Background

W.L. Construction Limited issued proceedings against Charles Chawke and Edward Bohan, co-owners of well-known Dublin pub, the Lord Lucan, in respect of payment for work done by it on foot of a building contract completed in 2006. Mr Loughnane is the 99 per cent shareholder of W.L. Construction Ltd. The original summons in 2008 claimed €191,030.40; however, when the claim was opened by counsel in November 2015, the claim was at €342,931. Mr Justice Noonan in the High Court estimated that fourteen different versions of the claim sought were presented to the Court. Amongst other issues, the trial judge found Mr Loughnane had procured fraudulent altered documents.

The High Court struck out the claim following the plaintiff’s evidence, stating that striking out the case was justified in order to prevent further abuse of process and oppression of the defendants.

Following the claim being struck out, the defendants sought a ‘Moorview Order’ from the Court to join Mr Loughnane to the proceedings for the purpose of making him liable for their costs.

This application was based on the Supreme Court decision of Moorview Development Limited & Ors v First Active plc [2011] 3 IR 615, which confirmed that a person who funds litigation, but is not a party to the proceedings, may be liable for some or all of the costs of the proceedings where they are the driving force behind that litigation and stand to benefit from it if the action is successful.

The High Court joined Mr Loughnane to the proceedings in 2017 and granted the non-party costs order. The Court found that Mr Loughnane should be liable for the defendants’ costs as he was grossly dishonest and solely responsible for directing and overseeing a claim that transpired to be fraudulent and a manifest abuse of Court process.

The Court of Appeal reversed the High Court decision, on the basis that as a non-party, Mr Loughnane was not put on notice during the litigation that costs may be sought against him and so was deprived of any opportunity to alter his circumstances to minimise a potential cost exposure.

Supreme Court

The Supreme Court upheld the order made by the High Court. Ms Justice O’Malley delivered the unanimous Supreme Court judgment.

Ms Justice O’Malley stated that it was incorrect to say that Mr Loughnane could not have known that he might be made liable to costs if the correct criteria were met. It was found that Mr Loughnane was informed of the case to be made against him personally when the defendants sought an order against him and that a party to litigation is not obliged to notify the opposing party in advance of the course of action that it will adopt in relation to all possible eventualities.

Further, the Supreme Court held that the question of notice is one which is left to the discretion of the trial judge. It was also noted that Mr Loughnane chose to continue with the proceedings, even after it had been signalled to him that he was at risk of criminal prosecution due to his fraudulent behaviour.

Ms Justice O’Malley reiterated a point made by Chief Justice Clarke in Moorview that there is a need to prevent persons from litigating on a consequence-free basis with the aim of personal benefit.

Conclusion

The purpose of a non-party costs order, as set out in Moorview, is to ensure that a non-party to litigation is not permitted to benefit from successful litigation, without having to bear the risks of any personal exposure to costs if the action does not succeed.

The Supreme Court has determined that it is not necessary at the early stages of the proceedings to put the non-party on notice that costs will be sought against them personally, and that whether the non-party was put on notice or not is only a factor to be considered by the Court in exercising its discretion.

The Supreme Court decision in W.L. Construction has affirmed the jurisdiction of the Court to make non-party costs orders in the appropriate circumstances and confirmed that this is at the discretion of the trial judge.

If pursuing a ‘Moorview Order’, although the Supreme Court has affirmed that it is not an absolute requirement, it is advisable that the non-party is put on notice, at the earliest stage possible in the proceedings, that a party to the proceedings will be seeking a non-party costs order against them personally.

It is important for the shareholders and directors of a limited liability company to be aware that a Court may look beyond the corporate veil and hold them personally liable for the other party’s costs.

Alternative strategies to consider

An alternative option to applying for a ‘Moorview Order’ is to seek security for costs as soon as proceedings are issued. In relation to a limited liability company, section 52 of the Companies Act 2014 allows a Court to order security for costs against a plaintiff company where there is a prima facie defence to the plaintiff’s claim and credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant, if they are successful in their defence.

If an order for security for costs is made, the plaintiff company will be required to provide security for the defendants’ costs and the proceedings will be stayed until this security is given. However, this is entirely at the discretion of the judge and if special circumstances are shown to exist, such as the proceedings involving an issue of exceptional public importance, the application may be refused. The Court must be satisfied that the financial position of the defendant has not been significantly adversely affected by the alleged actions of the defendant. Further, the amount of security is not a guarantee of the actual costs as it is based on an estimate of the defendants’ likely costs in the proceedings. Since the introduction of the Companies Act 2014, the amount to be lodged in court is at the discretion of the Court and may well be insufficient to cover the actual costs at the end of the proceedings, should the defendant be successful.

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