A recent decision of the Supreme Court to award legal costs against a director of an insolvent company demonstrates the Courts' approach to directors who do not act in good faith and seek to use litigation through the company for their own personal benefit.
In this case a claim brought by an insolvent company, in which Mr Loughnane was the 99% shareholder, was dismissed for fraudulent amendment of invoices and the unreliable evidence of Mr Loughnane at hearing. The Supreme Court 'lifted the corporate veil' and ordered that Mr Loughnane be personally liable for the legal costs of the Defendants, notwithstanding that he had not been a party to the proceedings.
Details of the case
- The insolvent company sued the Defendants for payment for work done by it on foot of a building contract
- The evidence on behalf of the insolvent company was provided by Mr Loughnane and a quantity surveyor who provided evidence at the direction of Mr Loughnane
- The claim was dismissed at the conclusion of the evidence of the insolvent company and the High Court lifted the corporate veil and awarded the legal costs of the case against Mr Loughnane, who was not a party to the case
- The Supreme Court confirmed the decision to lift the corporate veil and award the legal costs of the case against Mr Loughnane personally for the twin reasons of litigation misconduct, amounting to abuse of process, and failure to prove that any debt was due
What did the director do wrong?
- Mr Loughnane mistakenly believed that in arranging for the insolvent company to bring the claim, and by not being a party to the litigation, that he could avoid any personal liability for the legal costs of the Defendants through the separate corporate personality of the company
- Mr Loughnane also failed to provide honest and truthful evidence to the Court which grounded the dismissal of the claim and the litigation misconduct
The Supreme Court confirmed that Mr Loughnane was personally liable for the legal costs of the Defendants.
What can directors of companies learn from this case?
The lesson for all litigants, especially directors, is that they should always be cognisant of the possibility of personal liability. Nothing less than honest and truthful evidence can be provided to the Court. Bringing a claim under the guise of a company will not restrain a Court from lifting the corporate veil and apportioning liability to the party responsible for bringing a claim that amounts to an abuse of process. Directors of companies should conduct all litigation with the utmost good faith and not rely upon the separate legal personality of a company where the company has been used for an improper purpose.