When can a costs order be made against a non-party company director personally in respect of litigation involving the company?

McGlone v Gerard Brandrick & Associates Pty Ltd & Anor [2023] VCC 1895 provides a useful reminder of the circumstances in which such an order may be made.

The proceeding concerned building works carried out at the ‘American Hotel’ in Echuca, Victoria.  The plaintiff’s claims related to building defects against the first defendant (the ‘architect’) and the second defendant (the ‘building company’) that had carried out the works.  The plaintiff’s claim against the architect was settled but the architect remained a party by reason of the building company’s claim for contribution against it.  The Court ultimately gave judgment in favour of the plaintiff and dismissed the contribution claim against the architect.  The Court ordered that the building company pay the plaintiff and the architect’s costs, subject to the parties seeking a different order as to costs.  Shortly thereafter a liquidator was appointed to the building company and, in those circumstances, the architect sought a non-party costs order against the director of the building company (the ‘director’).

The Court held that it was in the interests of justice to pierce the corporate veil and to make an order for costs to be paid by the director personally. 

Noting that it was not necessary for the Court to ‘tick off’ all of the requirements, Her Honour Judge Burchell’s reasoning included the following.

First, Her Honour found that the building company had been the subject of the director’s premeditated efforts to reduce it to a ‘man of straw’.  In particular, the director had commenced operating another building business through a new company whilst ceasing to trade via the building company and transferring its assets to the new company.  Her Honour found that the director’s decision no longer to trade via the building company was done to reduce the funds available to pay legal costs awarded against it.

Second, the non-party director had played a sufficiently active role in the conduct of the litigation.  As the sole director and shareholder, he had directed the course of the litigation and had made decisions which impacted the parties as the proceedings unfolded. The director had lent money to the building company to fund at least a portion of the litigation, which was further evidence of his personal involvement.

Third, the non-party director had a sufficient interest in the litigation.  He stood to benefit from the building company’s inability to meet a costs order due to liquidation. He also stood to personally gain from the prospect of any contribution from architect.

Finally, her Honour found that it was not in the interests of justice to permit the director to hide behind the corporate veil in circumstances where there had been a deliberate attempt to use the principles surrounding limited liability to avoid the payment of costs that the building company ought rightfully bear.  Her Honour observed that phoenixing is ‘antithetical’ to a director’s fiduciary duties and is, therefore, a further consideration of how the interests of justice is best served by providing for a non-party costs order.

Roman Rozenberg

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