Piercing the Corporate Veil Series: Non-Party Costs Orders Side-Stepping the Corporate Veil

Non-party costs orders allow successful parties to sidestep the corporate veil by making an individual director/shareholder in control of a company liable for the costs of proceedings. Accordingly, they are a useful tool for litigators to ensure that liability for costs is not evaded by those who for example (i) might take steps to strip assets from a company or hide assets to defeat costs liabilities once a piece of litigation is seen to be going “south”; or (ii) conduct litigation through a shell entity.

Of course, if a party becomes aware or suspects that an opposing company would unlikely be able to meet the potential costs consequences at the end of proceedings then an application for security for costs may be available on the grounds of impecuniosity. However, that is a separate topic and not the focus of this article.

Executive Summary

1. Non-party costs orders operate in effect to sidestep the corporate veil of separate legal personality and limited liability. However, each case will turn on its own facts.
2. Non-party costs orders show the English and Welsh courts pragmatic approach to principles of (i) limited liability and separate legal personality and (ii) a successful parties’ right to claim for its costs against the losing party.
3. The threat/potential for the court to make non-party costs orders deters those who might otherwise bring frivolous claims and encourages parties to act reasonably.
4. Parties to litigation should review the potential cost consequences of proceedings from the outset and throughout the lifetime of any piece of litigation.

The Law

Section 51 of the Senior Courts Act (“Section 51”) provides the courts with a discretionary power as to the determination of whom and to what extent costs are to be paid.

It was then confirmed in Aiden Shipping Company Limited v Interbulk Limited¹ that the power conferred under Section 51 was very wide and was not just limited to the parties to proceedings i.e., there is no implied restriction on its use.

Rule 46.2 of the CPR deals with costs orders in favour of or against non-parties and provides that where a non-party costs order is made, the person that it is made against must (i) be added as a party to the proceedings for the purposes of costs only; and (ii) be given a reasonable opportunity to attend a hearing at which the court will consider the matter further.

Generally speaking, a non-party costs order will be sought following a full trial. However, it can also be sought at an interim stage, but particular caution will be taken by the court before doing so because it would be hard to predetermine the apportionment of costs between the parties at an interim stage².

For many years reliance was placed on the decision in Symphony Group v Hodgson³ which essentially set out the criteria and/or guidelines that the court should consider when exercising its discretion to make a non-party costs order. The guidance included that a non-party costs order should only be granted in exceptional cases.

However, the Court of Appeal in Deutsche Bank v Sebastian Holdings⁴ reconsidered the approach taken in Symphony Group. It held that:

1. ‘Exceptional’ meant ‘no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense’; and
2. The only principle applicable to determining whether to make a non-party costs order is that the court’s discretion must be exercised justly and each case will be determined on its own facts.

The key points for those seeking a non-party costs order to consider are as follows:

1. The discretion of the court is provided by Section 51;

2. It is helpful to show that there is a close connection between the non-party and the proceedings. If that is the case, then an application for a non-party costs order might be dealt with on a summary procedure basis;
3. If you can show that a non-party has effectively controlled the litigation to obtain a personal benefit should it be successful, that will usually entitle the court to regard them as a real party to the action and provide strong grounds for making a non-party costs order against them⁵;
4. The party being joined to proceedings for the purpose of costs only should be warned and/or notified of the intention to make an application for a non-party costs order as per Rule 46.2. However, the absence of a warning is simply a factor to be considered by the court when faced with an application for a non-party costs order and may not be fatal.

Conclusion

Non-party costs orders are a further example of the English and Welsh court’s willingness to circumvent and/or sidestep the corporate veil in specific circumstances and for good policy reasons. Whilst each application will turn on its own facts, those applying for a non-party costs order should keep in mind the factors set out above. Where there is a suspicion that assets have been dissipated or that there has been some form of impropriety, the appropriateness of an application for a non-party costs order should form part of the overall litigation strategy. Although the threshold for making a non-party costs order remains high, where the criteria is met they are a powerful tool in ensuring the successful party receives their costs.

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¹ Aiden Shipping Company Limited v Interbulk Limited (The Vimeira) (No 2) [1986] AC 965

² Ociusnet UK Ltd v Altus Digital Media Ltd (formerly Ociusnet Digital Media Ltd) [2021] EWHC 3377 (Ch) at paras [58] and [62]

³ Symphony Group v Hodgson [1993] 4 All ER 143, [1994] QB 179

⁴ Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23

⁵ Ibid, para. [51]