Directors often think that they are immune from liability for costs incurred by their companies. Listen and learn. The entrepreneur here finished up with a massive legal bill, not to mention a wigging from the judge
Entrepreneurs beware. Directors of limited companies sometimes think that they are immune. So long as they have their director’s hat on, nobody can get at them. Quite often they are right, but this is a story about how the magic can stop working. It’s not just a construction story but directors of construction companies are as much at risk as directors of other businesses.
Chantrey Vellacott is a firm of chartered accountants. It had a client called the Convergence Group, made up of several companies effectively run by one man. In 1996 he came to discuss a bright new idea code-named Marco Polo. Neither that name, nor the name subsequently given to the project (Silk Route), gave much of an idea of what it was about. The idea was to design, build, own and operate a broadband telecommunications network in Athens in time for the 2004 Olympics.
It didn’t happen. The idea was finally abandoned in 2003 because the company was unable to raise the finance. Chantrey Vellacott was owed £260,000 in fees and issued High Court proceedings for recovery.
Convergence defended and also brought a counterclaim for damages for professional negligence. The essence of the counterclaim was that the accountants had given bad advice, which had made it impossible for the company to raise the investment required. It said it had lost £100m as a result, and claimed that figure as damages.
The trial was due to last four months. Most of the first two weeks was spent in cross-examining the director of Convergence. It seems that things didn’t go too well for him in the witness box, and before much else could be done, the company called in administrators. The counterclaim was then abandoned and judgment was entered for Chantrey Vellacott for fees, interest and costs. The costs were estimated to be £5.6m.
Convergence had no money. The accountant asked the judge to order that the director pay the costs, even though he was not named as a party in the action. The court can make that order if the circumstances justify it. Mr Justice Rimer produced 120 pages of closely typed judgment analysing the position.
The judge peppered his judgment with words like ‘baseless’, ‘untrue’ and ‘dishonest’. Then he told
the director he must pay £5.6m in costs
The company had pursued a case that had no basis in fact. The director knew that. Whether or not he had reason to believe that the accountants had been negligent, it was clear that the project had failed for other reasons, and so the claim for £100m could never have been proved. The judge peppered his judgment with words like “baseless”, “untrue” and “dishonest”.
During the course of the litigation, the accountant had made applications for security for costs on the counterclaim. The firms asked the court to order that Convergence pay a substantial sum into court so that there would be a fund to meet at least some of the costs if the counterclaim failed. The applications had been defeated by reference to accounts that showed that Convergence had substantial assets. Those accounts were clearly wrong, and the inference was that the director knew that.
The company had been unable to fund this litigation. The director had assisted with payments both from himself and from other group companies that were within his control. If Convergence had succeeded in the counterclaim, the benefit would have passed through Convergence to a trust, of which the director was the principal beneficiary.
Given all this, the judge had little difficulty in deciding that the director should be responsible for paying the £5.6m costs.
There was then another argument. There had been a mediation. Should the costs of the action include the costs of the mediation, a process normally considered to be outside the control of the court and the litigation process? The judge was told that at the mediation the accountants had offered £1m but the director had not been prepared to settle for less than £20m. The rejection of the apparently generous offer was unreasonable, and the judge thought it just to include it in the costs the director should pay.
This case has some real lessons for directors with substantial personal interests in their companies. It should not be assumed that litigation can be pursued relentlessly, regardless of merit, without personal liability for costs. It doesn’t help if the judge decides that the director “has been personally responsible for the prosecution of a false and dishonest case”.
John Redmond is head of construction at solicitor Osborne Clarke in Bristol