In the past, directors and shareholders involved in litigation were largely safe from a personal costs liability due to the protection afforded to them by the difficulty posed in 'piercing' the corporate veil. That is no longer a safe assumption and all those with an interest in a litigating company and those advising them should be aware of the wider circumstances in which a personal costs order may be made against directors and/or shareholders.

The recent decision in Total Spares v Antares [2006] reflects the growing trend of extending the circumstances in which a non-party costs order may be made under section 51 of the Supreme Court Act 1981.

In Antares, personal liability for costs was extended beyond director level, to a non-director shareholder, who managed and exercised control over Antares, the defendant company. Of particular significance, however, is that for the first time, a costs order was granted despite the absence of a causative link between the actions of the non-party and the costs that were incurred.

The causation debate

Proof of causation had been viewed as a necessary pre-condition to a non-party costs order see, for example Lord Justice Simon Brown in Hamilton v Al Fayed [2002]. A change came about when the then Lord Phillips of Worth Matravers, Master of the Rolls (now the Lord Chief Justice) in the Court of Appeal case of Arkin v Borchard [2005] suggested otherwise, stating that "causation is also often a vital factor in leading a court to make a costs order against a non-party".

The court in Antares concluded that in the light of Arkin it could no longer be said that causation is a necessary pre-condition to a non-party costs order.

In Antares, and unknown to the claimant, two weeks before trial, Antares had transferred most of its assets to a newly-formed and closely-connected Italian company, Antares for Water and Fire (AWF). This was never mentioned in evidence at trial and judgment was given in the claimant's favour. Antares allowed itself to be struck off the Italian company register, leaving the claimant unable to recover its costs from that company.

The claimant issued a section 51 application against (1) Mr Gargani personally (who, although he was not a director, managed and controlled the business and indirectly held 90% of the shareholding); and (2) AWF.

The court held that both were liable for the claimant's costs.

Any requirement to prove impropriety in order to succeed in obtaining a non-party costs order has also now gone – where the non-party can be described as the 'real party', then even where he has acted in good faith or without impropriety, he may be exposed to a personal costs order ( Goodwood v Breen [2005], see also BE Studios v Smith & Williamson [2005]).

Such an order was made against a non-director in Petroleo v Petromec [2005], without there having been any question of bad faith or impropriety. The court expressly rejected the arguments that in the absence of bad faith the proper remedy should be in security for costs or that such an order would interfere with the corporate principles of limited liability.

Impropriety on the part of the non-party will nevertheless greatly assist the applicant's prospects of success.

Boundaries widened

It remains to be seen whether the approach to causation in Antares will lead to a significant increase in third-party costs orders being made in 'no-causation' cases as this was a case where, on the facts, justice demanded an order be made.

Each case will always turn on its own facts, but it is clear that the removal of the requirement for causation is a significant widening of the boundaries, and the courts may now be invited to make third party costs orders in situations where previously the absence of a causative link would have been fatal.

It is also clear that the courts are increasingly willing to use their powers under section 51 and that with preconditions of impropriety and causation falling away, the risk of non-party costs exposure is far greater than before. Antares is a good case in point – although the facts were exceptional, section 51 liability was nevertheless extended for the first time to a non-director who was not even funding the litigation.

For those advising directors, officers or shareholders the message is clear. We are now likely to see a spate of section 51 applications in which the tests may be further refined. Advisers who do not wish to find themselves caught up in such cases would be well advised to consider the bigger picture and alert all of those with an interest in the litigation, not just the parties, of the possible risks they may face.

While ultimately the courts will only make an order when the facts of the case and the interests of justice require it, for most clients the very risk of being brought into proceedings to face a non-party costs application will be an unwel-come distraction.

Neil Jamieson is a partner and Stephen Elam an associate in the commercial litigation team of Barlow Lyde & Gilbert.