According to a judgment of 19 January 2018, the Supreme Court has affirmed that the board of directors of a company is liable in damages for the decision to continue a legal action at a time when the company was no longer able to pay the costs to the opponent. The case was conducted by partner Christina Steen on behalf of the parent company and board of directors of Company D.

The subject-matter of the case was whether the board of directors of a company, Company D, could be held liable to pay imposed and unpaid costs, and also whether the parent company was liable to pay, through a lifting of the corporate veil. The claim was primarily based on the view that litigation speculation was intended.

In the specific case, Company D's board of directors is identical to Company D's parent company, which makes up the board of directors of Company D, with authority in Dutch law.

The question was specifically whether the board of directors could be made liable in damages for deciding to bring legal action and continuing that legal action at a time when the company was no longer able to pay the costs. The claim had been made by the parties who had not received payment of the costs which Company D had been ordered to pay, and the claim had been calculated based on the order for costs.

FINANCIAL SITUATION DETERIORATED DURING LEGAL ACTION

During the legal action, there was focus on the fact that Company D’s financial situation deteriorated during the case, and the fact that the company itself did not finance the expense for the litigator. However, the outcome of Company D’s legal action was decisive for the company’s possibility of generating earnings on the Danish market and could therefore significantly affect Company D’s possibilities of complying with an order for costs.

The case raises the question whether insufficient liquidity may prevent a party from bringing or continuing a legal action, and whether board members and/or shareholders risk being liable for any costs imposed. In addition, it was also discussed which standard of evidence may be required from a statement of loss.

During the legal action, the board of directors claimed that no financial barriers may be set up for access to the courts, and that no requirements may therefore be made for a party to have sufficient funds at any time to be able to pay costs, if any, to a winning opponent. In relation to the question of liability in damages, the board of directors argued, among other things, that negligence could not be established when the board of directors decided to bring legal action and continue the legal action based on advice from Company D’s attorney, who had made a positive statement on the litigation options. A significant argument was also that it had to be considered important that the outcome of the legal action was essential for Company D’s possibility of maintaining its earnings base.

On the other hand, the claimant argued that the board of directors should not have decided to bring legal action and to continue the legal action at the time when it had to be clear to the board of directors that the company was not able to pay any costs imposed. It was also argued that it was an aggravating factor that Company D, at a time when the company’s accounting figures were red, extended the legal action against the claimants with a claim for damages for a three-digit million amount, and that the board of directors let a third party finance the expense for the litigator.

According to the statement of loss, Company D’s board of directors argued that the loss could not exceed the claimant’s actual legal costs. The view was based on the fact that there were invoices showing that two of the three claimants had been invoiced attorneys’ fees which were lower than the amount awarded according to the order for costs. The claimants’ overall view was that the loss could be based as a whole on the order for costs which had not been complied with.

THE EASTERN HIGH COURT: NO BASIS FOR LIFTING THE CORPORATE VEIL

The case was referred to the Eastern High Court as the court of first instance due to its general public importance.

According to a judgment of 14 March 2017, the Eastern High Court assessed that there was no basis for lifting the corporate veil. According to the Eastern High Court, the actual decision to bring legal action did not give rise to liability for the board of directors. On the contrary, the Eastern High Court assessed that Company D’s board of directors had acted in an actionable manner by deciding to continue the case and at the same time increase the claim at a time when it was considered that the company would not be able to pay any costs imposed.

On this basis, the claimants were successful in approx. 60 % of the amount calculated as the board of directors only incurred liability in damages for the amount accruing from the time in the legal action when it was decided to continue the legal action and increase the claim.

The High Court took into account that the loss could be calculated based on the order for costs with which Company D was unable to comply.

THE SUPREME COURT AFFIRMS JUDGMENT

According to a judgment of 19 January 2018, the Supreme Court has affirmed the High Court’s judgment, but with a reduced interest period.

COMMENTS

The judgment may seem to reflect an increase of directors’ liability and a set-up of legal barriers to prevent access to a judicial review. In addition, the judgment contains elements indicating a relaxation of the requirements for documentation of a loss suffered and access to compensation for disappointment. However, it is Horten's opinion that caution should be exercised as to generalization based on the judgment as its outcome must be based on specific matters and circumstances.

contacts

Christina Steen

Partner

Christina Bach-Kristensen

Attorney