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In a recent case the personal consequences directors may face in company litigation were brought home.
The English High Court (the Court) in Cresta Estates Ltd & Ors v MPB Developments Ltd & Ors [2025] EWHC 1291 (Ch) ordered two directors to pay the legal costs of the company and the petitioners. This was made under an order analogous to a non-party order having found that the directors were the “real parties” in the litigation. The Court found the directors acted in their own best interests in seeking personal benefit and acted without propriety in their conduct of the litigation engaging in a highly speculative defence.
The Court rejected claims of honest belief in the company being solvent and concluded that the directors had acted unreasonably in the litigation without any genuine intention of defending the case at trial.
Background
This case followed the winding up of MPB Developments Limited (the Company) in January 2025 after a 20-month defence of the petition. The Court was satisfied that the Company was balance sheet insolvent and unable to pay its debts.
The creditors (the Petitioners) who brought the winding-up petition (the Petition) sought costs orders against two of the three directors of the Company (the Directors) in their personal capacity. The defence was undertaken against the wishes of the third director, against whom costs were not sought.
Decision
Two questions of fact were asked to determine whether the costs order would be granted:
An affirmative answer to either of these questions sufficed to justify a non-party costs order. It was not necessary to satisfy both.
Real party to the litigation
The Directors accepted that they controlled the Company's defence of the Petition by using their majority on the Company's board of directors. The Directors were involved in funding the Company's defence via a company that they owned and controlled.
The Directors denied that they were seeking to benefit personally from the litigation. They maintained that they believed that the Company was solvent and their continued defence of the Petition was justified by their belief that a negotiated settlement with the Company's major creditors would preserve the Company as a going concern and would result in a better outcome for the Company than a sale in liquidation.
The Court found “ample evidence,” including from a meeting transcript, that the Directors were acting in their own interests rather than in the best interests of the Company. By causing the Company to defend the Petition for 20 months, the Directors each personally benefited £240,000. The Court found that the receipt of salaries when combined with all of the other facts was significant. The Directors engaged in various settlement discussions, all of which included terms which were personally advantageous to them.
The Directors defence that they were at all times acting in what they believed to be the best interests of the Company, notwithstanding that what was in the Company's best interests may also have benefitted them, was rejected. The Directors gave no evidence that they ever considered the realism or viability of the business plans produced in response to the Petition. It was held that the business plans were wildly optimistic and that the Directors had a duty to look at the business plans with a questioning eye.
Acting with impropriety by pursuing a highly speculative defence
The Court held that the Directors were pursuing a highly speculative defence of the proceedings in circumstances where they had no genuine belief in the solvency of the Company and so the defence should not have been advanced. The Court indicated that when a company is hopelessly insolvent, a company's interests are to be treated as equivalent to the interests of its creditors.
The Court found that the Directors acted unreasonably in the litigation without any genuine intention of defending the case at trial and caused the creditors to incur significant costs running to in excess of £1 million. They failed to provide information or provide or obtain expert evidence.
Why is the case significant?
A non-party costs order is made in exceptional cases when it is just to do so.
This case is a serious reminder to directors that they need to be cautious when deciding to defend a winding-up petition as they are at risk of a non-party costs’ application being made against them if they will personally gain from their actions or they are directing the pursuit of speculative litigation.
To protect themselves from allegation of speculative litigation, directors defending a petition should:
Irish courts have the ability to join a non-party to proceedings for the purpose of making a costs order against it when they are the real party to the litigation. These orders are only made in exceptional cases to prevent injustice.
Date published: 3 September 2025
