SHAREHOLDER’S LIABILITY FOR PROCEDURAL COSTS

Litigation financing has become an industry. For many years there have been various forms of financial support for claimants fighting powerful and often economically superior respondents. In certain instances, financing can come from creating a new legal entity to which the disputed claim is assigned. These special purpose companies (SPVs) are only capitalised with enough funding to cover their own procedural costs, but not the counterparty’s. In other instances, these companies even had their shareholders pay the legal fees of their counsel directly. If successful, the SPV’s shareholders receive the profit; if the SPV is unsuccessful, it files for bankruptcy. As a consequence, the prevailing party has to bear the procedural costs on its own. Common law jurisdictions sometimes have used the concept of piercing the corporate veil in order to hold the SPV’s shareholders liable.

While the concept of piercing the corporate veil in a procedural context has been alien to civil law jurisdictions thus far, two recent court decisions in Sweden and Germany may serve as a first indication that the concept is slowly getting recognised.

The Swedish Supreme Court recently decided that the shareholders of a stock company can be held personally liable for the procedural costs in case the company had been set up for the sole purpose of enforcing claims against a third party. The SPV was a Swedish stock company which had been founded with the sole purpose of running an action of damages against an audit firm. The SPV was equipped with a share capital of KR 100,000, which was only sufficient funding to cover its own counselling costs. The SPV lost the dispute and was obligated to compensate the counterparty for its procedural costs. As expected, the SPV had to file for insolvency. When the audit firm did not receive any compensation from the insolvency estate, it sued the shareholders and claimed that they should be held personally liable for the SPV’s procedural costs. 

Jul-Sep 2015 issue

Mannheimer Swartling