Directors of companies involved in litigation face a risk that is not always well understood — the risk that a court may order the directors to pay costs personally.

That risk is real. But the threshold for a third party costs order against a director is also high — and the specific circumstances in which such orders will and will not be made matter greatly.

EAGLEGATE recently acted for the directors of a company in precisely this situation. The application for a third party costs order against our clients was dismissed. The judgment is reported as Active Skin Pty Ltd v Yey Pty Ltd (No 2) [2026] FedCFamC2G 733, decided by Judge Manousaridis in the Federal Circuit and Family Court of Australia on 6 May 2026.

The Background

The underlying proceeding was a trade mark registration appeal. Active Skin Pty Ltd (ASPL) had applied to register two trade marks at IP Australia. Yey Pty Ltd (YPL) opposed the registrations, and the delegate of the Registrar refused registration. In July 2019 ASPL appealed that decision to the Federal Court.

After a three-day hearing in February 2021, ASPL’s appeal was dismissed in October 2022. ASPL was ordered to pay YPL’s costs on a party-and-party basis. Those costs were subsequently quantified at over $285,000.

ASPL could not pay. YPL then filed an application seeking orders that the directors of ASPL — Kim Taylor-Smith and Stephen Smith — pay those costs personally, as third parties to the proceeding.

EAGLEGATE acted for the directors in resisting that application.

The Legal Test for Third Party Costs Orders

The power to make a costs order against a non-party — including a director — is a discretionary power that courts exercise with caution. The applicable principles, derived from Knight v FP Special Assets Ltd (1992) 174 CLR 178 and subsequent authorities, require the Court to consider whether the non-party:

• Had an interest in the subject matter of the proceeding sufficient to render them effectively the true party to the litigation, or
• Engaged in conduct in relation to the litigation that constituted an abuse of process

Beyond those primary considerations, the Court weighs a range of factors including whether the non-party was warned of the intention to seek costs against them, whether the successful party delayed in seeking security for costs, and the overall conduct of the proceeding.

Merely being a director of a company that commences and loses litigation is not sufficient. The fact that a director caused a company to litigate — even unsuccessfully — does not of itself make that director the true party to the proceedings or constitute an abuse of process.

Why the Application Was Dismissed

YPL argued that the Directors had a sufficient interest in the trade mark registration appeal to be treated as the true parties — and that their causing ASPL to go into liquidation and causing another company they controlled to acquire ASPL’s assets constituted conduct warranting a costs order.

The Court rejected both arguments.

On the question of whether the Directors were the true parties, the Court found that while they had an interest in the outcome — as controllers of ASPL and of the entity that subsequently acquired ASPL’s assets — that interest was not sufficient, on the facts, to treat them as if they were the parties to the litigation. The proceeding was ASPL’s proceeding. The Directors caused ASPL to bring it. That is not the same as the Directors bringing the proceeding themselves.

On the question of abuse of process, the Court found that the Directors’ conduct did not meet the threshold. The decision to commence and maintain the appeal, and the subsequent corporate transactions, did not constitute conduct that was so unreasonable or improper as to amount to an abuse of process.

The Court also weighed YPL’s failure to warn the Directors before the application was filed — a factor the authorities indicate weighs against the making of a costs order.

The application was dismissed. YPL was ordered to pay the Directors’ costs of the application.

What Directors Need to Understand

Third party costs orders against directors are available — but they are not automatic consequences of losing litigation. The key principles for directors to understand are:

The threshold is higher than most people assume. Courts are cautious about piercing the corporate veil through costs orders. The fact that a director is the controlling mind of a company that loses litigation — and even that the director benefits from the litigation — is not sufficient on its own.

Conduct matters. Where a director engages in conduct that is genuinely abusive — manufacturing claims, destroying evidence, using litigation purely to harass — the risk of a personal costs order increases significantly. The legal exposure tracks the conduct.

Warning matters. Courts look at whether the party seeking a third party costs order gave notice to the director of their intention to do so before the application was made. Failure to warn is a factor that weighs against the making of the order.

Security for costs is the earlier and safer remedy. Where a party is concerned that the company on the other side of litigation cannot satisfy a future costs order, the appropriate early step is to apply for security for costs — requiring the company to pay a sum into Court as security before the proceeding continues. Waiting until after the event and then pursuing directors personally is a harder path.

Corporate transactions during litigation are scrutinised. Where a director causes the company to go into liquidation and assets to be transferred to a related entity during or after litigation, courts will examine that conduct carefully. It did not determine the outcome here — but it was a live issue.

What to Do if You Are a Director Facing a Third Party Costs Application

Seek legal advice immediately. These applications are time-sensitive and the response — including the evidence required to resist the application — needs to be prepared carefully. The legal principles are nuanced and the outcome turns on the specific facts of how the litigation was conducted and managed.

EAGLEGATE acts in commercial litigation and costs disputes across Brisbane, Queensland and nationally. For advice on your specific situation, book a confidential consultation.

The judgment in Active Skin Pty Ltd v Yey Pty Ltd (No 2) [2026] FedCFamC2G 733 is available on AustLII.

This article is general information only and does not constitute legal advice. For advice on your specific situation, speak with a lawyer.