Directors’ liabilities

03 Mar 2017

It is all too easy for directors of limited liability companies to believe that they can hide behind the cloak of limited liability and avoid any come back against them for the company’s acts and omissions. However, in recent years, the English Courts have begun to extend the areas in which directors can face personal liability, particularly where those companies are ones with a single director/shareholder.

In 2015, the Supreme Court in Sea Shepherd UK v Fish and Fish Limited held that directors could be jointly liable with their company for certain acts perpetrated by the company if it could be shown both that the director/shareholder actively cooperated to bring about the wrongful act and also that he intended that his cooperation would help to bring about that act. It is not just any act. It has to be what is known as a tortious act. A breach of contract, therefore, would not result in the director being personally liable. But if the company had acted negligently and as a result caused damage to another party, then the director could find himself on the hook. Other examples would be unlawful interference with someone else’s trade or contract, for example, disrupting someone else’s business unlawfully or negligent statements about the company’s business.

Another example is in the area of trade mark infringement. Last year, in the case of Grenade (UK) Limited v Grenade Energy and Another, which related to the use of the “Grenade” trade mark on energy drinks, the company who was being accused of infringement admitted liability but the director, who had been sued personally and who was also the sole shareholder, did not claiming that the acts in question were the acts of the company alone and that he was not jointly liable. The Court found that as it was a one-man company, it raised an evidential presumption that all acts done by the company were done at the instigation of its director/shareholder.

Whilst it may be overstating things to say that this case represents the death knell of the one-man company being able to hide behind the company’s limited liability status, it is going to make it very difficult indeed for directors of such companies to avoid personal liability for certain acts because how else can the company act but through its single guiding hand. It makes the case for two directors, even if one is relatively passive, all the more persuasive, although even then who is to say that the Courts will not come to the same evidential presumption in circumstances where both directors are sued. Indeed the same could be said for companies with three or four directors. We are in uncharted waters as to how far the Courts will go in finding the necessary degree of active cooperation between individual directors and their company to commit the sort of wrongful acts covered by this legal doctrine.

Of course, the more directors there are, the harder it will be for someone bringing a claim to prove the necessary degree of collusion between them and the company and/or to identify the individual director(s) who may have been responsible. For the moment, therefore, it remains the case that what are effectively sole traders operating as limited companies are most at risk. But given that sole traders often set up limited liability companies in order to give them a significant degree of personal protection, they should not delude themselves into thinking that they do so with impunity.

Directors will of course continue to be liable if they have made fraudulent misrepresentations on behalf of their company or in circumstances where their company goes into an insolvent liquidation (i.e. is unable to pay its debts) and there has been some form of wrongful trading or misfeasance, or advance payments of dividend in lieu of salary in anticipation of a profit that is not ultimately made which a director can then be liable to repay.