When is a director personally liable for a company's wrongs?

A recent Court of Appeal judgment considers when a director might be liable for wrongs committed by the company (including, specifically, by way of accessory liability).

Introduction

One of the foundational principles of company law is that of separate legal personality, that the company is recognised as a legal person capable of entering legal relationships in its own name. Coupled with this principle is that of limited liability of members, with members being liable only for the amount unpaid on their shares in the case of a company limited by shares. As a result, claims for wrongs committed by a company ought to be brought against the company and not its shareholders, directors or other officers.

It is also well-established that a director's duties are owed to the company, and that therefore where a director has breached those duties it is the company which has a claim against the director. Where a director's breach of duty has resulted in the company causing loss to a third party, then the chain of liability is from the company to the third party, and from the director to the company – as a starting point, there would be no direct liability from the director to the third party.

Notwithstanding this general position, there are numerous circumstances where liability for a company's actions can extend beyond the company – most obviously, where the director has been involved in fraudulent or other dishonest action on the part of the company, then the corporate structure will not protect that director from personal liability. 

A more difficult area arises in cases where the company causes losses to third parties for tortious acts (or civil wrongs) where the wrongdoing is below that of fraud or dishonesty. In some circumstances, directors may be required by law and regulation to take on personal liability to third parties, such as when a director takes on responsibility for the contents of a prospectus under the Financial Services and Markets Act 2000 regime. For the most part, however, the liability will be that of the company and not its directors. A recent decision of the Court of Appeal, Andrew James Barclay-Watt & Others v Alpha Panareti Public Limited, Andreas Ioannou [2022] EWCA Civ 1169, has brought renewed attention on the circumstances where directors may have personal liability for a company's wrongdoing to third parties (including, specifically, by way of accessory liability).

Barclay-Wyatt

Alpha Panareti Public Limited (APP) was involved in the development and marketing of luxury properties in Cyprus. APP faced a number of claims from UK residents who had purchased such properties as "armchair" investments to be let to tourists. As a result of the economic downturn following the 2007-8 financial crisis, the developments fell behind schedule and were not completed on time, resulting in the purchasers receiving incomplete properties. 

The purchase of each property had been funded by a 15% deposit from the purchaser, and a bank loan secured by a mortgage denominated in Swiss francs – this currency had been chosen because, in the economic environment of the early 2000s, it allowed a low interest rate and therefore appeared to be a cheap mortgage. However, this exposed the purchasers to currency risks on the Swiss franc. Both sterling and the Cypriot pound fell in value against the Swiss franc, resulting in the costs of the mortgages increasing, such that even if the properties had been completed and delivered to the purchasers as planned, the rent receipts would not have been sufficient to enable repayment of the loans. 

APP had two directors, a father and son, the latter of whom was the driving force behind the business (the Managing Director). The Managing Director had been responsible for the marketing plan, which involved the recruitment of a network of salespeople, the production and supply of marketing materials, and a training programme for salespersons in the UK and in Cyprus. The marketing materials had emphasised the mortgage as a key selling point. The Managing Director had no personal contact with prospective purchasers, who had instead dealt with the salespeople.

Several claims were brought in respect of the marketing of the properties, with the claimants alleging APP had made (or was responsible for) numerous misrepresentations and negligent advice. At first instance, one of these types of claims was successful, with the judge finding that APP had owed a duty of care to put the claimants on notice of the currency risks involved in the mortgage, and that it had failed to do so – importantly, this was a negligent failure, not deliberate deceit. The first instance judge had found that the Managing Director had no personal liability in respect of APP's breach of duty.
There were various appeals and cross-appeals, with the claimants arguing that the Managing Director ought to have been jointly liable with APP for the failure to advise of the currency risks. While at first instance it was argued that the Managing Director had assumed personal responsibility to the claimants, the first instance judge found against them, noting that there was no 'singular feature' which would justify a belief that the Managing Director had assumed personal responsibility, that the contracts had clearly been entered into between each claimant and APP and that, at the time of signing those contracts, it would not have occurred to them that they were contracting instead with the Managing Director. This line of argument was not pursued on appeal.

A second line of argument that had also been rejected at first instance, but that was pursued on appeal, was that the Managing Director had accessory liability with APP. To establish such liability, the claimants would have needed to prove:

•  that the Managing Director had assisted APP in the commission of the wrong against the claimants;
• that the assistance had been pursuant to a 'common design' between APP and the Managing Director that the wrongful act be committed; and
• that the wrongful act itself be a tort, i.e., that it would give rise to liability to the claimants.

The third of these had been established by the finding that APP had breached its duty to the claimants to warn them of the currency risks, and the Court of Appeal separately upheld this finding. Argument as to the Managing Director's accessory liability therefore focused on the first and second requirements.

The claimants argued that the Managing Director had assisted APP in the commission of the wrongful act, his involvement being substantial and non-trivial. The basis for this argument was the Managing Director's substantial involvement in all aspects of the marketing plan. The claimants further argued that there was a common design between APP and the Managing Director to sell as many properties as possible.

The Managing Director argued that he had not taken deliberate or active steps to conceal the currency risks from prospective purchasers, and that it would be wrong to characterise his conduct as assisting in the commission of a wrong – the wrong in question being a negligent omission.

The Court of Appeal found against the claimants, holding that the Managing Director had no accessory liability. The Court of Appeal's decision focused in large part on the lack of a common design, stating that there was no conscious decision not to warn the claimants of the currency risk and that therefore, it was difficult to say there was a common design not to do so. While it might be said there was a common design to market the properties in the way they were in fact marketed, and that such marketing constituted a negligent omission, it would be an unduly wide view of the personal liability of directors if they could incur accessory liability in such circumstances.

Analysis

Barclay-Wyatt highlights the need to balance the fundamental principle of a company's separate legal personality with the ability for claimants to have recourse for wrongs done to them where a company's officers have contributed to the fault.  The decision in Barclay-Wyatt re-affirms the general principle of separate legal personality by declining to take an expansive interpretation of accessory liability.  However, the decisions cited and referred to by the Court, as well as its own judgment, stress the difficulty of eliciting strict legal principles which govern a director's personal liability for a company's tortious acts, with many cases being decided on their specific facts.