Court of Appeal refuses to drive "a coach and horses" through the concept of a limited liability company in joint tortfeasor decision

27 October 2022. Published by Karina Plain, Senior Associate (Australian qualified) and Charlotte Henschen (née Ducker), Partner

The Court of Appeal upheld a finding of corporate liability, but no director accessory liability, for failure to advise of risks of property investment scheme, despite the director being the driving force behind the company's marketing of the scheme.

The Court of Appeal considered that a finding of director personal liability in these circumstances would "drive a coach and horses through the concept of a limited liability company", and that there could be no accessory liability as there was no common design on the part of the company and director to commit the wrongdoing: Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169.

What was the scheme?

The claim related to a property investment scheme in which the claimants, some 280 individual residents in the UK (the Investors), were persuaded to invest.    The investment scheme involved the purchase of apartments and villas at three sites in Cyprus which were being developed by the first defendant, a property development company (the Company) with a view to letting those properties to tourists. 

The properties were marketed by third party companies under contractual arrangements with the Company. The contracts described those third parties as the Company's agents, and provided that the Company would provide all necessary promotional material.  The second defendant was one of two directors of the Company and was described as the "driving force" behind the Company (the Director). Whilst the marketing was carried out by the Company via sales agents, it was the Director who planned the marketing of the investment to UK residents, and he remained closely involved with all aspects of the marketing.   

The Company marketed the properties as "armchair investments" which would be easily lettable, with rental payments matching or exceeding the mortgage repayments. The investment was also marketed on the basis that the purchases were to be funded by a low interest rate loan from a Cypriot bank secured by a mortgage; the low interest rate of that loan was said to be possible by borrowing the funds in Swiss francs.  The High Court found that the availability of a cheap mortgage in Swiss francs was a "big selling point" for Investors.  In fact, after the investments were made, the fall in value of both sterling and the Cyprus pound against the Swiss franc meant that the cost of the mortgages spiralled. 

Company negligent for failing to warn of currency risks 

The High Court held that the Company acted negligently in its marketing of the properties. The Investors had claimed that the Company had made numerous misrepresentations and given negligent advice in the course of marketing the properties, which included, amongst other things, failing to warn the Investors of the foreign currency risks involving with borrowing in Swiss francs when the anticipated rental income would be in Cyprus pounds or sterling. The High Court found that, in marketing the mortgage as a fundamental part of their offering, the Company owed a duty of care to the Investors to put them on notice of those risks and had failed to do so in breach of that duty. The Company appealed this finding, which was dismissed by the Court of Appeal. 

Director not personally liable for Company's wrongdoing 

The Investors had also claimed that the Director, who was the brainchild and driving force behind the marketing scheme, was personally in breach of the duty to warm them about the currency risks of the loan (a claim which was ultimately not pursued), or that he was liable as an accessory to the tort committed by the Company. The Investor's appealed the High Court's finding that the Director was not personally liable.

The Court of Appeal reached the same conclusion as the High Court that the Director was not personally liable for the negligent conduct. In dealing with personal liability, the Court of Appeal observed the need to strike a balance between relevant competing principles: one being the principle that an individual is entitled to limit their liability by incorporating a company to carry on their business, and another being the principle that a tortfeasor should be liable for his or her tortious acts and should not escape liability merely because he or she is a director or officer of a company. 

The Court of Appeal considered that a finding in this case that the Director was not personally liable did not offend these principles. Unlike the Company, the Director was not in any relationship with the Investors whereby he assumed responsibility towards them to warn them of the currency risks (and it would not have occurred to the Investors that he had), and therefore, there was no personal wrongdoing on the Director's part. 

In order for the Director to have been found liable as an accessory to the Company's wrongdoing, the Director must have assisted the commission of an act by the Company, the assistance must have been pursuant to a common design on the part of the Director and the Company that the act be committed and the act must constitute a tort as against the Investors (Fish & Fish v Sea Shephard UK [2015] UKSC 10). The Court of Appeal did not find that the Director had assisted the Company in its wrongdoing, pursuant to a common design on the part of the Company and the Director; the Company had not consciously decided not to warn the Investors about the currency risks and therefore, it was difficult to say that there was a common design between the two not do so. The Court indicated that there could be a common design between the Company and the Director to market the properties in the way in which they were marketed (which did not include a warning about the currency) but to say that this amounted to a common design sufficient to incur personal liability as an accessory would lead to an unduly wide view of the personal liability of directors and senior managers. 

A welcome decision for directors, but no escape if director commits wrongdoing

This decision highlights the Court's reluctance to pierce the corporate veil and hold directors and senior managers liable for conduct carried out by the company. It will undoubtedly be a decision welcomed by directors and senior managers on the one hand, but remains a disappointment to claimants who might feel equally aggrieved by the individual "key player" and the corporate which they represent, and face a situation where the individual has better means to meet an award for damages but is nonetheless insulated from liability. That being said, whether a director is personally liable for wrongdoing involving the Company will come down to the facts involved. Whilst directors should not be exposed to personal liability when carrying out the company's business, this does not equate to free rein to act unlawfully and expect to be shielded from liability by way of the corporate veil. There will be circumstances where director will be personally liable for wrongdoing which it has committed, for example where there is evidence to show a clear common design.   

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