Director was not personally liable for actions of a company

But a recent decision in the Court of Appeal of England and Wales demonstrates why it can be more difficult to bring a claim against a director or a member of senior management than it is against the company itself.

Alpha Panareti Public Ltd (APP), a property development company based in Cyprus, marketed a number of investment properties to UK investors. Once construction of the properties was completed by APP, they would be rented to tourists. The UK residents each paid a deposit to APP and took out a low-cost mortgage in Swiss francs, which would be covered by the rental income from each property.

APP’s director, Andreas Ioannou, was responsible for marketing the properties to UK residents and for hiring and training a network of salespeople in the UK and Cyprus. He also coordinated the production and supply of literature about the investment.

The development was, however, severely delayed and none of the UK investors received a completed property. Then, as both the British and Cypriot pound dropped in value against the Swiss franc, their mortgage repayments increasing substantially. The UK investors raised a claim against the APP and Ioannou for misrepresentation and alleged that the advice that they had received was negligent because it did not include the risk of currency fluctuations.

In a trial lasting 29 days the judge, Sir Michael Burton, found that APP was liable for the claimants’ investment losses since it had failed to properly advise them on the risk of currency fluctuations. But he rejected the investors’ argument that Ioannou was personally in breach of a duty to warn them about the currency risks. He found that Ioannou had no personal responsibility to the investors because they had been advised by third party sales agents.

The investors had also argued that Ioannou was an “accessory” to the tort committed by APP, which is often referred to as “accessory liability”. But Sir Michael held that developing and marketing the properties was the business of APP, not Ioannou personally. He said that the commitments which APP entered into, including the contracts with the UK investors, were not those of Ioannou.

The appeal

Before the Court of Appeal, the investors argued that that Sir Michael should have held Ioannou personally liable as an accessory to the wrongdoing of APP. The court reconsidered the personal liability of an individual director or senior manager of a company as an accessory to a tort committed by the company but ultimately agreed with Sir Michael’s findings. It held that Ioannou was not liable and dismissed the investors’ appeal.

Handing down the decision of the court, Lord Justice Males said that it could be argued that there was a “common design between APP and Mr Ioannou to market the properties in the way in which they were”. But, he added, to decide that this was “sufficient to incur personal liability as an accessory” would lead to “an unduly wide view of the personal liability of directors and senior managers in such cases.”

The ‘corporate veil’

In company law each individual company has its own legal personality which is separate and distinct from that of its directors and shareholders, who sit a behind a ‘corporate veil’. As a result, any rights or liabilities are those of the company, rather than those of the directors or shareholders.

In limited circumstances the courts will be prepared to lift the corporate veil and attach liability on the directors or shareholders. This could happen, for example, when the company is effectively a sham and is simply being used to allow people to hide behind the limited liability status of the company.

In this case, however, the Court of Appeal agreed with Sir Michael’s judgment that there was “no arguable basis for 'piercing the corporate veil” because the UK investors had not demonstrated that APP lacks “any independent existence, nor that it is a facade or a sham to cover a personal adventure” by Ioannou.

Both courts acknowledged the balancing act between individuals’ entitlement to limit their liability by incorporating a company on one hand, and the principle that an individual should not escape liability for tortious acts merely because he or she is a director or officer of a company on the other.

It is reassuring for both directors and senior managers that both courts were reluctant to impose liability in an accessory liability case like this one. Their decisions point out to that to do so would impose an unduly wide potential liability on directors and senior management and drive a “coach and horses” through the concept of limited liability.

Co-written by Will Carr of Pinsent Masons.