When may directors or employees become personally liable for company liabilities?

The basic position, of course, is that a limited company exists as a legal entity in its own right: its liabilities will not extend to its officers or employees. In particular circumstances, however, that basic position is displaced and liability may extend to directors and employees.

A limited company as an entity is controlled by people. It can only act according to the actions of people. There is a common theme for the circumstances in which personal liability may occur. That is when a person exercising control is dishonest. The dishonesty can be in a variety of ways.

Dishonesty need not relate to conduct which amounts to a criminal offence. It may apply to conduct such as making a statement when knowing it to be false or dishonest. Where such a misrepresentation is made by a director or employee on behalf of the company then the director or employee is exposed to personal liability. Such a "fraudulent" misrepresentation is to be contrasted with a misrepresentation which is made not knowing it to be false or dishonest: then possible personal liability for the misrepresentation will not attach to the director or employee making the misrepresentation.

A deliberate decision by a director to procure that a company infringes the Intellectual Property rights of another will also expose the director to personal liability for the breach of those rights. Similarly if before the breach occurs a director intentionally does something to cause a company to breach a contract then that the director may be liable for procuring that breach of contract.

Finally, it is worth noting that directors have substantial obligations of loyalty must be in good faith to the company, and are required to act in the best interests of the company when fulfilling their duties as directors. If the director is in breach of those duties then the dirrector is exposed to claims for recompense by the company.

For more information contact Simon Daw

Filed: 28/06/2010 12:10:17