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It's nothing personal – Court of Appeal rejects claims against a director for company's negligence

Posted on 12 October 2022

In Barclay-Watt & Ors v. Alpha Panareti Public Ltd & Anor [2022] EWCA Civ 1169 the Court of Appeal considered when a director of a company can be held personally liable for the mis-selling of investments by the company itself.

The Court of Appeal upheld the first instance judge's decision that the director could not be held jointly liable for any losses suffered by the claimants as a result of the company's wrongdoing. In doing so, it re-affirmed the protection against personal liability afforded by limited companies, and the importance of preserving the "corporate veil" save for in the most extreme of circumstances.

Background

The claimants had lost substantial amounts of money on investments in Cypriot luxury holiday properties made prior to the 2008 financial crash (the Investments). The Investments were sold to them by Alpha Panareti Public Ltd (the Company).

The claimants alleged that the Company had made numerous misrepresentations and given negligent advice in the course of marketing the Investments. Had it not done so, they claimed, they would not have made the Investments or suffered the resulting losses. Unusually, however, the claimants also brought claims against one of the two directors of the Company, Mr Andreas Ioannou, personally. The claimants argued that Mr Ioannou was the driving force behind the marketing of the Investments. As such, they claimed, he should be jointly liable for the Company's misrepresentations made and negligent advice.

At first instance the judge, Sir Michael Burton GBE, held that the Company had owed the claimants a duty of care to notify them of currency risks in relation to the supporting mortgage scheme, which required the claimants to borrow in Swiss Francs on a variable interest rate. It had had failed to do, and thus was in breach of this duty. However, he held that Mr Ioannou was under no personal liability in respect of this duty.

The claimants appealed the finding in respect of Mr Ioannou, contending that, applying the principles set out by the Supreme Court in Fish & Fish Ltd v. Sea Shepherd UK [2015] UKSC 10, he should be held personally liable as an accessory to the wrongdoing of the Company The claimants contended that the three elements of the Fish & Fish test were met, namely:

  1. the marketing of the properties had constituted a tort against the claimants;
  2. Mr Ioannou had assisted in the commission of the Company's tort; and
  3. Mr Ioannou gave this assistance as part of a common design between him and the Company.

Mr Ioannou argued that the nature of the tort involved in Fish & Fish Ltd was different to that in this case, and therefore the principles set out in that case were not necessarily applicable.

Analysis

The Court of Appeal rejected the claimants' appeal.

Fish & Fish concerned strict liability torts (specifically trespass and conversion). The Court of Appeal therefore held that the conclusions reached in that case were not directly applicable to torts where liability depends upon the assumption of responsibility by the primary tortfeasor (as in this case). The Court went on conclude that, whilst a director could be held to have accessory liability to a company on this basis, no such liability should be imposed on Mr Ioannou in this case.

This conclusion was informed by the Court's consideration and application of the principles set out in Williams v. Natural Life Health Foods Ltd [1988] 1 WLR 890. In Williams the individual defendant, the managing director and principal shareholder of the corporate defendant, had: (i) provided the claimants with a brochure advertising his personal experience in the health food trade; and (ii) played a prominent part in preparing misleading financial projections for the company. The claimants sued the director for misrepresentation, saying that he had assumed personal responsibility to them. The House of Lords rejected this claim. Lord Steyn commented that in order to establish the personal liability of an individual acting on behalf of a company, there had to have been such an assumption of personal responsibility by the individual sufficient to create a special relationship between them and the claimant:

"… someone acting on [another's] behalf may incur personal liability in tort as well as imposing vicarious or attributed liability upon his principal... [however] there must have been an assumption of responsibility such as to create a special relationship with the director or employee himself."

The Court of Appeal held that in the present case there had been no such assumption of responsibility by Mr Iannou.

It further held that this conclusion was in accordance with the principle that the use of a limited liability company should allow the individuals carrying on that business to do so without exposing themselves to personal liability. Moreover, such a conclusion did not offend against the principle that a person should be liable for his own torts because Mr Ioannou did not himself commit any tort against the claimants. Here, the business of developing and marketing the properties was the business of the Company, not Mr Ioannou. Similarly, the contractual commitments which the company entered with the claimants into were the commitments of the Company and not of Mr Ioannou. There was no suggestion that Mr Ioannou had undertaken any personal liability under those contracts; nor was it being maintained that Mr Ioannou had himself committed any tortious act.

Rather, the suggestion was that Mr Ioannou, without incurring liability as a primary tortfeasor, was an accessory to the tort committed by the Company. However, if that was so, it was difficult to see why any director or senior manager heavily involved in a company's marketing of an unsuitable investment should not incur personal liability for a negligent but non-fraudulent failure to warn of the risks of that investment. The actions of Mr Ioannou here consisted of no more than operating a business through a limited liability company and there was no personal assumption of responsibility by him.

The Court of Appeal therefore concluded that, although Mr Ioannou and the Company had a shared common design to market the properties through the sales personnel and promote the benefits of the Mortgage Scheme, it was the Company's failure to warn the claimants of the currency risks which rendered its conduct tortious. There was no common design between Mr Ioannou and the Company to commit a tortious act. Certainly, there was no conscious decision on the part of Mr Ioannou not to include a warning about the currency risks. Further, Mr Ioannou did not have any personal dealing with the clients. Accordingly, there could be no suggestion that he had taken on any personal liability to the claimants. As a result, the court concluded that to impose personal liability upon Mr Ionannou "would drive a coach and horses through the concept of a limited liability company".

Conclusion

Where corporate vehicles are used to carry out a business plan that is clearly shaped and driven by one or more individuals, there can be a tension between the principle of limited liability and the law's interest in ensuring that parties should not escape liability for their own wrongful acts because of how they have organised their business.

The personal liability of a senior manager or director for the tortious liability of a company will depend on the context and circumstances of the case. It will be very fact specific.  For that reason, judges are careful to stress that statements of legal principle, and their application in a particular case, must be understood in the context of the case in which they are being considered. However, as this case makes clear, in most cases the courts will be very reluctant to impose personal liability upon the individuals acting on behalf of a company, even where the wrongs committed by that company are driven by those individuals.

The lesson for investors is that they must carefully distinguish between the individuals whom they are relying upon, and the entities with which they are actually contracting when making an investment. If they wish to be able to pursue the individuals directly, they will need to be able to show that they relied upon that individual as more than just the agent of the corporate entities.

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