corporate governance / director

A director is separate to her company –so why was a director personally liable for his company’s actions?

That directors are separate from the company and not liable to creditors is a core principal of company law:

“the apathy of a creditor cannot justify an imputation of fraud against a limited company or its members …and…a creditor who will not take the trouble to use the means which the statute provides for enabling him to protect himself must bear the consequences of his own negligence” Lord Herschel,  Salomon v. Salomon & Co Ltd [1897] AC 22

However, directors cannot assume they can escape liability for the company’s debts in all cases, as the court has the discretion to “use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure”, Cumming-Bruce L.J., In Re a Company [1985] 1 BC99.  The recent High Court decision as reported in the Irish Times (Carolan 2017) has increased a director’s liability for costs of failed actions by their company.  In this case the decision was that the company’s claim against the defendants  “ultimately transpired to be fraudulent and a manifest abuse of process” and was dismissed by the High Court.  The defendants sought to have the director held personally liable for their court costs. It is normal to seek to have the failing side pay the other sides costs, however, the director was not the losing plaintiff, his company was.  The defendants argued  there was no prospect of the company being able to pay the costs, and the court accepting the defendants request  held that making such an order against the director was reasonable in a case “of such bad faith”.

This is a case where the judge applied “the interests of justice” concept.   In effect, it would have been unfair to make a defendant pay for his own defence costs where it was held to be a “fraudulent” and “bad faith” case.  To make a defendant pay his own costs in such a case could actually encourage fraudulent and bad faith claims from companies who know their liability is limited to paying their own legal fees.

For directors anxious about the decision and their own personal liability it is worth noting that the “interests of justice” concept is somewhat vague and lacks the certainty essential to the commercial world.  As a result, only egregious cases are successful and there are clear precedents which limit the raising of the corporate veil to make directors personally liable. In fact, the  cases holding directors liable for their company’s debts are rare. The reality is that the political and public frustration with directors of bankrupt companies leaving creditors destitute with no recourse or punishment against the directors has led to increased statutory provisions culminating in the creation of criminal offences for failures of statutory company law (Companies Act 2014, sec.871).

For example, directors now risk 10 years in prison for failing to keep proper books of accounts  (Companies Act 2014, sec.181, sec. 286).  Directors should thus be more concerned about ensuring compliance with statutory requirements.  Whether this and other provisions will be a deterrent against irresponsible behaviour and also how the courts will interpret and apply these new statutory provisions remains to be seen.

References

Companies Act, 2014.

Carolan, M (2017, May 19). Building firm owner liable for €735,000 costs in failed action. The Irish Times. Retrieved  May 23, 2017 from http://www.irishtimes.com

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