Can a director/shareholder be liable for a company’s actions?

Resources

Can a director/shareholder be liable for a company’s actions?

19 Jul 2016

The general answer is no, due to the doctrine of ‘separate legal personality’ of a company. This means that the directors and shareholders are separate from the company itself, with shareholder liability limited to the nominal value of their shares in the company.

However, the ‘corporate veil’ can be pierced in certain limited circumstances where directors/shareholders can be held personally liable for the acts of a company. It is widely held for instance, that the corporate veil can be pierced to prevent an individual abusing the principle of separate legal personality. An example of abuse could be a situation where a person is under an existing legal obligation, liability or restriction, and uses the corporate veil to deliberately evade this. However, even in this case, if there is another legal remedy available to the claimant – despite abuse having been established – the individual cannot be made liable.

In the recent intellectual property ‘passing off’ case of Grenade (UK) Ltd v Grenade Energy Ltd and another, a sole shareholder and director had been joined as a defendant to the proceedings, along with his company (the first defendant). The judge found that the corporate veil could be pierced in this situation on the basis of joint liability, which meant that the director/shareholder should be made liable with the company.

Joint liability can be placed on a party if they actively cooperate to bring about the act of the first defendant, and/or intend that their cooperation will bring about the act (and the act is unlawful). In this case, the judge found that because the individual defendant was the sole shareholder and director of the company, a presumption was invoked concluding that all acts done by the company were done at the individual’s hands. He would have to prove otherwise if this was not the case.

The legal implications of this decision aren’t huge as this was an Intellectual Property Enterprise Court decision – it will not be binding in any other courts. However, it is an important decision that could be certainly be influential.

Past trends have indicated that judicial willingness to pierce the corporate veil has been reduced to those cases where it is deemed absolutely necessary, i.e. where there is abuse and there is no other remedy available. This recent decision may indicate the beginning of a steer away from this trend, or at least a brief veer from the well-trodden path.

For directors and shareholders – particularly a sole director and shareholder –  this case demonstrates that they should be aware that the actions that they are taking on behalf of the company could, at the discretion of a judge, be traced back to them and they could be made liable accordingly.

We would advise therefore, that directors and shareholders consider whether the actions they are taking on behalf of a company could be considered an abuse of its separate personality and be conscious that, as the case above indicates, they could be made individually liable.

If you require any advice in relation to this, please contact a member of the Kuits Corporate Team on 0161 838 7806.

  • Share this post

Subscribe to our mailing list