Corporate Negligence: A High Bar for Directors’ Personal Liability
Companies and directors owe several statutory duties of care towards the company and its shareholders. Directors are required to, for example, promote the success of the company and exercise reasonable care, skill and diligence when carrying out their role.
But to what extent are those duties owed? Sub-standard conduct could amount to a breach of duty and, potentially, be considered corporate negligence. However, a recent appeal court ruling confirms the limits of a director’s personal liability for negligence did not extend towards the company’s investors – a decision that will come as a relief to many.
Failure to warn
The company concerned had marketed luxury properties across three developments in Cyprus between 2005 and 2007. As a result of its marketing, the claimants purchased properties within the development – which they never actually received, largely because the subsequent financial crisis led to substantial delays.
The claimants were individuals resident in the UK who were persuaded to invest most, if not all, their personal savings into the properties, with the aid of mortgage funds provided in Swiss francs. The claimants were not sophisticated investors and lacked detailed understanding of financial matters.
The driving force behind the plan to market the properties was a director of the company, but the actual marketing was conducted by salespeople. However, the salespeople did not warn the investors of the known currency risk associated with borrowing in Swiss francs at the time.
There followed a substantial fall in the value of both sterling and the Cyprus pound against the Swiss franc. The cost of the mortgages spiralled, the claimants were not even able to receive rent for the properties (not being complete) and they became increasingly indebted to the bank.
The claimants brought proceedings against the company and against the director personally. They argued that he was a joint tortfeasor – jointly and severally responsible for the financial damage caused by the same act or omission.
No personal liability
The High Court found that the company had acted negligently towards the investors by not warning of the currency risks. However, it did not accept the claimants’ argument that the director should be held jointly liable with the company. The judge said it was a case of negligent failure to warn, not deliberate deceit.
The Court of Appeal also rejected the claimant’s argument that the director should be held liable. While the company itself owed a duty of care to warn of the currency risk, the director had not assumed personal responsibility to the investors. Indeed, it would not even have occurred to any of the investors that he had done so.
The judge also pointed out that:
· to say there was a ‘common design’ between company and director - to market the properties and not to include a warning - sufficient to incur personal liability on the director, seems to “lead to an unduly wide view of the personal liability of directors and senior managers in such cases”.
· imposing liability on the directors and senior managers would expose them to "the harsh provisions of the bankruptcy law" if the company subsequently become insolvent.
The court’s conclusion was in line with the principles that “accessory liability [of a director] ought to be kept within reasonable bounds and that it should be possible to carry on business by means of a limited liability company without exposing the individuals carrying on that business to personal liability”.
What does this mean?
Directors will be reassured by this ruling but they should not be emboldened to neglect their statutory duties. In the absence of deliberate deceit, it seems unlikely a director could be found personally liable for negligence.
That said, the ruling does suggest that had the director assumed personal responsibility to the claimants – the outcome could have been different. As is often the situation, each case will be considered on its facts.
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