Can A Director Be Held Personally Liable After Losing Status?
The possibility of a company director being personally liable for losses is a concern never far from a director’s mind. Ordinarily, personal liability only arises where there is evidence of fraud dishonesty, or in some cases where losses are caused to third parties.
However, an individual could be personally liable in wider circumstances, for instance a former director has been held liable for unauthorised share transfers - despite losing his powers because the company went into liquidation.
The Court of Appeal has ruled that a director of a BVI company was personally liable after he wrongly approve the transferred shares held by the company in a subsidiary. Notably, he no longer held any director powers.
What led to the case?
The director (M) is an international businessman and has founded several companies. He formed the company, MBI, in 2004 for the purposes of holding real estate and of which he was sole director and shareholder.
M later considered restructuring various companies. As part of this, by 2009 MBI acquired a significant minority shareholding in another of M’s companies, JJW (of which he was also sole director).
In 2010, M signed various instruments to transfer MBI’s shares to JJW. In fact, the Share Transfer Forms had not been signed and no further steps had been taken to complete the transfer. The following year, MBI was placed into liquidation and M’s application two years later for the liquidation to be terminated was refused.
Under the law in England and Wales, a director ceases to hold office when a winding-up order is made in respect of the company, but the position is different for BVI companies (under section 175(1) of the BVI's Insolvency Act 2003).
The impact here was that while M remained in office, his directors’ powers, functions and duties had all but ended - the liquidator having custody and control of the company's assets.
However, in 2016 M purported to approve the transfer of MIB’s shares in JJW to another of his companies, JJWG. While that transfer was void under English law, given that JJWG was by then registered as the holder of the shares transferred from MBI – JJWG had acquired legal title.
As a result, the liquidators sued M for breach of director’s duty and that he was liable to pay compensation to MBI. But M argued that as his powers and functions as director ended with the liquidation, he effectively had no powers to abuse – and was not liable. He also resisted the notion that he could have incurred liability by ‘intermeddling’.
The outcome
The court ruled that M did breach his fiduciary duty and was personally liable. It concluded that while he lacked any power to transfer the shares by 2016, he purported to have exercised the powers of a director which existed when M signed the Share Transfer Forms back in 2010 - causing the shares in MBI to be transferred to JJWG.
In the issue of ‘intermeddling, the court commented in general terms that company property can be the subject of intermeddling without ever being in the hands of the intermeddler.
“In particular,” the ruling continues, “causing title to such property to be transferred elsewhere can potentially amount to intermeddling regardless of whether the intermeddler receives the property.”
Key takeaway
While BVI law had an important bearing on this case, the lessons for UK companies and company directors are unavoidable.
First, practical actions undertaken by a director who has lost their powers (eg during liquidation), following the earlier lawful exercise of their directors’ powers could attract personal liability.
Second, in insolvency situations where they cease to be a director, the individual must not intermeddle with, or misuse company property – otherwise they could be held personally liable for any resulting losses.
1Mitchell and another v Al Jaber and others [2024] EWCA Civ 423
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