Holding a director personally liable for wrongdoing committed by a company
Whether a director can be held personally liable for wrongs committed by the company is always a complex and fact-specific question, however the Court of Appeal’s decision in Barclay-Watt v Alpha Panareti Public Ltd  EWCA Civ 1169 provides new clarity on the principles that the Court will apply in such cases.
Alpha Panareti Public Ltd (APP) was involved in the marketing of luxury Cypriot properties to unsophisticated investors in the UK as armchair investments between 2005 and 2007. The property deals involved APP offering investors mortgages for the properties denominated in Swiss francs, provided by Alpha Bank Cyprus. APP told their customers that these mortgages were exclusive and had a low interest rate because of the stability of the Swiss franc, and that the properties themselves were easily lettable, with rent receipts capable of covering the cost of the mortgages.
A substantial fall in the value of both British and Cypriot currencies against the Swiss franc subsequently led to the costs of the mortgage products offered by APP increasing dramatically, with APP’s customers (including the Claimants) becoming deeply indebted to Alpha Bank Cyprus. The economic downturn of 2008 caused substantial delays and the Claimants never received completed properties from APP. They were therefore incapable of generating any rent. Even if the properties had been capable of rental, in any case the rent receipts would not have been sufficient to repay the mortgages.
APP had two directors, Andreas Ioannou and his father. Mr Ioannou was the chief driving force of the company and was closely involved in business planning, including the recruitment and training of salespersons and the creation and distribution of marketing materials. Mr Ioannou, however, did not deal directly with the APP’s customers.
The Claimants brought a number of claims against both APP and Mr Ioannou personally for misrepresentation and for providing negligent advice. The Claimants’ position was both that Mr Ioannou was in breach of his duty because he did not personally warn the Claimants about the currency risks and was an accessory to APP’s negligent advice.
First Instance Decision
Sir Michael Burton GBE, sitting as a Judge of the High Court, ruled in the first instance that, while APP had been negligent in failing to notify their prospective customers of the currency risks associated with taking out mortgages in Swiss francs, Mr Ioannou had not assumed personal responsibility and was therefore not personally liable. Sir Michael also found, more specifically, that the role of Mr Ioannou would not have crossed Claimants’ minds at the time of them contracting with APP.
APP appealed the finding of their liability, and the Claimants cross-appealed the finding of no personal liability against Mr Ioannou as an accessory to APP’s negligent advice.
The Court of Appeal’s decision against APP’s appeal
The Court was quick to dismiss APP’s appeal, ruling that the training that APP’s salespeople had received, placing the emphasis on extolling the benefits of cheap borrowing and taking advantage of existing relationships that potential customers had with their financial advisers, meant that APP’s agents and sub-agents had had authority to make the representations. The risks associated had been apparent to both APP and its agents and APP was liable to the Claimants in damages.
Consideration of the Claimants’ cross-appeal
When it came to the Claimants’ cross-appeal, however, the Court took the time to consider the principles behind personal liability for directors in more detail. The Court held that the question of whether Mr Ioannou was personally liable as an accessory should be determined via a two-stage test, as in Lifestyle Equities CV v Santa Monica Polo Club Ltd  EWCA Civ 675, namely:-
- Was Mr Ioannou’s participation in the course of conduct by APP sufficient to render him liable?
- If so, did Mr Ioannou’s role as a director of APP afford him a defence?
“First, the defendant must have assisted the commission of an act by the primary tortfeasor; secondly, the assistance must have been pursuant to a common design on the part of the defendant and the primary tortfeasor that the act be committed; and, thirdly, the act must constitute a tort as against the claimant.”
In addressing the second stage of the test, the Court referred to the judgment in Lifestyle Equities CV, ultimately referring back to Chadwick LJ’s judgement in MCA Records Inc v Charly Records Inc  EWCA Civ 1441, that “…a director will not be treated as liable with the company… if he does no more than carry out his constitutional role in the governance of the company…”
Application and decision
The Court recognised that the circumstances in the instant case made applying stage one of the test more challenging than it had been in Fish & Fish, or in the set of intellectual property cases that followed that case.
However, the Court ultimately decided that there had not been a common design between APP and Mr Ioannou to not warn their customers about the currency risks of the mortgages. The fact that there had been no warning rendered APP liable, but, as Mr Ioannou had not entered into a relationship of assumed responsibility towards the claimants, the need for such a warning did not occur to him personally and a common design did not arise.
The Court did recognise that there was potentially a common design between APP and Mr Ioannou to market the properties in a particular manner, and that that manner did not include a warning about the currency risks. However, holding such a common design to be sufficient to incur personal liability as an accessory would result in an unduly wide view of personal liability of directors and senior managers.
Cases such as Barclay-Watt serve to re-emphasise the necessity of striking the correct balance between two fundamental principles of law: the ability of individuals to limit their liability to carry on their business, against the desire for wrongdoers to not escape their liability merely because they were company directors or officers.
This conflict is never an easy one to resolve and will always depend on the specific circumstances, as well as the type of wrongdoing involved, however the clarity provided by the Court of Appeal in Barclay-Watt provides a reasonable framework for both potential future Claimants and Defendants.
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Articles are intended as an introduction to the topic and do not constitute legal advice.