Personal liability of company directors - out of joint

A recent decision by the Court of Appeal in Barclay-Watt and others v Alpha Panareti Public Ltd has provided new guidance on when a company director may be jointly liable as an accessory to a tort committed by the company ((2022] EWCA Civ 1169). The court held that the director was not liable for his company’s negligence, but emphasised that each case will turn on its own facts and the nature of the tort. Nonetheless, the decision indicates the balance that the law attempts to strike by permitting directors to lead their companies but without the worry of being too easily drawn into actions alleging that they are jointly liable in connection with torts committed by their company.

Joint tortfeasor liability

An individual or entity committing a tort may be a primary or joint tortfeasor. In the leading case on joint tortfeasor liability, Fish & Fish Ltd v Sea Shepherd UK, the Supreme Court held that a joint tortfeasor is someone who has substantially assisted the commission of a tort by the primary tortfeasor under a common design between them that the tort be committed ((2015] UKSC 10). Therefore, a company director may become liable as a joint tortfeasor if the director’s actions are sufficiently bound up with the tortious act of the company, as the primary tortfeasor.

Background

Alpha Panareti Public Limited (APP) appointed agents and salesmen to market new build properties in Cyprus to UK-resident investors, with a Cypriot bank offering the investors low-interest mortgages denominated in Swiss francs (the scheme). The scheme involved letting the properties with anticipated rental income received in Cypriot pounds or pounds sterling to cover the mortgage payments. Significant falls in the value of the Cypriot pound and sterling against the Swiss franc sent the cost of the mortgages spiralling up, leaving the investors indebted to the Cypriot bank. The investors did not receive the completed properties or the anticipated rental income.

A director of APP, Mr Ioannou, was the driving force behind the scheme, although he did not deal directly with the investors. The investors issued proceedings against APP and Mr Ioannou, including claims for providing negligent advice and for not warning them of the risks of the currency fluctuations. The investors, including Mr Barclay-Watt, sought recovery of the sums spent on buying the properties.

High Court decision

The High Court found that APP, having assumed a responsibility to the investors, was in breach of a duty of care and had acted negligently by not warning them of the potential currency fluctuation risks when borrowing in Swiss francs and receiving rental income in Cypriot pounds or pounds sterling. APP had failed to take care that the scheme was sound, and had provided negligent advice.

The court found that Mr Ioannou had no direct contact with the investors and had not assumed any responsibility towards them. Therefore he had not personally committed any tort, nor was he jointly liable with APP as a joint tortfeasor.

APP appealed. The investors cross-appealed against the finding that Mr Ioannou was not liable, arguing that he was jointly liable as an accessory to APP’s negligence in accordance with the principles set out in Fish & Fish Ltd v Sea Shepherd UK ((2015] UKSC 10) (see box JJoint tortfeasor liability”).

Court of Appeal decision

The court dismissed both the appeal and the cross-appeal. It held that APP had a relationship with the investors whereby it assumed responsibility towards them and was liable in damages for the negligent failure to advise them about the currency fluctuation risks of the Swiss franc mortgage product. It also held that Mr Ioannou was not an accessory to APP’s negligence in accordance with the principles in Fish, and was not liable to the investors as a joint tortfeasor.

Two-stage test. In deciding whether a director is jointly liable as an accessory to a tort committed by the company, the court will apply the two-stage test from Lifestyle Equities CV v Santa Monica Polo Club Ltd ((2021] EWCA Civ 675). In doing so, the court will consider whether:

• The director is a joint tortfeasor in accordance with the conditions set out in Fish, that is, whether they substantially assisted in the commission of the tort by the company under a common design by both parties.
• A defence is available because of the director’s position. The grounds for a defence are narrow but may apply where, for example, the tortious conduct for which the director is potentially liable amounts to no more than carrying out the director’s constitutional role in the governance of the company. Similarly, a director will not be treated as a joint tortfeasor if the conduct in issue merely consists of voting at board meetings (MCA Records Inc v Charly Records Inc (2001] EWCA Civ 1441, www.practicallaw.com/4-101-1835).

In Barclay-Watt, the conditions specified in Fish were not met, meaning that Mr Ioannou was not a joint tortfeasor and was not liable as an accessory to the tort committed by APP. In particular, there was no common design between APP and Mr Ioannou to negligently withhold information from the investors about the currency fluctuation risk. As Mr Ioannou was not liable, the court did not need to consider the second stage of the test.

Type of tort. The nature of the tort committed by a company can be significant in determining whether a director is jointly liable. Cases in which directors have been held to be jointly liable with their companies as joint tortfeasors often involve strict liability torts such as trespass and conversion, as in Fish, or intellectual property (IP) torts which do not require any assumption of responsibility. However, in Barclay-Watt, APP’s liability was dependent on its assumption of responsibility to the investors. Mr Ioannou had not assumed any such responsibility to the investors and had not had any direct contact with them.

Demonstrating a common design between the company and director, and establishing joint liability is more difficult in situations such as Barclay-Watt where the tort consists of a negligent failure to do something rather than a deliberate act.

Competing legal principles

The court noted that determining when a director is jointly liable in connection with a tort committed by the company can be a difficult and fact-sensitive exercise, which means that it is necessary for the law in this area to balance competing legal principles that are dependent on context and the nature of the tort. These competing principles include a director’s right to run a company without incurring personal liability and ensuring that a director who is instrumental in a company committing a tort does not escape liability just because of their position.

This balancing of principles can be seen with the court’s narrow and specific interpretation of the common design between APP and Mr Ioannou, and the observation that a wider interpretation could result in an unduly wide view of the personal liability of directors and senior managers in such cases.

In a similar vein, the court highlighted the importance of respecting the doctrine of separate corporate personality. A finding of personal liability on the facts of Barclay-Watt, which were far removed from those in which directors had previously been held liable, typically in IP infringement or fraud cases, would have risked exposing directors to a plethora of new tort claims.

In this respect, the court was persuaded by another negligent misstatement case in which the House of Lords had commented, obiter, in relation to accessory liability, that a director who was a stranger to the special relationship with the company on which its liability was founded could not be a joint tortfeasor with the company (Williams v Natural Life Health Foods Ltd [1998] 1 WLR 890). This was compelling persuasive authority against Mr Ioannou being found personally and jointly liable.

This article first appeared in the October 2022 issue of PLC Magazine, https://protect-eu.mimecast.com/s/z-2bCg5Zwsy758yuNivuq.