Can a director be liable for a tortious act of the company?

In Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169, the Court of Appeal has held that a director was not liable as an accessory to a company’s negligent advice.

The Court followed Williams v Natural Life Health Foods Ltd [1998] UKHL 17 and reasserted the need to keep accessory liability within reasonable bounds as it is in the interests of the purposes served by incorporated enterprises that they operate with limited liability and without their officers easily being exposed to personal liability.

Background

Alpha Panareti Public Ltd (APP), a property developer in Cyprus, promoted property investments involving cheap mortgages in Swiss francs. The claimants, a group of UK-based investors, alleged that APP gave negligent advice in the course of its marketing.  Specifically, APP had failed to warn the investors of the interest and foreign exchange risks linked to the mortgages.

The claimants succeeded against APP at first instance but not against the director of APP, Mr Ioannou, who the claimants argued should be held personally liable for his role in APP’s wrongdoing. The claimants appealed the decision in respect of Mr Ioannou.

Decision

The claimants sought to make Mr Ioannou liable through either direct personal liability or as an accessory to APP’s wrongdoing. The claimants failed in both arguments.

For Mr Ioannou to be directly liable, he would have had to assume responsibility to the claimants personally. Whilst AAP had claimed expertise in providing financial services, and had made clear that this expertise derived from Mr Ioannou’s expertise, this was not enough. There had been no communications to the claimants indicating that Mr Ioannou was personally answerable for APP’s services.

The Court’s analysis of accessory liability was more complex and fact-sensitive. As a starting point, the Court outlined the test for accessory liability:

1.  the accessory gives substantial assistance to the primary tortfeasor in relation to an act;
2.  the assistance is pursuant to a common design between the accessory and the primary tortfeasor to commit the act; and
3.  the act is a tort against the claimant.

The Court stressed that the test must be applied in a way that balances two competing principles: the separate legal personality of a company and the principle that a person should be responsible for their tortious acts. This balancing act has led to a narrow defence where directors will not bear accessory liability for a company’s acts where the directors have acted only within their constitutional role (eg voting at board meetings). Further, and more broadly, courts should be careful to keep directors’ accessory liability in reasonable bounds.

The Court was careful to distinguish a case of negligence from earlier cases where directors had been accessorily liable in claims of fraud or strict liability torts such as IP infringement. The fact that the case involved negligence proved key to the decision. The Court focused on the second element of the test for accessory liability (see above) and found that as there was no conscious decision not to warn the claimants of the risks of investing, it could not be said that there was a “common design” to commit a tortious act.

Takeaways

The Court of Appeal rejected an extensive application of accessory liability to directors, recognising that if the net is cast too wide then every managing director or senior manager involved in a corporate tort would be held personally liable. This would “drive a coach and horse through the concept of a limited liability company”. However, the highly contextual and fact-sensitive character of the decision means directors should continue to take care. The courts may be more willing to impose liability in cases of intentional torts, many of which are frequently alleged in commercial disputes.

With thanks to Rebecca Vickers for her assistance in preparing this post.