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Making directors liable

By on May 06 2008

Most directors believe that a limited company does what it says on the tin: in other words, they do not expect to be held personally liable for the company’s misdemeanours. That could be a false assumption, writes Kelly Tinkler of solicitors Rooks Rider.

A recent decision in the Court of Appeal has confirmed that a director who signs a contract on the company’s behalf can be held legally responsible for a fraudulent representation implied in that contract.

In the case of Contex Drouzhba against Wiseman, the court found that a director had, by signing a contract, implied the company was able to pay in accordance with the contract’s terms. In fact, the company was insolvent.

Even if there is nothing amiss with your business’s finances, this judgment has implications for any representation about your company that might be made in a contract – for example, about the quality of its widgets or ability to deliver them on time.

A key question in the case was whether the signature on the contract could be said to be that of the director as an individual, when he was signing for the company. The court concluded that where the director was effectively 'the mind of the company', the director has personal liability.

That suggests the case is more likely to apply to directors of small companies than large ones.

The court also noted that when a company has been trading while insolvent, a claim can be made against its directors under the Insolvency Act 1986 for fraudulent trading. Should any money be recovered from directors, this would be distributed equally to all unsecured creditors – though a creditor bringing a claim could in theory leapfrog other creditors and recover their loans in full.

The lessons from this case are clear. Directors should make doubly sure that all representations, express or implied, in a contract are accurate before they sign on the dotted line; and if your business is owed money, the insolvency of the debtor company may not be the end of your options.

Kelly Tinkler is a partner in the dispute resolution department at solicitors Rooks Rider.

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