How limited is limited liability?

Published: 13th November 2008

As if company directors didn't have enough to worry about as the economy slides into recession, the protection of limited liability is also under attack.

In the recent case of Contex Drouzhba Ltd v Wiseman, the court has ruled that a director who had signed an agreement containing a promise to pay for goods on behalf of a company, gave an implied representation that the company had the capacity to meet its obligations under the agreement. Since at the time of signing the agreement the director knew that the representation was untrue, he was held to be personally liable for a claim in deceit.

The director of the company knew at the time of signing the agreement that the company was insolvent and that there was no chance of obtaining capital from elsewhere. He was found to have represented that the company had the capacity to meet the payment terms and since he was effectively "the controlling mind" of the company, he was personally liable for his own fraud.

The case has indicated that creditors seeking recovery from directors of insolvent companies may have an alternative route to the existing insolvency laws relating to wrongful trading. Hurdles to recovery (such as it being the liquidators' decision whether or not to pursue claims against directors and that any reimbursed monies would still be subject to the usual priorities in any liquidation) may be avoided. The defrauded creditor may now have a direct cause of action by claiming against the director personally in deceit.

By no means will every contract signed by a director contain implied representations that the company will be able to fulfil its obligations. Arguably few do and each case will depend on its own facts. Proving deceit is notoriously difficult to do.

Nevertheless, the case illustrates an increasing trend moving away from previously robust views of what limited liability meant. Directors of companies in trading difficulties need to consider carefully their personal position when committing companies to long term commitments; do they genuinely believe that the company will be financially able to meet them?

If you would like to discuss any of the issues raised in this update please contact either Paul Raftery in our Manchester Corporate Department on 0161 214 0500, Ian Hodgkinson in our Liverpool Corporate Department on 0151 236 8989 or your usual contact in the Corporate Department.