The protection afforded by the separate, limited liability status of a company, distinct from its shareholders and directors, is a fundamental part of day to day life in business. It allows shareholders and entrepreneurs to invest in businesses knowing the maximum extent of their potential exposure, and it allows directors to carry out their roles in making the important decisions in running their companies without fear of personal liability for their actions.
As with most rules though, there are exceptions, and the risk that directors can potentially be personally liable for actions carried out in their role as director was highlighted in the recent case of Invertec Limited v. De Mol Holding BV & Another.
In this case, the court held that a selling company had made fraudulent misrepresentations during the due diligence process in its sale of another company. But – the court then went further, in finding that as the representations had been made by an individual who was at the relevant time both sole director (and principal negotiator) of the selling company, he personally had made the fraudulent misrepresentations and so was found personally liable for the damages awarded.
This meant a finding against the director in question of over £2m in damages, including over £500,000 in respect of the consequential loss of the purchaser flowing from the misrepresentations made.
This case reiterates that, whilst generally directors will not be personally liable for the actions of the company to which they are appointed, in the case of fraud, this protection will not apply.
It also provides a reminder that, when selling a business, in providing information to prospective purchasers and in giving warranties in any sale documentation, it is essential that the information provided is, so far as possible, accurate and not intentionally misleading, and when disclosing against the warranties, you should give as full and accurate disclosures as possible.
MacRoberts have extensive expertise in buying and selling businesses for clients, large and small, from negotiating initial heads of terms, managing the due diligence process, negotiation of contractual documentation through to completion, and managing the process throughout.