Can all directors in a company be personally liable for a company’s wrongdoing and, if so, what remedies are available?

Partner Jeremy Laws

Partner Jeremy Laws discusses director liability and the remedies available.

A recent High Court decision (Lifestyle Equities v Santa Monica Polo Club Ltd & Ors) has highlighted how all company directors can be found to be personally liable, along with their company, for certain acts.

In this case, it was established that the defendant company had infringed UK and EU trademarks and that its use of certain logos amounted to passing off.  A second trial considered whether the directors of the company were also liable for the acts of infringement and, if so, what financial remedies should be awarded against them.

Case findings

The defendant directors were husband (First Director) and wife (Second Director) and they were both shareholders in the defendant company. The claimants sought compensation in the form of the profits made by the defendant company (from its wrongdoing) personally and in full against each of the defendant directors.

The First Director was managing director and the judge found him to be the ultimate decision maker in the company. The Second Director was head of sales of a branch of the company.

Although a separate person, a director can be personally liable for the same acts as a company where those acts are torts (civil rather than criminal wrongs which cause harm, and which are not breaches of contract).

One way this can happen is where a court is satisfied that the director(s) authorised or caused the acts.  Such authorisation has to be clear, but it can be either express or implied. Enablement and encouragement of an act of infringement do not constitute authorisation.

Another way there can be liability is if the director assists with an act of infringement in the sense that he or she has a common design to make it happen (with the defendant company).

In this case both directors were found to be jointly and severally liable with the defendant company, which means that the company and each of the directors was fully liable. The Second Director, as head of sales, was only found to be jointly and severally liable in respect of the branch of the defendant company which she managed.

There was extensive comment in the judgement as to what financial sanctions should be imposed on the directors. As this was a claim to transfer the profits made by the defendants to the claimant, the judge noted that it was interesting that the claimants did not submit any evidence as to their losses.

How then, should any financial remedy against the directors be quantified?

Existing case law suggested that once a director’s assistance (in the act of infringement) is found to be more than inconsequential, then the court can apportion liability. An account of profits should be considered as against each defendant, in each case being assessed on the profits resulting from that particular defendant’s acts of infringement and the amount of liability being the profit derived by that defendant.

However, the Judge noted that there was contrary authority suggesting that the directors could simply be made liable for the same sums as the company (whether or not they had received any of the profits it made).

The judge went on to consider the position of both directors. The First Director had received a loan in the sum of £635,789.00 from the defendant company. Following the defendant company going into administration, the claimants argued that if the loan was not recovered by the administrators, then the First Director would have been unjustly enriched by the loan. The Judge agreed with the claimants and ordered the First Director to account to the claimants for the full loan amount.

In the judge’s assessment the acts of infringement accounted for approximately 10% of the defendant company’s turnover. Applying this to the First Director’s remuneration, whilst this was not fixed, it was assessed that he had received £1,441,922.00. Therefore, the judge ordered that the First Director account to the claimants for 10% of his remuneration, totalling £144,192.20. The First Director was therefore required to account to the claimants for a total of £779,981.20, being the full amount of the loan and an apportioned part of his remuneration.

The Second Director’s total remuneration amounted to £570,076.00. Applying the same method as the First Director, the judge apportioned 10% of her remuneration and therefore she was required to account for a total of £57,007.60.

The Judge recognised that if his interpretation of the law was incorrect, then the sums they would be required to account to the claimants for would be significantly higher. The lack of accounting data and information regarding profits made any assessment by the Court challenging.

Previous ArticleNext Article