Companies have limited liability. In general, this means that their shareholders and directors do not share liability incurred by the company. This note examines three areas where the line can become blurred.
Liability for Company Acts
A debt or liability incurred by a company is enforceable against the company. A director or shareholder might have offered a guarantee for a debt or an indemnity against a particular event, in which case the obligation will also be enforceable against director or shareholder as guarantor.
Outside such situations creditors of an insolvent company will look for other ways to pursue someone who is “good for the money”. An example is to allege that a director or a shareholder is jointly liable for an act committed by a company. Liability will be imposed in only very limited circumstances. It would be necessary to show that the director/shareholder:
In practice this means that it is necessary to show that the director or shareholder was intimately involved in a wrongful act by a company rather than, say, just having overall responsibility for its actions.
Personal Liability for Costs
Similar principles apply to a costs order in litigation. It may be that a company has insufficient assets to satisfy a costs order and the party with the benefit of the order will look for someone else against whom to enforce. Non-party costs orders can be made under Section 51 Senior Courts Act 1981. The court must assess the connection between the non-party and the litigation – who is funding it, who is making the key decisions and who stands to gain if the litigation is successful. Non-party costs orders are exceptional and are likely to only apply where litigation, although conducted in the name of the company, is really run for the benefit of its own director or shareholder. Such orders will not be made against “pure funders” who have no interest in the litigation and cannot control the conduct of it.
The court’s ultimate sanction against directors who continue to hide behind their company is to find the director in contempt of court. This is a very serious matter, often leading to a term of imprisonment. Recent examples where contempt orders have been made concern cases where an injunction has been ordered against the company requiring it either to do, or stop doing, a particular act but the company’s director has caused the company to simply ignore the order.