Directors of owner managed businesses often feel immune from personal liability for claims made against their companies. However as well as the obvious personal liability arising from personal guarantees and recovery actions upon insolvency the potential generally for personal liability is very real.
The Supreme Court has recently reviewed when the corporate veil of limited liability may be pierced and an individual, or other third party, made liable for the actions of a company.
In the 1897 case of Salomon v Salomon the courts recognised the separate legal status of a company. This has been a cornerstone to corporate law ever since. However there have always been situations where a third party, may be made liable for a company’s debts. However the Supreme Court made it clear this power should only be used where the “true facts” required it and there is a person behind the company who is the relevant actor or recipient and not the company. The company must be used as a façade to conceal the true facts and for the individual to evade his liability by interposing a company. Examples of this might be:
• Using a company to solicit former clients when the individual is contractually prevented from doing so; or
• Selling a personal asset to a company to frustrate a claim against that asset.
The Supreme Court went on to identify other areas where parties can be liable for the apparent actions of a company, but which would might not technically constitute piercing the veil. These included:
• Companies used for fraudulent purposes.
• Groups of companies may be treated as partnerships in certain circumstances.
• Agency, where a company is merely the agent of the shareholder or a third party.
Generally the courts have stated they will lift the corporate veil where common sense, reality and justice requires it.
In an owner manged business there is always the potential risk that a disgruntled party will seek to sue the directors personally by alleging that the company is merely an agent of the shareholders.
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