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Sue ‘behind the corporate veil’

In February 2010 Steve Wengraf, Litigation Partner at Rutherfords Solicitors, won a trial for a client who successfully pursued the director of a limited company and obtained personal liability against the director. The case went all the way to trial but on the afternoon of the trial a compromise was reached in Plymouth County Court entitling our client to compensation against both the limited company (which is still trading and on the Company Register) and the director personally.

Whilst you may be confident in your chances of success against the proposed defendant, if the defendant has little or no prospects of being able to pay if you win then it may be a pyrrhic and ultimately expensive victory. Unfortunately it is common that if the defendant is a limited company with little or no assets then the directors may attempt to hide the liability to you ‘behind the corporate veil’. 

What can you do? Put it down to experience and move on or fight another day?  Not necessarily. You ought to consider bringing an individual director as a ‘joint tortfeasor’ to assist in the successful prosecution of your claim.

In this particular case our client had paid a substantial deposit for a second hand commercial tractor but the vehicle was not delivered nor was the deposit returned. The defendant said that the transaction was with a limited company which was ‘in the process of being wound up’. We disagreed as our client had been dealing with the director personally as well as the company.

In this case we were able to establish the direct liability of the director in his personal capacity as the contact was with him.

You you can sue the director of the company personally in other circumstances. The approach that the Court will take in determining whether a director should be held liable is to balance two competing principles;

1)      that an incorporated company is a separate legal entity and distinct from its shareholders, directors and officers; and,

2)      everyone should be answerable for his tortious acts.
It is important to note that each case will be treated separately on its own facts.

In this particular case we were able to convince the court  that there was sufficient evidence to establish that the client was dealing with the director personally even though he was ‘holding himself out’ as merely the director and servant of the limited company. The defendant decided to settle rather than risk the Court finding against him for larger damages and costs!

The priniciple of the protection for individuals of Limited Liability  are well established. Lord Halsbury said in Salomon v A Salomon and Company Limited [1897] AC 22 at 30: -

“it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”

Therefore the starting point is that Director of a Company may derive the protection of a Companies limited liability status unless as Lord Keith said in Woolfson v Strathclyde Regional Council : -

“special circumstances exist indicating that it is a mere façade concealing the true facts”

The Court will only consider piercing the corporate veil where there is (1) control of the company by the 'wrongdoer' and (2) impropriety, that is the use of the company as a device or façade to conceal the wrongdoing: Hashem v Shayif & Radfan Ltd [2008].

The company need not be incorporated with deceptive intent and the question is simply whether it is being used as a façade at the time of the relevant transaction.

This is complex area of law and a difficult priniple to establish and you do require expert advice please contact our Steve Wengraf.

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