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When will a director be liable for having assisted wrongdoing committed by the company?

Overview

The decision of the Court of Appeal in Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169 provides a clear articulation of the principles that the Court will apply in determining whether an individual is personally liable for having assisted a tortious act committed by the company of which they are a director.

Whilst this is an inherently fact sensitive area, the Court's application of those principles to the facts of this case, and wariness about an overly expansive approach to accessory liability will likely be considered carefully in comparable cases.

Background facts and decision at first instance

The dispute concerned the marketing of luxury properties in Paphos, Cyprus by Alpha Panareti Public Ltd (APP) to unsophisticated investors resident in the UK, including the claimants. As part of the package, APP offered a mortgage product denominated in Swiss francs, provided by Alpha Bank Cyprus. APP described the mortgage as being exclusive to its customers, with a low interest rate made possible by the relative stability of the Swiss franc. The properties were marketed as armchair investments, which would be easily lettable, with rent receipts covering the cost of the mortgage.

Mr Ioannou was one of two directors of APP, the other being his father. He was the driving force behind the company. Mr Ioannou was responsible for, and closely involved in, the plan for the marketing of properties to UK residents, which involved the recruitment and training of salesmen and the production and supply of marketing literature. However, he did not deal directly with the claimants.

There was a substantial fall in the value of the British and Cypriot currencies against the Swiss franc. Consequently, the cost of the mortgages spiralled, and the claimants became heavily indebted to Alpha Bank. The claimants never received completed properties, such that there were no rent receipts, but even if there had been, they would not have sufficed to repay the mortgages. The claimants brought various claims against APP, and Mr Ioannou personally, for misrepresentation and the provision of negligent advice, seeking recovery of the amounts paid to purchase the properties (any claims they may have had in contract were assigned pursuant to settlement agreements reached with other defendants).

The trial judge, Sir Michael Burton GBE, held that APP had negligently failed to warn the claimants of the foreign currency risks they were assuming by borrowing in Swiss francs, when the anticipated rental income would be in Cyprus Pounds or Sterling. However, he held that Mr Ioannou had not personally assumed responsibility to the claimants, such that there was no basis for a finding of personal liability against him. APP appealed the finding of liability against it, whilst the claimants cross-appealed against the finding that Mr Ioannou was not personally liable.

The Court of Appeal dismissed both appeals. This article focuses on the determination of the claimants' cross-appeal against the finding that Mr Ioannou was not personally liable.

The two routes to personal liability: primary tortfeasor / joint tortfeasor

At first instance, the claimants had argued both that Mr Ioannou was personally in breach of a duty to warn them about the currency risks, i.e., that he was a primary tortfeasor, and that he was an accessory to a tort committed by APP. The claimants did not pursue the former argument on appeal, given the trial judge's findings that it would not have crossed the claimants' minds in negotiating the transactions that Mr Ioannou was assuming personal liability. The Court of Appeal emphasised that for an individual acting on behalf of a company to be found personally liable as a primary tortfeasor, the individual would need to have assumed responsibility to the claimant, so as to create a special relationship between the individual and the claimant; further, the claimant would need to have relied on the individual defendant's assumption of personal responsibility.

The claimants' cross-appeal instead centred on the question of accessory liability: the claimants argued that the judge ought to have held Mr Ioannou personally liable as an accessory to the negligent advice provided by APP. The Court of Appeal held that this question should be determined through a two-stage analysis, as was undertaken in Lifestyle Equities CV v Santa Monica Polo Club Ltd [2021] EWCA Civ 675.

The two-stage analysis to determining accessory liability

The first stage was to assess whether the individual defendant's participation in the tortious conduct was sufficient to render them liable as a joint tortfeasor. The second stage was to determine whether the individual defendant's status as a director of the primary tortfeasor afforded them a defence.

In order for the first stage to be surmounted, the three conditions articulated by Lord Neuberger in Fish & Fish v Sea Shepherd UK [2015] UKSC 10 [2015] AC 1229 must be satisfied: "[f]irst, the defendant must have assisted the commission of an act by the primary tortfeasor; secondly, the assistance must have been pursuant to a common design on the part of the defendant and the primary tortfeasor that the act be committed and, thirdly, the act must constitute a tort as against the claimant".

Given the fact sensitive nature of this kind of tortious liability, Lord Neuberger was wary of over elucidation. However, he did offer the following points of clarification, amongst others: (i) the assistance provided by the defendant must be substantial, and not trivial; (ii) the defendant should not escape liability simply because their contribution to the tortious act was relatively minor when compared with the actions of the primary tortfeasor; (iii) a common design will normally be expressly communicated, but it can be inferred; and (iv) the claimant is not required to prove that the defendant intended to cause the claimant harm, or understood that the act which they assisted was tortious.

As regards the second stage, the Court of Appeal said in Lifestyle Equities CV v Santa Monica Polo Club Ltd that an individual defendant may have a defence to a claim for accessory liability by virtue of their status as a director of the corporate defendant if the conduct which has made them potentially liable amounts to no more than carrying out their constitutional role in the governance of the company. In MCA Records Inc v Charly Records Inc [2001] EWCA Civ 1441, Lord Justice Chadwick said that a director would not be treated as a joint tortfeasor if the conduct in issue consisted of voting at board meetings.

The Court of Appeal's application of the two-stage test

The Court of Appeal noted that the question of whether a director should be held personally liable as an accessory to a tort committed by a company was inherently fact sensitive. They also observed that the liability of a director or senior manager may differ according to the nature of the tort in question, and that different considerations may apply, for example, in the case of fraud.

The Court plainly considered it challenging to apply the principles outlined by Lord Neuberger to the facts of this case; noting that the exercise was less straightforward than had been the case in Fish & Fish v Sea Shepherd UK, or the subsequent succession of intellectual property cases.

Ultimately, the Court concluded that there was no "common design" between Mr Ioannou and APP to commit the tort in question; namely, the negligent failure to warn of the currency risks associated with the mortgages. There was no conscious decision to omit such a warning. The Court considered whether there was a common design between Mr Ioannou and APP to market the properties in the manner they were marketed, which included a failure to advise of the currency risks, but concluded that if this was sufficient to establish personal liability it would result in "an unduly wide view of the personal liability of directors and senior managers in such cases". If Mr Ioannou's involvement in the marketing of the investment was sufficient to satisfy the "common design" condition, so as to render him an accessory to the tort committed by APP, it "would be difficult to see why any director or senior manager who is heavily involved in a company's marketing of an unsuitable investment should not incur personal liability for a negligent but non-fraudulent failure to warn of the risks of that investment. So to hold would drive a coach and horses though the concept of a limited liability company".

In this regard, the Court's judgment echoed the (obiter) observations of Lord Steyn in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 890. Lord Steyn cautioned that to hold an individual defendant personally liable as a joint tortfeasor with a corporate defendant, on account of that individual defendant's involvement in negligent projections made by the corporate defendant, "would expose directors, officers and employees of companies carrying on business as providers of services to a plethora of new tort claims".

The Court of Appeal accordingly concluded that the argument for accessory liability failed at the first stage: the conditions outlined in Fish & Fish v Sea Shepherd were not made out. Accordingly, the Court did not consider the second stage: whether Mr Ioannou may have had a defence by virtue of being a director of APP. The Court did, however, observe "that the "constitutional role" defence is intended to be of narrow application", and that it would be anomalous if accessory liability were to turn simply on whether the individual concerned was a director of the primary tortfeasor, or on the formality of a board resolution, or power of attorney, authorising the conduct in question.

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