Director beware

01/09/2008

By James Herbert, Partner and Head of Corporate & Commercial.

In a recent Court of Appeal case, Contex Drouzhba Ltd v Wiseman, a director was held personally liable for the debts of a company when he signed an agreement on behalf of the company containing an obligation which he knew that the company could not meet.

The director argued that it was the company that had signed the agreement and not him. Although the director signed in his capacity as a director of the company rather than in his own name, the Court decided that by signing the agreement knowing that the company could not meet the payment obligations, the director had made a fraudulent representation. In those circumstances, the director could be held liable under the law relating to fraud. Although a company is a legal entity in its own right, directors cannot hide behind the company when they break the law. Directors can be personally liable for the debts of the company in an increasing number of circumstances and they need to make themselves aware of what these circumstances are. This case again shows how willing the Courts are to find against rogue directors and to require them to make payments to compensate the company.