Corporate Law Update

In this week’s update: a director was not jointly liable for negligence committed by their company and the FCR publishes a new report on ESG data production.

Director was not co-liable for company’s negligence

The Court of Appeal has held that a director of a company was not jointly liable in respect of the company’s negligent conduct.

What happened?

Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169 concerned a company that marketed luxury properties in Paphos, Cyprus. The company had two directors, one of whom – a Mr Ioannou – was the “driving force” behind the company.

The company and its salespersons marketed properties as investment opportunities that could be purchased with the aid of mortgages provided by a specific bank and denominated in Swiss francs. The marketing literature specifically highlighted the stability of the Swiss franc and, as a result, lower interest rates as attractive features of the investment structure.

However, the company and its salespersons did not alert investors to currency risks involved for non-Swiss residents when borrowing in Swiss francs. This was despite the fact that the Cyprus Consumer Council had previously highlighted currency risk in connection with an investigation into mortgages provided by the bank in question in Swiss francs.

In due course, the value of the Cyprus pound fell substantially against the Swiss franc. As a result, the cost of the mortgages “spiralled”, the investors never received completed properties and, even if they had, any rent from the properties would not have been sufficient to service the mortgages.

The High Court found that the company had acted negligently towards the investors by “trumpeting the supposed benefits of [a] Swiss franc mortgage” but failing to warn them of the risks involved when borrowing in foreign currency.

The investors had also claimed that Mr Ioannou should be held jointly liable with the company as a “joint tortfeasor”, because the marketing scheme had been his “masterplan or brainchild” and that he had micromanaged the company’s salespersons and approved the content of the marketing literature.

However, the High Court dismissed that claim, finding that Mr Ioannou had not been a joint tortfeasor. The investors appealed.

What is a “joint tortfeasor”?

Under English law, a tort is a civil wrong that does not arise from breach of contract. There are numerous torts in English law, including defamation (libel or slander), deceit (a type of fraud), misrepresentation and trespass. In this case, the tort in question was negligence.

A person who commits a tort is termed a “primary tortfeasor” and is liable to pay damages to the person who suffers loss as a result of the tort.

In some cases, a person can be jointly liable for a tort, along with the primary tortfeasor, as a “joint tortfeasor”, even if they did not carry out the actions that amount to the tort itself. For this to happen, the joint tortfeasor must have provided substantial (i.e. more than trivial) assistance to the primary tortfeasor to commit the tort, and both the primary tortfeasor and the joint tortfeasor must have had a “common design” (express or inferred) to carry out the tort.

What did the Court of Appeal say?

The court found that Mr Ioannou had not been a joint tortfeasor (and so dismissed the appeal).

Lord Justice Males, who delivered the court’s unanimous judgment, provided a useful summary of the law relating to joint tortfeasors. In relation to company directors, his judgment notes the need for a careful balance between (on the one hand) allowing directors of a company sufficient latitude to run the company’s business without incurring personal liability to third parties and (on the other hand) ensuring that directors who deliberately lead a company to commit a tort do not escape liability.

The court noted that previous cases in which directors had been found jointly liable with a company as a joint tortfeasor had involved different kinds of tort, such as trespass and intellectual property torts. These torts are “strict liability” torts which do not require any assumption of responsibility.

By contrast, the tort of negligence can be committed only where a person assumes a “duty of care” to another person. Although the company had assumed a duty of care to investors, Mr Ioannou had not assumed any such responsibility, nor would it have occurred to any of the investors that he had.

What is more, the company’s liability in this case arose not out of some positive act, but rather because it had omitted to inform investors about the potential currency risk they would be assuming. There was no evidence that Mr Ioannou and the company had acted with a “common design” to withhold this warning deliberately from investors.

The court was not prepared to find that Mr Ioannou and the company had acted with a common design merely because they marketed the properties in the way in which they did, with no warning of currency risk. In the court’s view, this would lead to “an unduly wide view of the personal liability of directors”.

What does this mean for me?

This is a sensible decision which will be of comfort for company directors.

English law has for some time grappled with the fact that directors, by virtue of their office, assume day-to-day control of a company and so will necessarily often be the persons that lead a company directly into committing civil wrongs. Under normal principles, this ought to render company directors liable as joint tortfeasors.

But it is also a core principle of English company law that a company is a legal person distinct and separate from its economic owners (its members, usually shareholders) and its directors. From a policy perspective, it would be difficult to recruit people to serve as directors of companies if the threat of personal liability constantly hung over their heads.

This decision confirms that the courts will not be quick to impose personal liability on directors who carry out their constitutional role and function within a company and simply make use of the authority delegated to them as directors. As such, directors should ensure they take decisions in board meetings and document their decisions properly (which is, in any event, best practice).

However, directors should not assume that the decision provides carte blanche to direct a company into tortious acts. Status as a director does not afford an automatic defence, and the courts will hold a director personally liable where there has been a clear desire to commit harm to a third party.

FRC publishes report on ESG data production

In the first phase of its new project to examine the production, distribution and consumption of environmental, social and governance (ESG) data, the Financial Reporting Council has published a report focusing on ESG data production.

The report, which runs to 32 pages, is accompanied by a summary of the FRC’s findings. It focuses on the company's perspective on ESG data production (for both internal use and external reporting) and is based on interviews and roundtables with a diverse range of organisations across sectors and sizes.

In the report, the FRC provides a recommended step-by-step approach to ESG data production, including questions boards can ask themselves, breaking the process down into three stages:

  • motivation – identifying what data are needed to meet business strategy, stakeholder and regulatory needs;
  • method – collecting and processing data effectively; and
  • meaning – using data strategically.