Directors – be careful what you sign!
Directors of Companies may believe that they cannot be held personally liable for the debts of the Company but they can be liable if they have personally guaranteed the debt.
The Court of Appeal case of Contex Drouzhba v Wiseman and Another highlights the need for directors to take great care when signing contractual documents on behalf of the company.
Personal liability can arise when a company director makes a representation to another person which is fraudulent – the fact that the contract may not benefit the director is not a defence.
Mr Wiseman signed a purchase agreement, on behalf of Scott Daniel Limited, with Contex Drouzhba Limited to pay for goods to be ordered in the future. Wiseman however knew that the company was insolvent and that there was no chance of an injection of capital and as such they would be unable to pay for the goods. When this became apparent, Contex Drouzhba sued the director personally for deceit.
Section 6 of the Statute of Frauds (Amendment) Act 1828 provides a defence in that a representation must be made in writing and signed by the party; it cannot be a representation made by conduct.
The trial judge found that the contract contained a representation that the company would be able to pay for the goods and that the director was personally liable as he knew that the representation was untrue.
In this case the Court made it clear that Wiseman was not liable simply because he was a director but because he himself had committed a fraud on the creditor. By signing the contract promising payment, and making a fraudulent representation, he was making a personal representation as well as one on behalf of the company.
The Court of Appeal upheld the original decision. Mr Wiseman’s appeal was dismissed on the basis that Wiseman was effectively the mind of the company. Therefore when he made a fraudulent representation in a document where payment was a key feature he was personally acting in a fraudulent manner and should be personally liable.
This decision has caused concern for directors trading in insolvency situations or situations of doubtful solvency and who are considering credit options to maintain the business while a solution is sought. They may be tempted to ‘take a chance’ in the hope that thing will improve …but what if they don’t?!
The moral of the story – directors, be careful what you sign as liability may not be limited if the Court finds that you knew that the company would not be able to meet its obligations.
For more information on Company Insolvency and Corporate Recovery contact Fiona Gaskell. You can call us on 0800 083 0815 or fill out our online enquiry form to arrange a call back.
