Peter Hamilton: One-man bands exposed despite limited liability

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The question is often asked: “If I incorporate my business, will I be protected from personal liability for the mistakes I make?” The legal answer is yes – usually. Of course, for someone seeking certainty, that is not a good answer, but this problem sits at the point where two inconsistent legal principles meet.

The first principle is that a wrongdoer is always personally responsible for the wrong, even if there is someone else who is also liable. Thus, in the case of a man who is employed to drive his employer’s lorry and who negligently collides with another’s car, the driver is himself liable. That may be thought to be self-evident. But the employer is also vicariously liable for the damage caused by the driver’s negligence – as long as the driver was driving in the course of doing his employer’s business.

The second principle is the status of limited liability of a company, which means a director is only to be held personally liable for the company’s negligent misstatements if the claimant can establish some special circumstances setting the case apart from the ordinary. So, in the case of a director of a one-man company, the law will seek to make sure the protection of incorporation is maintained.

Each principle is sound when considered in isolation. But here it is reasonable to ask on behalf of a client who has been negligently advised by the director of a one-man company, why that director should not be personally responsible for the advice, so that if the company is insolvent the director can be sued personally? After all, it was he who gave the negligent advice.

The House of Lords considered that question in a case in 1998 called Williams v Natural Life Health Foods Limited. In that case the one-man company operated a franchise of the concept of retail health food shops. The claimants approached the company with a view to taking a franchise. The director was prominently involved in the projections of future profitability produced for the claimants. All the material provided to the claimants, and on which they relied, was produced on company notepaper. But the claimants’ contact with the company was with an employee. They did not deal with the director at all.  They opened their own shop under the franchise but it was never profitable and it failed. They then sued the company to recover their losses. Before the trial, the company was wound up and dissolved, so the director was joined as a defendant.

The claimants were successful in the High Court and in the Court of Appeal but the House of Lords found in favour of the director and allowed his appeal. The essential reason was that the claimants had relied on the company and the director had not assumed any personal responsibility towards them. The director’s involvement had been the routine production of the projections and so the claimants could not reasonably claim they had relied on an assumption of responsibility by him personally. For the director to be personally liable, Lord Steyn said “there must have been an assumption of responsibility such as to create a special relationship with the director… himself”.

I would not be surprised if a director of a one-man IFA company is not reassured by the above. Not only is the first principle I have mentioned a problem but a dissatisfied client is likely to argue that of course he relied on what the director personally said in the advice in question, because he regarded the director as the person with whom he had had a personal relationship for many years, and the director had assumed a personal responsibility to him for the advice they had written.

The answer in a particular case is likely to depend on the actual facts. But provided the director takes care of the way in which they do business, they will usually (that word again) not be personally responsible for any negligent advice. They should make sure that:

  • All clients have signed and accepted the terms of business with their company
  • They always write on their company letter paper
  • They sign letters, including letters of advice, as director of the company, or “for and on behalf of” the company, and not personally
  • Ideally, they always write in the first person plural as from the company: i.e. uses words such as “we” and “our”, rather than “I” and “my”.

In practice, claimants will follow the money. As it is the business of the company, the professional indemnity insurance will cover the company. Thus claims will usually be against the company. Nevertheless, it would be wise to make sure the insurance also covers the director personally in respect of what they do in the course of the company’s business.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk