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Peter Hamilton: One-man bands exposed despite limited liability


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 



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. I was an unincorporated sole traded for 25 years. I was well aware of the liability position, but just regarded my situation as that of an old Lloyd’s member.

    Obviously, precautions are made. PII insurance, (as you say this covers the sole trader personally), legal protection insurance and all the other panoply. Not having all your assets in your own name wasn’t a bad idea either. The wife would get a fair chunk anyway if there was to be a divorce. (Thankfully not as we have been married for aeons!).

    Then there is always the emergency Plan B – emigrate if absolutely necessary.

    There are undoubted advantages of not being incorporated. Capital adequacy for one. At least your money can work for you and isn’t stuck in some side alley where repatriation may mean a tax charge. (Incorporated entities can’t own ISAs). Then you don’t have to submit returns to the Registrar.

    Accountancy and audit charges are also much cheaper and when you sell the firm, things are so much more straightforward.

  2. A very interesting and useful article Peter.

  3. Christopher Petrie 6th June 2016 at 3:49 pm

    Why would 20k being put in the company savings account be a problem Harry? You’re in danger of sounding like the “straw man” you often mention.

    Any professional person…IFA or anything else is a fool to operate in a business environment without the business being incorporated by limited liability.

    Why would anyone take such a senseless risk in a litigious society?

  4. @Christopher

    I can assure you I’m far from a ‘straw man’ my capital adequacy was always a considerable order of magnitude greater that that required. However I didn’t fancy having money tied up in a savings account paying around 1.5% or so. My money was (and is) mainly invested and working for me. Also with money tied in the firm (unless it is a Directors loan account) it could well be subject to taxation on eventual withdrawal – I’m amazed you don’t see that.

    As for being a fool, I can see that would apply for those who accept clients willy-nilly, but sensible precautions and some fastidiousness in accepting clients, coupled with knowing where the skeletons are buried does provide a decent measure of protection. Then of course assuring that you do the right thing (not too hard if you are a one man band) and if an error occurs spotting it and rectifying it immediately also helps.

    I find it is those whose business model is less than robust, or those who have employees who are not monitored closely enough, who seem to want to rely on the chimera of incorporation. As Mr Hamilton has said you are not completely covered by this and can always be sued in an individual capacity under the duties of Directors. And as we see so frequently the Regulator can decimate your personal bank account almost at a whim.

    • Harry – It just seems more prudent to me to be a Ltd Company, like me, you got caught up with some clients in Keydata (I never liked the plans, but let one of my then advisers overide my gut feeling), I was very pleased we were a Ltd Company when FSCS started playing hardball, despite no client complaints about the ADVICE.

  5. Christopher Petrie 7th June 2016 at 12:42 pm

    Well. we shall have to agree to disagree on this one. I’m perfectly confident my small business is robust and have had no problems in 16 years of trading, but I simply wouldn’t risk my family’s home for the sake of a single error or unlucky, unforeseeable circumstances. As I say, why take the risk, for the sake of tying up just 20k in cash?

    If I had a client who was say, a dentist, and had the small risk of an anesthetic going tragically wrong, would I suggest he ran as a sole trader or as an LLP/Director? And so I shall take my own advice, for the same reasons.

  6. But as Mr Hamilton (and company law) point out even being incorporated you are exposed anyway. Directors can be sued individually and severally and are also held to account within the provisions of company law.

    You are not protected as comprehensively as you imagine. (Oh and put the house in the wife’s name – much safer).

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