Litigation Litigator's View

Philip Banks-Welsh on the extent of directors' personal liabilities. Philip Banks-welsh is a partner at Trethowan Woodford.

The House of Lords recently overturned a Court of Appeal decision which had imposed personal liability on a company director for the negligent misstatements made by a limited company. The long-awaited decision is seen by many as being one of the most important company law decisions of this century.

The case, which involved action taken by franchisees against a company promoting franchises of health foods shops, escalated when the company went in to liquidation. The franchisees then decided to extend their claim to include a personal action against Richard Mistlin, the managing director of the company, Natural Life Health Foods.

In the High Court, and later in the Court of Appeal, Mistlin was held to be personally liable for the negligent misstatements, on the basis that representations made in a brochure supplied by the company to prospective franchisees made reference to Mistlin's experience in running a health food business, and also on the basis that Mistlin had personally approved the financial projections which were later found to have been flawed.

While personal liability for directors in the Hedley Byrne v Heller context is not a new concept, the Court of Appeal had imposed such liability on Mistlin in circumstances where he had no personal dealings of any note with the franchisees, nor had there been any suggestion that Mistlin would be responsible for the preparation of the projections. Indeed, it was accepted by the Court of Appeal that the franchisees had not believed that Mistlin would be personally involved in the preparation of the financial information.

The Court of Appeal decision created uncertainty for any director who played an integral part in the running of a limited company. Indeed the precedent set by the decision sent shudders through small companies, in particular where directors would often be held out as having particular qualities which were central to the operations of the company.

The decision is a clear indication that the Lords were concerned about the potential impact on the limited liability corporate structure which may arise as a result of the Appeal Court decision. It also represents a significant victory for company directors who will continue to benefit from the protection offered by the corporate veil in most cases.