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Company directors' liability - piercing the corporate veil

26 August 2015

One of the main reasons for choosing a company to carry on a business is the advantage of limited liability. This means that the company is liable for its debts and obligations, not its directors and shareholders (unless they have given personal guarantees in favour of the company).  There are, however, some circumstances where the directors can be held personally liable for the debts and obligations of the company. The terms “piercing” or “lifting the corporate veil” are often used where the courts have decided to ignore the company’s separate legal identity and find the directors or shareholders liable.

 

Mr Ivory not liable for destroying Andersons’ raspberry crop

In the Court of Appeal case of Trevor Ivory Ltd v Anderson the court refused to pierce the corporate veil and find Mr Ivory liable for negligent advice he gave to the Andersons, even though he was the sole director and shareholder of the company. Mr Ivory had advised the Andersons to use roundup to get rid of unwanted couch grass growing in their raspberry crop but he did not advise them to protect the raspberry canes. The roundup not only killed the couch grass, it killed the Andersons’ raspberry crop as well. Commentators since have noted that, had Mr Ivory had given the advice after the Fair Trading Act had come into force, the result may have been different.

 

Bendalls liable for failing to import ostriches

In the latter case of Specialised Livestock Imports Ltd v Borrie the Court of Appeal pierced the corporate veil and held two of the shareholders and the managing director liable under the Fair Trading Act 1986 for misleading and deceptive conduct in trade and making false representations. In that case the Bendalls had farmed ostriches and developed a scheme to import live ostriches from Australia. Their company entered into various contracts with the Borries and others to import ostriches but they failed to do this.

 

Legal grounds for directors’ liability

There are different legal grounds for finding directors liable. The Andersons attempted to find Mr Ivory liable for the wrongful acts (or “torts”) of his company. Directors may also be liable for failing to comply with duties imposed on them by the common law (or judge made law), by the Companies Act 1993 and by numerous statutes - for example, the Health and Safety in Employment Act 1992; the Resource Management Act 1992; the Income Tax Act  2007 and the Employment Relations Act 2000. The common law imposes a duty on directors to act in good faith towards the company. The Companies Act 1993 imposes obligations on directors to act in good faith; to exercise the appropriate level of care, diligence and skill; not to carry on the business in a manner likely to create a risk of serious loss to creditors; and not to agree to the company incurring an obligation it will be unlikely to perform.

 

You’re a director – how can you protect yourself?

As a director you can minimise the risks of being personally liable by being conscientious and diligent; exercising reasonable supervision and control over the company’s affairs; acquiring the necessary knowledge and skills or refusing to act as a director; taking care when relying on the advice provided by professionals and experts; taking out insurance (which can be expensive); and, where legally possible, excluding your liability in any contracts made by the company.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.