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If I Incorporate, Am I Safe?

28 October 2013

You‘ve taken the decision to become your own boss. If you trade as an individual you’re personally liable for your trading debts and at risk of being sued if something goes wrong. Your personal assets will be at risk.

When you go it alone, one option is to form a company. You can own all the shares and you can be the sole director. Will this relatively simple step protect you from liability?

If I had been writing this column in the early 1990s my advice would have probably been “yes”. Forming a “one man company”, as it’s colloquially known, would have been a simple and largely effective way of protecting yourself if your business life took a turn for the worse.

One of the reasons for that view would have been the 1992 decision of the Court of Appeal in Trevor Ivory v Anderson. At the time this case was seen as reinforcing the century-old principle of English company law that when a person contracted with a company, that company was the entity that the person had to bring a claim against. You couldn’t “pierce the corporate veil” to try and chase the directors or shareholders behind it if the company couldn’t pay.

Over the years as people in business were seen to be taking more aggressive advantage of the principle, the courts started to chip away at it to achieve what were considered to be fairer outcomes. There were examples such as the cases of builders forming a company solely for the purpose of doing one construction project. Once completed, and in an attempt to limit liability for bad workmanship or trading debts, the builders would liquidate the company. This sort of conduct encouraged the courts to reduce the thickness and coverage of the so-called corporate veil.

So over time the Trevor Ivory case has come to be seen as the high watermark rather than the norm. To such an extent that in 2013 the answer to the question put at the start of this column has changed. The answer is now more shaded and has shifted closer to “no” than “yes” in many circumstances.

A sole director and shareholder of a company which has carried out defective work can no longer be at all confident of that director not being personally liable. Key factors will be whether the director/shareholder in question ran the company and personally carried out the work, and also whether the work involved professional advice rather than the supply of goods or services. The so-called leaky building cases have also, however, found trades people personally liable when they have operated through a company.

It’s not only the changes in company law as applied by the courts that have undermined the historic level of protection offered by incorporation. A changing legislative landscape has been at work as well; most notably the Fair Trading Act. This legislation cuts through the corporate veil to reach individuals who have engaged in deceptive or misleading conduct in trade. Also the rise of health and safety concerns and standards have created more personal liability.  The bar will be raised even further in this area when the new health and safety regime, currently under development, comes in to force in late 2014.

In the end the answer becomes one of balance. Companies have and will continue to be the main vehicle through which modern business is conducted. But using them in conjunction with a good business insurance policy and an asset protection programme to better keep your private assets out of the line of fire should make your business life safer.

Geoff McDonald

 

Geoff McDonald is a partner in the Commercial Corporate team at Norris Ward McKinnon. He specializes in all areas of company law including company insolvencies.


 

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