The Court of Appeal recently handed down a decision which should convince directors to take great care when they sign contractual documents on behalf of their companies…because if the contract contains a misrepresentation, they can be held personally liable for it by the courts.
Personal liability can arise where a director of a company makes a fraudulent misrepresentation on which another person relies and which induces that person to sign the contract. The fact that the contract may not benefit the director is not a defence.
In the case in point, a company entered into a contract to pay for goods it then received. A director of the company signed the contract knowing that the company was insolvent and would be unable to pay for the goods.
The Court of Appeal ruled that the director had made an implied misrepresentation to the supplier. Since he knew the goods would not be paid for, the Court found him personally liable for the sum owed, as a result of his deceit.
The Companies Act 2006 places a statutory burden on directors to adhere to certain standards and consider specifically the effects of their decisions in various ways. A part-time, non-executive or even ‘shadow’ director (one who has no official position in the company but whose decisions are normally followed) can be in the firing line when things go wrong just as surely as can the full-time working directors.
