Can Directors or Shadow Directors of a Solvent Company be liable for the Company's Defualts?

May 2013

Can Directors or Shadow Directors of a  Solvent  Company be liable for the Company's Defualts?

As all those who own and run companies know, it is a fundamental principle of company law that a company has a separate legal personality from its Directors and Shareholders.

However in certain circumstances the Courts have allowed a claim to be made against those who control the acts of the company, known as “piercing the corporate veil”, where “special circumstances exist indicating that [the corporate veil]  is a mere façade concealing the true facts”.

In the recent case  of VTB Capital v. Nuetritrek International Corp & Others, the Supreme Court  refused to extend the circumstances in which the corporate veil may be judicially pierced, holding that it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, misuse of the company by the wrongdoer(s) as a device or façade to conceal their wrongdoing.

The Supreme Court therefore reinforced the protection that is available to Directors and Shareholders of companies, and made it clear that that protection will only be “pierced” in very exceptional circumstances.

The common theme running through all the cases in which the court has been willing to pierce the veil is that the company was being used by its controller in an attempt to immunise himself from liability for some wrongdoing which existed entirely outside the company.

Where those  dealing with companies  wish to ensure that others are liable beyond the corporate entity itself, they need consider who  is the driving force behind the company, and ensure that such individuals  enter into a separate contract or guarantee  which would provide an alternative remedy in the event of  the company’s default.

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