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24th November 2017
:: Adviser | Productivity | When directors are personally liable for contracts

When directors are personally liable for contracts
 
Here’s a sobering thought for directors of firms that are sailing financially close to the wind. They say honesty pays – or rather, dishonesty doesn’t pay - and on reading this, they’re undoubtedly right!
 
Written by a solicitor who offers practical legal advice to businesses, especially companies and individuals working in the financial services industry.
 
 
 
When directors are personally liable for contracts
by Guy Thompson
 
Directors must be very sure companies for which they are directors will be able to pay for goods or services before they sign contracts on behalf of the company. Otherwise they may be personally liable.
 
Last month, in the case of Contex Drouzhba Ltd v Wiseman and Anor, the Court of Appeal confirmed that a director who signs a contract implying the company will be able to pay for what it orders under the contract was personally liable for deceit, as he knew that this was false. The representation was in writing, and it had been signed by the director as "the party to be charged". In this case, by signing the agreement the Managing Director had impliedly represented that his company would be able to meet its obligations to pay for the goods it ordered. The representation was made fraudulently by this director, who knew the company could not pay and had no chance of being able to obtain new funds. On that basis the director was liable in damages for deceit. The Court decided the representation was "made in writing, signed by the party to be charged", which is a requirement of an ancient Act of Parliament (the Statute of Frauds Amendment Act 1828). The representation must be in writing for this rule to apply. A representation by conduct alone is not sufficient.
 
Directors cannot avoid responsibility by saying they were only signing on behalf of a company. No one can escape liability for fraud by saying "I wish to make it clear that I am committing this fraud on behalf of someone else and I am not to be personally liable."
 
Not every contract signed by a director contains implied representations by the director. But a director signing for a company may be making an implied representation about the ability of the company to pay.
 
For creditors of companies that have failed, this might open up a new line of attack, or at least negotiation with directors. If you have a contract signed by a director saying the company will pay you, you may well have a claim against the director personally, and not only as one of a number of claimants who will be fighting over the remains of the insolvent company.
 
 
 
 
Adapted from an original Blog from Ecademy.com, written by Guy Thompson in December 2007
 
Guy Thompson is principal of Guy Thompson & Co solicitors
 
 
 
 
 

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