Limited Liability in Jeopardy: Navigating Director Liability in the Supreme Court

Ronald Fletcher Baker is set to bring a landmark directors’ liability case to the Supreme Court this February, with the goal of reversing a recent judgment that could have significant ramifications for directors of small and medium-sized businesses.

Litigation partners Rudi Ramdarshan and Victoria Huxley share the reasons behind the firm’s decision to help their clients pursue the case to the highest court, and what steps directors can take to protect themselves from similar situations.

The case of Lifestyle Equities v Ahmed [2021] EWCA Civ 675, recently heard by the Court of Appeal, revolved around a trade mark dispute in which a group of defendants were found to have infringed Lifestyle Equities’ trade marks for Beverly Hills Polo Club. However, the focus of the appeal was not on the infringement itself, but on the liability of two individual defendants, Mr. and Ms. Ahmed, who were directors of two of the defendant company’s in the dispute. The appeal addressed whether the directors were jointly and severally liable for the company’s acts of infringement and, if so, whether they should be held responsible for the entire profits the company’s made or just their own personal profits. Unfortunately, the company in question went bankrupt, making the distinction between the two a critical issue for the defendants.

The clients initially represented themselves unsuccessfully in the High Court, but when they faced a barrage of enforcement proceedings before they could get their case to the Court of Appeal, they sought the help of Ronald Fletcher Baker. “Our key priority was ensuring they didn’t have to fight on all these multiple fronts,” explains Ramdarshan. “Victoria burned the midnight oil to get the enforcement proceedings stayed, and achieving that allowed us to focus on taking the matter to the Court of Appeal.”

One of the puzzling aspects of the case is that, on the face of it, the clients had done everything right. They had instructed professionals to assist them in the creation of the brand, taken advice, conducted an image search, registered their own trademarks, and taken all reasonable steps. Ramdarshan explains, “The problem is that the case concerned strict liability with directors of a company alleged to have acted in common design. In practice this means there doesn’t need to be any malice, wrongdoing or improper motive behind the action by the directors. At what point does the action in question become the acts of the director as opposed to the act of the company?”

The impact of such a decision on small and medium-sized businesses, and organizations like charities, is significant. Although the case is in the field of intellectual property, the consequences could be far more widespread. Huxley explains, “The question at the heart of this is the liability of a director or senior executive employee for causing a company to commit a tort of strict liability (in this case, trademark infringement). What if they acted in good faith, with due care, within their authority, and in the proper discharge of their fiduciary duties, without actual or constructive notice that the company’s acts will amount to such an infringement: are they jointly liable with the company, or is the company alone liable?”.

Ramdarshan goes on to explain that the Court of Appeal’s decision is inconsistent with established law in Canada and Australia and renders the law incoherent, undermining the intended protection of limited liability for those who trade in good faith and in accordance with their duties under the Companies Act 2006.

According to Huxley, “It goes far beyond Intellectual Property. Large companies, with more robust corporate structures and governance, are less likely to be impacted, but directors of small-to-medium sized businesses will be disproportionately affected if this decision stands. Most smaller companies don’t have enough time or resources to formally vote on every decision, which puts their directors at risk. This could also discourage people from becoming directors of charities or social enterprise companies, as they risk being held personally liable for decisions they had no control over.”

Ronald Fletcher Baker is deeply aware of the personal impact of this decision and is committed to fighting for their clients’ interests. The firm’s ethos, ‘people and the law,’ reflects this commitment. “We never lose sight of the fact that these are real people who are being affected by this decision,” says Ramdarshan. “Individuals whose lives and livelihoods are impacted. People who have spent years working to build a business which has now been forced into bankruptcy.”

Huxley adds, “we fought hard for our clients at the Court of Appeal to make sure they were not held to account for the nearly £4M infringing profit that the Company made, which is just unfathomable for two directors who worked hard for years building their business and have lost it all to pay, and successfully reduced their personal liability to under £80,000 each. But the fight can’t just stop there, the ramifications of the decision are too serious and far reaching.”

Ramdarshan explains, we have seen in Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169, the Court of Appeal grapple with attempts to use the Lifestyle decision to hold a director liable as an accessory to the company’s wrongdoing. Pulling the legal principal away from intellectual property cases brings into sharp focus how such an approach cuts against the very fabric of the concept of limited liability the Companies Act 2006. In the context of intellectual property, as seen in the case of Price v Flitcraft Ltd, 2022 WL 18034489 the bar for joint liability does not appear to be a particularly high one.

As to what steps directors can take to try and protect themselves, explains Huxley: “As it stands, businesses need to protect themselves from ending up in a similar situation by adopting a hyper cautious approach. Exercising control exclusively through the constitutional organs of the company, by merely voting at board meetings regardless of any delegated authority. But that’s just not viable for many smaller businesses.”

In conclusion, the directors’ liability case of Lifestyle Equities v Ahmed, to be taken to the Supreme Court in February this year by Ronald Fletcher Baker, has the potential to have far-reaching and devastating implications for small to medium-sized businesses and charitable organisations. The case raises important questions about the liability of directors, senior executive employees, and even charities and trustees, for causing a company to commit a tort of strict liability, the impact it could have on individuals and their livelihoods and the extent of financial penalties that could be imposed on them personally.

The outcome of this case will be closely watched by many in the business community, and the ramifications of the decision will be felt for years to come.

Additional Info

• News Author:Rudi Ramdarshan | Victoria Huxley