Ian Debbage finds directors can be personally liable if they unlawfully dispose of leased assets.
Many asset financiers have been in the situation whereby a customer has entered into administration and the asset on a lease or hire purchase agreement has been disposed of by the company. It is clear that the directors, or one director in particular has disposed the asset, but that director will hide behind the corporate veil of the company.
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However, following case law in recent years and in particular the cases of Standard Chartered v Pakistan and MCA Records v Charly Records, such directors can now be brought to heel. The courts are not piercing the corporate veil, far from it; they are holding directors liable together with the company as ‘joint tortfeasors’.
This notion of potential personal liability for company officers will come as a surprise to many directors who have traditionally believed that they could not be held personally liable for any non-criminal acts done for and on behalf of the company. Consider the following asset finance example:
A building firm enters into a lease agreement with a finance company for a folding crane worth £1m. The customer makes rental payments for 18 months and then goes into administration with no other assets. The finance company demands the return of the crane but discovers that it was sold and shipped to a company in China only one month into the lease agreement. There is virtually no possibility of the finance company recovering the crane and/or of recovery from the customer.
In this example, the finance company has clearly suffered a loss due to the wrongful act of the customer. While the customer will be liable for wrongfully disposing of the crane, this will be scant comfort as it is in administration. However, if the finance company is able to find out which director of the company procured the sale of the crane, a court may hold that director personally liable for the full extent of the finance company’s loss. In such a situation, a court will consider:
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By GlobalData1. Did the director personally carry out the tortious act?
2. Did the director direct or procure the company to carry out the tortious act?
3. Did the director nevertheless assume personal responsibility for the act?
If any of these can be answered in the affirmative, then the unwitting director could be held liable for the full value of the crane at the time it was sold.
It is not only selling assets that directors can be personally liable for. Any acts of deceit that caused the finance company to enter into the finance agreement can also attract personal liability provided one of the elements of the test above is satisfied.
While the first and most straightforward port of call for a finance company would always be its customer, in situations where the customer is insolvent, the next logical step is to look to the particular director who caused the loss as a potential source of recovery and there are still directors out there with deep pockets.
Ian Debbage is an associate in the litigation department of Squire Sanders and an asset finance specialist.
