young blonde business woman in red top, on phone, looking at laptop with concern. concept for finding out she is personally liable for company wrongdoing

While Limited companies largely protect you from being held personally liable, there are some circumstances in which you can be held responsible for company debts. This article shares an example case.

It is a well-established legal principle that directors’ liability for their company’s debts is strictly limited; hence the most common company type is a private limited company. However, there are some circumstances in which directors can be held liable for monies owed by the company. The Court of Appeal recently considered one such situation in Lifestyle Equities v Ahmed [2021] EWCA Civ 675.

Case study: Lifestyle Equities v Ahmed

The case involved two directors of a company (Mr and Ms Ahmed) that had infringed on the trademark of Lifestyle Equities, the question being whether:

  1. Mr and Ms Ahmed could be held personally liable for the infringement of trademark by their company; and if so,
  2. Whether they should be liable for all the profits the company made from the infringement, or only the profit that they had personally made.

Were they held personally liable?

On the first question, the Court of Appeal held that the Ahmeds could be held liable for the infringement of trademark by the company as they had a close, active, and personal part in the infringing activities. They effectively acted as ‘accessories’ to the infringement.

The court did note that where a director plays only a constitutional role in the governance of the company (i.e. they are not involved in the day-to-day running of the company, but perform an administrative function at corporate governance level) a director may have a defence to personal liability.

However, this defence is intended to be fairly narrow.

Where a director commits a tort, or is an accessory to the wrongdoing of the company, they are likely to be held liable. Any director of a company should take care to ensure that the company that they direct (even if in an administrative capacity) is acting in compliance with all laws and regulations, to keep themselves from personal liability.

Personal profits v company profits

On the second question, the distinction between the Ahmeds having to account for their personal profits as against the profits of the company was crucial.

The company of which the Ahmeds were directors had gone into administration by the time of the hearing, so the only source of compensation for Lifestyle Equities was the Ahmeds themselves.

A common remedy in trademark infringement cases is an ‘account of profits’. In other words, the compensation that the infringing party must pay to the trademark owner is not measured by reference to the loss of the trademark owner, but by reference to the financial gain by the infringer from the infringement.

In this case, the difference between the Ahmeds’ personal profits from the infringement and the profits of the company was close to £3m. Fortunately for the Ahmeds, the Court held that, as an account of profits is an equitable remedy, they could only be held liable for the profits that they had personally received from the infringement, by way of salaries from the company.

What was the judgment?

Although the amount of compensation deemed payable was limited in this case, the fact that the Ahmeds were held liable at all is a warning to all directors to keep themselves from foul play, as the company may not always be used as a shield.

Equally, this judgment is a reminder to parties making a claim against a company to consider joining the directors of the company as co-defendants to the claim to give yourself the greatest number of avenues of recovery. Previously, this type of strategy has mainly been used against small businesses, but this judgment is an indication that the same approach may be successfully deployed against larger companies too.

Are you concerned about being held personally liable for your company’s wrongdoings, or about trademark infringement claims?

We are one of the largest trademark filers in the UK and have a dedicated trademarks team who would be happy to discuss trademark matters with you.

If you would like advice on a personal liability case or strategy, or need further information on any of the issues that we’ve raised in this article, please get in touch.

We also have a package tailored to business owner disputes and exit strategies here.