Physical Address
Kampala, Uganda
A company is a separate and distinct legal entity from its members/shareholders and directors. The implication of this long-standing legal principle is that the directors and members/shareholders are, as a general rule, not personally responsible for the company’s liabilities.
The principle is not absolute, however, and in certain instances, the company’s corporate veil may be lifted to hold directors or members/shareholders personally responsible for the company’s liabilities. Under Ugandan law (the Companies Act, 2012), a corporate veil may be lifted to hold directors and members/shareholders liable in circumstances including involvement in fraud, tax evasion or where a company falls below the statutory minimum number of members.
This article considers the recent Irish High Court decision in William Thomas Powers V Greymountain Ltd (in liquidation) (“Greymountain”) which elaborates and expands the instances in which a corporate veil may be lifted to hold directors personally liable for the conduct of a company. The article also juxtaposes the position in Greymountain with the position in Uganda.
The Irish decision in Greymountain
In Greymountain, the Plaintiff, William Powers alleged that through a scheme engineered by the company (Greymountain Ltd), investors such as himself were dishonestly led to trade in financial instruments and that the collected monies were instead diverted to the personal use of two individuals (‘the Cartu brothers’). Although they were not official directors of Greymountain Ltd, the Cartu brothers effectively controlled its activities and were therefore argued to be “shadow directors”. It was established that over the course of 3 years, the company had received over USD 186 million from various investors in a similar manner.
Mr. Powers therefore sought to hold the official directors of the company (R.C and L.G) and the Cartu brothers (the “shadow directors”) personally liable for the fraud committed against him by the Company and to obtain compensation for his loss of over USD 120,000.
The Cartu brothers were referred to as shadow directors because while they exercised effective control over the affairs of Greymountain, they were not officially appointed as directors. The court noted that in determining personal liability for acts of a company, no distinction is made between official directors and shadow directors and as such, the principles would apply as though the shadow directors were official directors.
Based on the foregoing interpretation, the Court found that the evidence against the Cartu brothers was incontrovertible and demonstrated that they had participated and benefitted from the fraudulent activities through which Mr. Powers and other investors had lost money. It was thus concluded that they were personally liable for the fraudulent activities of the company.
The finding regarding the Cartu brothers is in consonance with one of the traditional circumstances for lifting the corporate veil and imputing personal liability on directors, which is fraud. The crux of the decision of the Irish court, however, relates to the expansion of the parameters for lifting the corporate veil, to include breach of duty by directors and this is addressed in the next section.
Directors’ personal liability for breach of duty
Greymountain’s official directors (R.C and L.G) argued that, unlike the Cartu brothers, they neither participated in nor benefitted from the fraud committed by the Cartu brothers and were therefore not liable to Mr. Powers. They also argued that they were, in any event, not actively involved in the management of the company, the Cartu brothers being its true controlling minds.
This, however, was not sufficient to absolve them of liability as the Court noted that a director, whether executive or non-executive, has the following duties, among others:
- To acquire and maintain a sufficient knowledge and understanding of a company’s business to enable them discharge their duties; and
- To exercise appropriate supervision or oversight at aboard level in respect of whatever tasks have been delegated.
The court then concluded that while RC and LG did not participate in the fraud and had no knowledge of it, they were still personally liable for the fraudulent activities suffered by the investors because they had abdicated their duty to acquire sufficient knowledge of the affairs of the company and to exercise appropriate supervision over the company despite receiving monthly director fees. Further, because of their dereliction of duty, they created an avenue for the Cartu brothers to act fraudulently and were thus indirect facilitators of the fraud.
By finding as it did, the court underscored the point that directors, may be personally liable for failure to discharge their duties to the company, especially where the company is used by other individuals as a vehicle for fraud.
In the next section, I consider the position in Uganda, especially regarding shadow directors, directors’ personal liability for breach of duty and the possible implications of the Irish court’s decision going forward.
The position in Uganda
As I highlighted earlier, the Irish court noted that for purposes of determining personal liability, no distinction would be made between official directors and shadow directors. The position in the Companies Act of Uganda is more sweeping, however. The Act does not distinguish between official and shadow directors whatsoever. It follows then that the duties and obligations imposed on directors by the Act and the attendant liabilities thereto would apply uniformly to both official and shadow directors.
Regarding directors’ personal liability for breach of duty, the decisions from Ugandan courts appear not to address this point. They restrict the circumstances under which directors may be held personally liable to the traditional principles, such as fraud.
However, it may be argued that the provision in the Act that provides for the circumstances under which the corporate veil may be lifted, in its use of the word “including”, is not exhaustive. It leaves room for a court to rely on other grounds, such as breach of duty, to impose personal liability on a director.
It must be stressed however, that this would only be possible where the primary circumstances warranting the lifting of the veil are already present, but the directors are not directly involved. The rationale for such a conclusion would perhaps be public policy, to ensure directors are always alive to their duties.
This reasoning may be supported by S.201(1)(ii) of the Act, which grants a court power to restrict a person from acting as a director without the court’s permission if during the process of winding up a company, it appears that such a person was in any breach of their duty to the company. Indeed, while not all fraudulent activities involving a company, may trigger insolvency processes, it is not too far fetched to assume that such activities may trigger these processes. As a deterrent therefore, a court may expand the application of the principles on lifting the corporate veil to a director’s breach of duty.
Conclusion
The decision from the High Court of Ireland introduces a critical angle to personal liability for a director – in respect of the imputation of personal liability for failure by a director to effectively discharge their duties, in cases warranting the lifting of the corporate veil. The case underscores the point that it is no defence for a director to claim they were not aware or involved in the fraud.
The decision also stresses the duties of a director, dormant or otherwise, to acquire sufficient knowledge of a company’s operations and exercise oversight over these operations. It follows therefore, that the role of a director is not a passive one but comes with responsibilities that must be fulfilled.
Directors will therefore be expected to rigorously exercise diligence in the execution of their duties, to avoid liability. While the Irish court did not lay down a test as to the level of diligence expected of a director to escape personal liability, the Companies Act requires that the standard of diligence should be that which a reasonable person would apply when looking after their own business.
The Act grants a court power to excuse a director from personal liability if it can be shown that such a director acted reasonably. A director would have to demonstrate that they acted reasonably and to the standard of diligence expected of a director, to be excused from personal liability for breach of duty.
While the decision of the Irish court is merely persuasive and not binding in Uganda, it provides insights to the trends on how courts may approach corporate personality matters in the future. Companies may therefore consider taking out directors & officers (D&O) insurance policies to cover directors from personal losses arising from such suits.
Disclaimer: “The views and opinions expressed on the site are personal and do not represent the official position of Stanbic Uganda and Khulani Capital.”
