A company is, in the eye of law, a legal entity distinct from its members and officers.  It can commit wrongdoings and be held liable for them on its own.  A director is generally not liable for the tortious act of the company, unless he crosses the line.  This article illustrates where the line is.

Why Sue the Director?

In considering whom to sue in respect of a tort committed by a company, the company will normally be the first target.  However, when the company is on the verge of insolvency, the victims may consider joining the directors of the company as Defendants so as to maximise recovery. 

A director of a company is not automatically to be identified with his company for the purpose of the law of tort, however small the company and however powerful his control over its affairs may be.  In determining whether a director is liable, the Court will focus on the part the director plays personally in the act complained of. 

Director Not Liable Unless Personal Responsibility Assumed

In Williams and Another v. Natural Life Health Foods Ltd [1998] 1 W.L.R. 830, the Plaintiff approached Natural Life Health Foods Ltd (the “Company”) with a view to obtaining a franchise of a health food shop.  He entered into the franchise relying on the projections and other information given by the managing director (the “Managing Director”) of the Company, which were later found to be overstated.  Having incurred substantial losses, the Plaintiff sued the Company and the Managing Director for negligent misstatements.

The House of Lords explained that for a director to be liable for negligent advice given by a company, there must be reasonable reliance by the Plaintiff on the assumption of personal responsibility by the director so as to create a special relationship between them.  The test was an objective one, which requires consideration of things said or done by the director or on his behalf in dealing with the Plaintiff.

In that case, neither the fact that the Managing Director owned and controlled the Company nor the fact that the misstatements were mainly contributed by the Managing Director were sufficient to render the Managing Director personally liable.  On the evidence, there had been no personal dealings between the Plaintiff and the Managing Director.  As such, the Managing Director had not assumed personal responsible for the negligent misstatements and was thus held not liable.

Fraud Committed on Behalf of Company is No Defence

While William v NLHF illustrates that a director will not lightly be fixed with personal liability for negligent misstatement made on behalf of the company, the same does not apply to fraud.  In Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 All ER 173, William v NLHF was distinguished.  In this case, a director knowingly made a false statement in order to obtain payment under a letter of credit.  The House of Lords held that the director could not escape liability for deceit on the ground that his act had been committed on behalf of the company.   Hence, where fraud is involved, the Court is likely to pierce the corporate veil and hold the directors personally liable for their acts.

Directors’ Tortious Liability under Statutes

In addition, statutes impose personal liability on directors for inducing others to invest money in certain cases.  Concerning public offers of shares, where any form of application for shares must be issued with a prospectus, section 40(1) of the Companies Ordinance (Cap. 32) (the “CO”) imposes civil liability on directors to pay compensation for losses suffered by those who subscribe to shares after relying on untrue statements in a prospectus of the company.  For the purpose of section 40 of the CO, statements which are misleading in the form and context as well as material omissions are also regarded as untrue statements.  In addition, even though the company concerned is incorporated outside Hong Kong, section 40 applies so long as the prospectus of offer of shares is issued, circulated or distributed in Hong Kong.

Moreover, section 108 of the Securities and Futures Ordinance (Cap. 571) (the “SFO”) imposes civil liability on any person who makes a fraudulent, reckless or negligent misrepresentation which has induced another to, inter alia, enter into an agreement to subscribe for securities.  “Securities” are widely defined to cover different financial products in the market, including shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, an incorporated or unincorporated body or a government.

Furthermore, section 108(2) provides that where the misrepresentation is made by a company, a director of the company at the time when the misrepresentation was made is presumed to have made the misrepresentation, unless it is proven that he did not authorize the making of the misrepresentation.  As such, a director may be held liable for misrepresentation made by any person on behalf of the company to induce others to invest in the company.

Directors’ Liability for Mis-selling

In light of the above, company directors may be targeted by victims of mis-selling of financial products in legal actions.  In this regard, whether a director can be indemnified by the company is another matter.  For details, please read our newsletter “Can a Director be Indemnified from Liability?” which is available at

https://www.onc.hk/en_US/publication/can-a-director-be-indemnified-from-liability.