Liability for misrepresentations by companies: directors and employees remain exposed

In company dealings, there is sometimes a misconception that conduct engaged in with third parties on behalf of the company cannot expose a director or employee of that company to personal liability. This presumably arises from the benefit of the corporate veil that arises once a company is incorporated and it conducts business as a separate legal entity. For anyone involved in business activities, it is important to understand the scope of possible personal exposure and how concepts such as accessorial liability, intention and deceit can play into personal liability for directors and employees.

Background

Recently, the NSW Court of Appeal handed down its decision in Care A2 Plus Pty Ltd v Pichardo [2024] NSWCA 35 (Care A2 v Pichardo), which provides a useful summary of the law in this area.

The Case

In the case, Care A2 made payments in the total value of $2,200,000 to DCA Sydney Enterprises Pty Ltd (DCA). 

DCA made representations to Care A2 that the payments:

(a)  were intended to secure streaming rights for the 2021 Rugby League World Cup

(b)  would generate an annual revenue of $15,000,000 or $30,000,000.

It was found that both of the above representations were false and that the sole-director of DCA misappropriated the funds received from Care A2 for personal gain.

In the first instance, the Court found that DCA’s sole director was liable for deceit and misleading or deceptive conduct, but DCA’s CFO was not similarly liable. Damages were awarded to Care A2 on that basis.

On appeal, the NSW Court of Appeal determined that both DCA’s sole director and its CFO were liable for misleading or deceptive conduct and tortious deceit, on the basis that:

1.    Direct liability for misleading or deceptive conduct under section 18 of the Australian Consumer Law depends upon whether the impugned person’s conduct is objectively misleading or deceptive, or likely to mislead or deceive.[1]

2.    A person’s knowledge or intention to mislead or deceive is immaterial to determining whether that person is liable for misleading and deceptive conduct;[2] It is sufficient that the conduct leads or is likely to lead another person into error.[3]

3.    The status of an employee or officer does not necessarily immunise him or her from liability for contravening conduct engaged in that capacity.[4]

4.    Persons who are merely conduits of information are not liable for misleading or deceptive conduct.[5] However, an intermediary will be more likely to have engaged in misleading or deceptive conduct where:

a.    the underlying information has been altered before being passed on;

b.    the intermediary is aware of its falsity; or

c.     the matter is a relatively simple one which should be within the intermediary’s professional judgement.[6]

Primary and Accessorial Liability

This decision adds to and strengthens the established body of law that supports third parties in claims against employees and directors of companies where misleading, deceptive or deceitful conduct has been engaged in ‘for and on behalf of the company’. These claims could either be direct, where the person themself has primary liability for the actions, or accessorial where the company is primarily liable and they are knowingly involved in some way.[7]

However, where a person knows that another is going to make representations, but does not know that they are misleading, that person cannot be said to be “knowingly concerned” in the other person engaging in misleading conduct. It is necessary to show that the accessory has actual knowledge of the falsity of the representations.[8]

Key Takeaways

Directors and employees should be aware that misleading or deceptive conduct engaged in when ostensibly acting for and on behalf of a company can give rise to personal liability for those actors. This should be kept in mind when they are themselves acting on behalf of a company and also when dealing with directors and employees of companies that they are doing business with. 

In certain circumstances, claims against natural persons as well as corporate entities can apply significantly more pressure and create the added leverage required to entice parties to engage early to resolve issues on a realistic basis. In order to safeguard against personal liability in these circumstances, directors and employees should ensure that they carry out their roles and responsibilities with care, diligence and integrity, and apply independent knowledge and judgement when passing on information and asserting matters to third parties.

The Commercial Disputes team at Bartier Perry is experienced in this area. Should you have an issue of concern, please don’t hesitate to contact Gavin Stuart or Isabelle Stillman.

Authors: Gavin Stuart and Isabelle Stillman