PERSONAL LIABILITY OF COMPANY DIRECTORS
by Richard Kettlewell

A significant legacy from the “leaky building” crisis will be the change witnessed in the attitude of the Courts to the personal liability of directors. Directors are now routinely being held personally liable in negligence for acts and decisions they undertook on behalf of their companies. This is of concern to directors, who by definition must be the ultimate decision makers for a company and who will sometimes have a hand in physical works as well.

The high water mark was perhaps reached in a recent Bay of Plenty leaky building case where a director was found personally liable, not for any positive act or decision made by him with respect to the dwelling in question, but effectively for his alleged failure to ensure that his company operated in such a manner that the houses it built would not leak. The decision was overturned on appeal in the District Court but it is likely that similar arguments will be run in the High Court and Appellate Courts in the next 18 months and it remains to be seen what the attitude of those Courts to such an argument will be.

The current risk profile of the directors of building and development companies is perhaps best illustrated by considering examples of cases in which directors have and have not been found to be personally liable. The examples below are from actual cases. They all concerned a director sued personally despite the fact that in each case it was the company that had contracted to undertake the work.

“On the tools” physical performance of the building works by a one man band building company – director personally liable.
The decision to ignore the recommendation of an engineer with respect to foundation requirements resulting in defective foundations – director personally liable.
The administration of a building company, organising materials for subcontractors who were left to get on with the actual building themselves – director not liable.
Regular onsite presence, co ordination of sub-trades and ensuring work carried out in accordance with plans and specifications – director personally liable.
Preparation of company budgets, arranging bank facilities, organising and letting tenders, other administrative tasks but all unrelated to the actual building process or more particularly to any construction defects – director not liable.
Onsite responsibility for architectural and project management services and held out his personal expertise as a point of difference in securing the job for the company – director personally liable.

It is difficult to define the feature or hallmark of an act by a director that will give rise to a finding of personal liability. The law in this area is still developing but what is certain is that a director who exercises direct control (either physical or in a decision making capacity) over a failed element of a project faces a very high likelihood of finding him or herself a defendant in any resulting litigation.

The mere fact that the limited liability company was the party contracted to undertake the work no longer affords the director/s anything like the immunity that it might have done even five years ago. It is only a matter of time before the law that has developed in this area in the context of leaky buildings spreads out into other areas of commerce. Those directors without sound personal asset protection and/or Directors and Officers insurance might do well to rectify that state of affairs.

Richard Kettelwell is an Associate at Sharp Tudhope Lawyers specialising in Building and Construction law.