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Limited liability has its limits

Neil Palmer
28/01/2015

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United Kingdom

One of the principal reasons for incorporating a business is to benefit from the fact that the liability of company shareholders is limited.

One of the principal reasons for incorporating a business is to benefit from the fact that the liability of company shareholders is limited.  However, this protection is not absolute and a recent decision by the Intellectual Property Enterprise Court illustrates one way in which a shareholder may still have personal liability.

The Court ruled that a website advertising escort services in South Africa contained photographs which infringed the UK copyright of the claimant, because they were targeted at the public in the UK.  Whilst primarily a copyright infringement case, the Court also ruled that the sole shareholder and director of the company which owned the rights to the website and published the content was personally liable for the copyright infringement, in addition to that company.  This has important implications for directors of UK companies, especially if they are sole directors and shareholders.

Mr Carter engaged a South African national to design a website which would advertise escort services in South Africa.  The website contained pornographic photographs, which infringed the copyright of the claimant.  The website was owned and operated by an English company which was wholly owned by Mr Carter, who was also the sole director of the company.

The claimant brought a claim against both Mr Carter and his company on the basis that the infringing material was targeted at the public in the UK and therefore coming within the ambit of the Copyright, Designs and Patents Act 1988.  The case is Omnibill (Pty) Ltd v Egpsxxx Ltd (in liquidation) and another [2014] EWHC 3762 (IPEC).

Having concluded that an infringement of UK copyright had taken place, the judge was required to decide if Mr Carter was personally liable for the infringement, as well as his company which hosted and published the material. 

The judge found that Mr Carter was jointly liable for the infringements committed by his company. Normally, a shareholder will only be liable in respect of his or her company's obligations up to the amount invested by that shareholder in the company and the amount of any unpaid shares.  However, this case demonstrates that the principle of limited liability will not protect an individual from being found liable to a third party where the individual has used a company under his or her control to perpetrate a wrong on that third party.  In this case, Mr Carter was personally liable because he knowingly created a situation where the copyright infringement occurred.

This case is a useful reminder for directors and shareholders who control companies that they can be personally liable if they use their companies as tools to infringe the rights of third parties.  The fact that Mr Carter's company was a limited liability company (which generally shelters shareholders from liability for the company's acts) is not relevant to the question of whether or not Mr Carter was personally liable for deliberately using a company which he controlled to infringe third party copyright.

Neil Palmer is a Partner and Julian Grant is an Associate in Fieldfisher's Corporate Group in London.

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