A company is a popular type of trading entity because – among other things – it helps protect directors, shareholders, employees and other representatives from business risk. This protection arises because the law regards a company as a separate legal entity with ‘limited liability’ status. Limited liability means that if a company incurs obligations, then (generally speaking) those obligations belong to the company – not its directors, shareholders or representatives.
To get the benefit of that limited liability status, it is important that the company name is clearly and accurately used in all company dealings. If not, there is a risk of personal liability under section 25 of the Companies Act 1993.
Section 25 is an often overlooked provision. It provides that any document recording the obligations of a company must clearly state the registered company name, including the word ‘Limited’ or the abbreviation ‘Ltd’ (e.g. Mars Ventures Limited, not the business trading name Mars Ventures).
This rule exists because it’s important that people know they are dealing with a limited liability entity – not the individual they are interacting with.
If a person acts on behalf of a company, but doesn’t include the company name on documents, then that person may be personally liable for the relevant obligations of the company. As you can appreciate, this could have severe financial repercussions for that person.
Formal written agreements and deeds are obviously caught by this rule and it will always be important to ensure the full company name is included. But what about emails?
Yes – all emails should include the company name too. Under the Companies Act, the word ‘documents’ is broadly defined, and includes any writing on any material or any information recorded by computer or other device. Today, many ‘contracts’ are just email exchanges between staff at companies.
Despite this requirement, it is quite common for emails from a director or employee of a company to only include a logo at the bottom of the email or just a business trading name with no reference to the full name of the company. This is a big risk.
It is important to ensure that all email sign-offs include the full name of the company including the word ‘Limited’ or ‘Ltd’. This applies equally to letters and other correspondences from a company. Also remember to include the company name on the company’s business cards and website.
Section 25 does provide some exceptions to the personal liability rule. For example, personal liability will not apply if the person on the other side was aware, at the time the document was issued or signed, that the obligation was incurred by the company. The other exception is if the court is satisfied that it would be unjust and inequitable for the person who issued or signed the document to be held personally liable.
The Courts have dealt with this issue in a variety of contexts. For example, a director who signed a letter relating to a lease was sued because the tenant company name was misstated in the letter. In another case, a director was sued by an employee bringing a personal grievance because a trading name was used in the employment agreement and it was unclear who the employer actually was.
In both cases, the Court decided it was just and equitable to excuse the director from personal liability because the Court was satisfied that the misdescription of the company name did not cause the claimants’ losses.
Still, it is better not to be in a position where you have to prove an exception to the rule, especially when compliance with section 25 of the Companies Act is such a simple and straightforward exercise. Not to mention the Court costs to successfully fight a lawsuit.
If you are acting on behalf of a company, you should ensure that the registered company name, including the word ‘Limited’ or ‘Ltd’, is clearly stated in all written communications and documents that record an obligation or liability of that company.
This article originally appeared in the Otago Daily Times on 4 November 2019.
Facebook
LinkedIn