Dec 6, 2024 | Are directors of a limited company liable for infringement?

1 According to the Companies Ordinance (Cap. 622) and the common law, the liability for infringement of a company generally does not result in personal tortious liability for the company’s directors. In other words, even if the Court rules that the company is liable for infringement, the directors typically do not bear responsibility.

2 However, there are exceptions to the above fundamental legal principle. Based on the author’s experience, there are two situations in which directors may also be held liable for infringement committed by the company:

The company is a small company (“Small Company”), and the relevant director handles all company affairs single-handedly. This is especially true when the director is the sole director and sole shareholder of the company (“Small Company Director”); and
The directors of the company are aware of the infringing sales and have participated in the infringing conduct (“Informed Directors”).
3 A company is a “legal entity” and must conduct its business through individuals, including the purchase and sale of infringing products. In the case of a Small Company, directors are often seen as the sole decision-makers and executors of the company.

4 In Hong Kong legislation, directors of such small companies can be presumed to be the decision-makers and executors of infringing conduct (Grenade (UK) Limited vs. Grenade Energy Limited & others (2016)) and bear tortious liability (“Presumed Liability”).

5 If a director plans and arranges the purchase and sale of infringing products, he may also bear the same tortious liability as the company for the infringing conduct, regardless of the size of the company.

The Benefits of Suing Directors

6 For intellectual property owners, they may consider including the Small Company Directors (even including Informed Directors) as one of the defendants in litigation. This approach has the following benefits: it prevents Small Companies from evading compensation for the damages and legal fees of intellectual property owners through a “cicada shedding its shell” tactic during liquidation. When the Small Company Directors are also amongst the defendants in the lawsuit, the likelihood of such “cicada shedding its shell” situations occurring is greatly reduced.

7 During the litigation process, the vast majority of Small Company Directors will also be the ones signing the “Statement of Truth” and affidavits. If this is the case, it becomes more difficult for the Small Company Directors to argue that they were unaware or that they do not need to be liable for the infringing conduct of the Small Company.

8 If the Small Company Directors were genuinely unaware and did not participate in the infringing conduct, they could explain and defend themselves in Court to rebut that “presumed liability” (“Presumed Liability”). However, to successfully rebut it, the Small Company must disclose who arranged for and executed the infringing conduct, and must provide specific evidence and documentation to challenge the Presumed Liability.

9 In reality, rebutting the Presumed Liability is not easy. Once the responsible party is identified, the intellectual property owner may choose to sue the relevant responsible party in addition to the company and its directors, adding them as a third defendant. This makes the tort litigation more complex, which could be more troublesome and potentially more dangerous for the company directors and the responsible parties.

10 As for Informed Directors, the author recommends that intellectual property owners first collect sufficient evidence before filing a lawsuit to support that the relevant director was involved in the infringing conduct, such as personally quoting and selling infringing products or communicating with customers.

11 If the intellectual property owner did issue a warning letter to the company directors before filing the lawsuit, and the director continued to arrange, sell, and conduct transactions involving infringing goods after receiving such warning letter, then their tortious liability is likely to have been established. In this case, the intellectual property owner should definitely sue the involved director alongside the company.

12 In light of the above, the author reiterates the recommendation to sue company directors, as having key individuals from the company as defendants in the lawsuit not only helps to avoid the “cicada shedding its shell” situation, but also encourages the defendants to settle with the intellectual property owner sooner, thus avoiding protracted, lengthy, and costly litigation.