Company director personally liable for auction bids
The High Court has found that a company director bidding in an auction was acting as agent for the company and, under the auction house's conditions of sale, was personally liable with the company for the purchase price.
In Tattersalls Ltd v McMahon  EWHC 1629 (QB) Mr McMahon and Ms Whitney had incorporated a company which was to deal in bloodstock assets including broodmares, yearlings and foals. Mr McMahon and Ms Whitney were appointed as the company's directors and, in order to attract investment into the company, they applied for Advance Assurance under the EIS scheme.
To ensure that they were able to bid at Tattersalls Limited's upcoming sales, Ms Whitney completed their New Buyer Form in the name of the company. She also applied for, and was granted, credit of £300,000 and payment terms of 60 days.
Although the EIS Advance Assurance had still not been received, and therefore no investment in the company had been secured, Mr McMahon attended an auction and successfully bid for two foals at a total cost of £320,775. When completing the related purchase confirmations, Mr McMahon inserted the company's name and the auction house subsequently issued its invoices in the name of the company.
In fact the EIS Advance Assurance was never received and so the company failed to attract any investors' funds. It was therefore unable to pay the purchase price for the two foals.
When the auction house subsequently took steps to recover the purchase price, it relied on a provision in its conditions of sale to pursue Mr McMahon personally. Those conditions stated: "Unless there is in force a Purchasers Authorisation accepted in writing by Tattersalls the highest bidder in the ring and any principal for whom he may be acting shall be jointly and severally liable under the contract of sale".
Mr McMahon argued that the purchases were in fact made solely on behalf of the company and that the company was in fact the "highest bidder in the ring". No Purchasers Authorisation has been lodged by the company and therefore no agent had been appointed. Accordingly, it must have been the company who bid for and purchased the foals, acting through its director, Mr McMahon.
The judge disagreed with Mr McMahon holding that if a bidder, as agent for a principal, wished to avoid personal liability for his bid made in the ring, he must complete a Purchasers Authorisation. But, in the absence of such an authorisation, the highest bidder in the ring is personally liable for the purchase together with the principal (outside the ring) for whom he was acting. According to the judge the words "in the ring" in the conditions of sale emphasised that it is the individual who physically bids for the lots in the ring that is personally liable for the bid.
The judge accepted that Mr McMahon had been acting as agent for the company when bidding for the two lots. But this did not prevent him from being personally liable under the conditions of sale with the company (as principal) for the auction lots. It was Mr McMahon who bid in the ring and, in doing so, he incurred personal liability. The fact that no Purchasers Authorisation has been lodged by the company did not mean that he was not bidding on behalf of the company but instead meant that, in doing so, he could not avoid personal liability under the conditions of sale.
Directors are not normally personally liable for the acts of the company they represent. But, in this case, the specific provisions of the auction house's conditions of sale meant that the director was liable – not because he was a director, but because he had been the individual bidding in the ring on behalf of the company. Under the conditions of sale that personal liability could have been avoided by the company completing a Purchasers Authorisation. Had it done so, the auction house would presumably have investigated the company (as Mr McMahon's principal) to determine if it was good for the money. But in the absence of such an authorisation, the person bidding in the ring, even if he was doing so in his capacity as a director of a company, was unable to avoid personal liability.