UK: Directors Held Liable For Inducing Breach Of Contract And Unlawful Means Conspiracy Where They Placed Company Into Liquidation To Avoid Outstanding Debt

Last Updated: 17 October 2018
Article by Gary Milner-Moore and Catherine Emanuel

The Technology and Construction Court has upheld economic tort claims against two directors of a limited liability company who placed the company into liquidation in order to avoid the company having to pay its outstanding debts to a building contractor. The building contractor succeeded in establishing that one of the directors had induced the company to repudiate the building contract, and also that they had conspired to injure the building contractor using unlawful means: Palmer Birch (a partnership) v Lloyd [2018] EWHC 2316 (TCC).

The case highlights the risks for individuals who operate through the medium of an undercapitalised limited liability company, in particular that they may not be able to rely on the protection of the company's distinct legal personality in circumstances where their conduct gives rise to claims under one of the economic torts.

Economic tort claims are not straightforward to establish, in light of the high evidential hurdles that must be met. However, this decision illustrates the potential for bringing an economic tort claim in a relatively novel context, in particular where there is an attempt to abuse the doctrine of separate corporate personality. It seems significant in this case that funds which could have been made available to the company to meet its obligations to the claimant were, instead, diverted to a separate company which was used to complete the works through a different contractor.

Gary Milner-Moore and Catherine Emanuel consider the decision further below.

Background

In 2012 the claimant, a building contractor, entered into a contract with Hillerson House Limited ("HHL") to carry out renovation works on a substantial property in Devon. The two defendants, D1 and D2, who were brothers, were the decision-makers behind HHL (D1 was an appointed director and sole shareholder whereas D2 was a de facto or shadow director). D2 had funded loans to HHL to fund the works, and the property was to be used as D2's English home.

In December 2014, it became clear that D2 was experiencing cash flow issues. HHL failed to pay the claimant sums due under its December 2014 invoice and, by the end of January 2015, HHL owed the Claimant around £444,000.

In March 2015, D2 secured funding from another of his investments and would therefore have been able to pay the sums outstanding. However D2 did not use those funds to pay the claimant. He instead diverted them to a different company owned by D2, which was ultimately used to complete the works through a different contractor.

In April 2015, HHL gave notice to terminate the contract with immediate effect stating that there was no third party funding available and, in the event of a liquidation, no distribution would be made to the claimant. In June 2015, HHL was placed into voluntary liquidation. By that point, the claimant estimated that it was owed £1,082,000 by HHL.

The claimant brought proceedings against the defendants alleging that they had induced HHL to breach the contract and also that they had engaged in a conspiracy to injure the claimant by unlawful means.

There was no claim brought by the liquidator of HHL, for the benefit of creditors generally, in respect of the conduct of the defendants prior to the liquidation, nor was there any attempt to bring a claim against them for misfeasance.

Decision

Inducing breach of contract

The High Court (HHJ Russen QC) held that D2 was liable for inducing HHL to breach the building contract. In doing so, he placed emphasis on the distinction between acts of "inducement" properly so-called and those which constitute "mere prevention" of a party's performance of the contract. As the judge noted, the distinction can be a delicate one.

On the judge's findings, D2 could not be found liable for inducement simply on the basis of a failure to fund HHL; as he put it, the authorities are clear in establishing that the inducement tort is not committed simply through a "failure on the part of the defendant to feed the coffers of a limited liability company, to enable it to meet its contractual obligations, when in fact there is no legal obligation to do so".

However, D2's actions in diverting funds away from HHL, leading to HHL's liquidation, amounted to procuring a repudiatory breach of the contract. In the judge's view, the active decision on the part of D2 to put the company into liquidation, while taking the benefit of the works and completing the project through a different company, crossed the line from prevention to inducement. The judge commented:

"Whereas a simple finding that [D2] could have made the funds available to HHL, but simply chose not to, might arguably leave [the claimant] on the wrong side of [the fine line between prevention and inducement], my further conclusion that he should in the circumstances have done so sustains their claim ...."

Unlawful means conspiracy

The judge also held that D1 and D2 were liable for the tort of conspiring to injure by unlawful means because they had colluded to bring about the repudiatory breach. Based on the evidence, and as a result of inferences drawn from the defendants' actions, he found that a tacit agreement existed between D1 and D2 to bring about the liquidation of HHL so it could escape its obligations under the contract, secure the value of the existing works, and avoid meeting the claimant's existing and anticipated claims. Correspondence from the defendants' solicitors clearly established that the defendants had the necessary intention to injure the claimant.

D1, the de jure director, argued that he could not be personally liable in conspiracy as he was at all times acting as a director and agent of HHL. However, the judge would not allow D1 to rely on the protection of the corporate veil as a defence to personal liability because the corporate veil "... had become largely shredded by a combination of his own actions and abnegation of his own director's role during the life of the Contract". In these circumstances, D1 could not properly be described as having acted within the scope of his constitutional role as director of HHL. By contrast, he had acted independently of the company's interests and with the impermissible objective of furthering the interests of D2.

The defendants also sought to rely on a defence of justification, praying in aid JSC BTA Bank v Ablyazov (No.14) [2018] UKSC 19 (considered here) where the Supreme Court held that the "real test" for what constitutes unlawful means is "whether there is a just cause or excuse for combining to use unlawful means". Judge Russen QC rejected that argument. He did not consider that the Supreme Court had recognised the existence of a discrete defence of "justification" but rather that the presence or absence of a "just cause or excuse" was part of the analysis of whether the conspiracy involved unlawful means. In this case, in view of the court's findings, plainly it did.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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