The English High Court recently considered in Palmer Birch (a partnership) v Lloyd (TCC) the personal liability of directors to compensate debtors of a company in circumstances where its liquidation has been engineered as a means to defeat those debts.
Palmer Birch (PB) was employed by Hillersdon House Limited (HHL) pursuant to a standard JCT building contract to carry out refurbishment works to Hillersdon House. HHL was operated by its sole shareholder and director, Christopher Lloyd and his brother, Michael Lloyd who was at all times the decision maker and de facto or shadow director.
During the Project, invoices were raised by PB and funded by Michael. Cash flow issues arose and by January 2015 HHL owed PB c. £444,000. Whilst Michael secured additional funding in March 2015, these monies were paid to a successor company, Country Sporting Experience Limited (CSEL), of which Michael was sole director and shareholder.
On 22 April 2015, HHL gave notice to terminate the Contract. HHL subsequently entered creditors’ voluntary liquidation on 25 June 2015. In the meantime, Michael sought, through CSEL, to complete the Project with a different contractor. PB issued proceedings against Christopher and Michael for, inter alia: (i) an alleged inducement of HHL to breach the Contract; (ii) unlawful interference; and (iii) unlawful means conspiracy.
HHJ Russen QC held that Michael was liable for inducing HHL’s breach of contract, distinguishing between acts of inducement and “mere prevention”, recognising that “the dividing line between inducement and prevention will often not be clear cut…”. The Court held that Michael’s diversion of funds, the liquidation of HHL and continued works through CSEL, constituted inducement for the purposes of HHL’s breach of the Contract:
“…by pressing on with the decision to liquidate…Michael did cross the line from prevention to inducement…by purporting to speak for HHL as if he was the Client under the Contract. This is not, therefore, a case where the alleged inducer can say that the breach would in any event have taken place without any inducement on his part.”
The Court also held that Michael and Christopher were liable for unlawful means conspiracy, having colluded to bring about the repudiatory breach of the Contract:
“In my judgment, the evidence safely supports the inference that by no later than late January 2015 Michael and Christopher had reached an agreement to bring about the liquidation of HHL so that it might escape from the Contract and thereby avoid meeting PB’s existing and anticipated claims.”
The Court rejected Michael’s argument that he acted as director and agent of HHL without personal liability, stating that the corporate veil had been “largely shredded by a combination of his own actions and abnegation of his own director’s role during the life of the Contract.” The Court also rejected the argument that the defence of justification existed in the context of an unlawful means conspiracy allegation.
The decision brings into sharp focus the importance of obtaining personal guarantees when contracting with undercapitalised limited liability companies, to guard against losses occasioned upon the insolvency of a company and attempts by unscrupulous directors to sidestep its obligations.