Stretching the limits of Directors’ personal liability for torts?

24 July 2020

It is a sad reality that the Covid-19 Pandemic is likely to lead to a spike in the number of companies being put into insolvency.  This has the potential to leave parties with claims against those companies with a reduced prospect of full recovery, even if their claims are strong.  As a result, claimants may look for alternative targets, including ways in which they could sue directors personally. 
 

As a general rule, a director will not be personally liable for inducing a breach of contract committed by their company where that director acted “bona fide within the scope of their authority” (Said v Butt [1920] 3 KB 497).

However, in the case of Antuzis v DJ Houghton Catching Services Ltd and others [2019] EWHC 843, the High Court found that the sole director (and 100% shareholder) and the company secretary of a company were both personally liable for inducing its breaches of contract. This case stands as a warning of the risk for officers that there may be circumstances when they will not be able to hide behind the limited liability of the company.

The claimants in the Antuzis case were Lithuanian nationals who were employed at various farms to catch chickens. They were employed in an exploitative manner by gang-masters, working extremely long hours and being paid less than the statutory minimum prescribed under the Agricultural Wages Act 1948.  The claimants sued the company for breaching their contracts of employment and its officers, Darrell Houghton (director and shareholder) and Jacqueline Judge (company secretary), for inducing the company to breach their contracts of employment, claiming, amongst other things, compensation for unpaid wages and damages for personal injury.

The Court concluded that the defendants made use of one worker who was an “enforcer” to ensure that the claimants followed a “gruelling and exploitative work regime”.  The claimants were required to live in particular accommodation, charged an unlawful amount for such accommodation in view of their wages, and were often required to work on very little notice to the point where one of them felt he could not afford to leave the premises even to go to the shops.

The company, DJ Houghton Catching Services Limited, had clearly breached its contractual obligations to the claimants, but the Court had to consider if Mr Houghton and Ms Judge were personally liable for inducing those breaches of contract?  The Court confirmed that merely procuring a breach of contract, even where derived from legislation such as the Agricultural Wages Act, cannot be the touchstone for deciding if a director is liable: “If it were, then directors would, in the employment field, regularly face personal liability because many aspects of employment contracts have a statutory element”.

The Court went on to say that in considering whether directors were acting “bona fide within the scope of their authority”, the focus must be on the individual director’s conduct and intention in relation to his/her duties to the company, rather than to the claimants.  Therefore, the Court considered whether the individual defendants’ actions amounted to a breach of their duties to their company under the Companies Act 2006 (“CA”), and section 172 in particular which provides that:

“A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–

(a)  the likely consequences of any decision in the long term,

(b)  the interests of the company's employees,

(c)  the need to foster the company's business relationships with suppliers, customers and others,

(d)  the impact of the company's operations on the community and the environment,

(e)  the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)   the need to act fairly as between members of the company.”

The Court found that the actions/intentions of Mr Houghton and Ms Judge towards the claimants were in breach of their duties to the company and sought to clarify his reasoning with an example:

“There is, plainly, a world of difference between, on the one hand, a director consciously and deliberately causing a company to breach its contract with a supplier, by not paying the supplier on time because, unusually, the company has encountered cash flow difficulties, and, on the other hand, a director of a restaurant company who decides the company should supply customers of the chain with burgers made of horse meat instead of beef, on the basis that horse meat is cheaper. In the second example, the resulting scandal, when the director's actions come to light, would be, at the very least, likely to inflict severe reputational damage on the company, from which it might take years to recover, if it recovered at all.”  

The Court concluded that that Mr Houghton and Ms Judge were on the wrong side of the line and had wrecked the company’s reputation in the eyes of the community, leaving it exposed as a pariah.  The Court also found that they had realised that what they were doing caused the company to breach its obligations to the Claimants.

So it seems that claimants may be able to pursue directors personally if they can show that the director knew that his/her actions were in breach of his/her duties owed to the company under s.172 CA.

The Antuzis decision has the feel of a Court going out of its way to assist claimants who were also bringing claims under the Modern Slavery and Human Rights Acts for the particularly heinous treatment they suffered at the hands of the defendants. Although, the reasoning in the case seems to indicate that directors could act in a significantly less egregious manner and still find themselves personally liable. 

So, the advice to directors is that breaching your duties to your company could be at your personal peril. 

Further Information

If you have any concerns or require further information about directors’ duties and their potential implications, please contact a member of our directors and officers team.

 

About the Authors

Nick Ralph is a Partner in our Employment Law team. Nick is a highly experienced employment lawyer with an exceptionally strong reputation in the City of London and beyond. Nick acts for executives, partners and employers across a variety of sectors including: professional services, “C-suite”, hedge funds, legal, retail, trading, insurance, technology, private equity, IT, accountancy, regulatory and banking.

Fiona Simpson is a Partner in our Dispute Resolution team. Fiona specialises in civil fraud litigation, advising clients bringing or defending civil fraud proceedings, often with an international dimension. Fiona regularly advises on freezing orders and asset tracing. 

 

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