The conventional view of the liability of a limited company is that any corporate losses will not exceed the amount invested in it, i.e. as represented but limited to the value of its shares. In other words, shareholders’ personal assets are not at risk if the company fails. The company is a separate legal entity so it carries its own losses.
However, company directors (who are often also shareholders) owe a duty of care to the company, its shareholders, employees and creditors. As a result, a director can become liable for his or her own PAYE and NI payments, for income tax due on any cash taken from the company, any personal guarantees and/or indemnities provided to company creditors, and any liabilities resulting from wrongful trading (trading when the company was insolvent and had no prospect of avoiding liquidation), misfeasance (e.g. acquiring a company asset for less than it was worth) and fraudulent trading (e.g. fraudulently obtaining credit in the company’s name).
In last November’s newsletter I reported a case in which company directors were held to be liable for a £2m award in a whistleblowing case. This is because in such cases, as with discrimination claims, individuals can be named as co-respondents along with the limited company.
We now have another example of how directors can be held liable in respect of the actions of a company in the High Court case of Antuzis & others v DJ Houghton Catching Services & others.
The claimants were Lithuanian nationals who claimed that they were employed by the first defendant (DJ Houghton Catching Services Limited) in an exploitative manner, commonly working very long hours and being paid less than the legal minimum (under the Agricultural Wages Act and related legislation). Their job was to catch chickens at various farms, which were then transported for slaughter and human consumption.
In a synopsis of the evidence it was recorded that, for example, one of the claimants, Tadas Balciauskas, answered an ad in a local newspaper in Lithuania to work in a farm in the United Kingdom. It did not say that the job involved catching chickens and there was no mention of an employment fee. He described the accommodation as “really horrible”. He never signed a contract of employment and there was no training or protective clothing provided.
The working week started at midday or 1.00 p.m. on a Sunday and usually ended on Friday, around 8.00 p.m. to midnight. The work could involve visiting three or four farms in one go and being away for two nights. Sometimes the gap between shifts could be one or two hours and occasionally less than an hour. While away they had to sleep in the work bus and occasionally with the chickens. If they complained that they were exhausted they were threatened with not being paid and losing their jobs.
He was not paid for his first week’s work, being told that this was normal. His first payslip showed that £40 was deducted for rent and £50 for his boss, plus a further unspecified £50. On another occasion he was charged £350 as an employment fee because he had returned to Lithuania to visit his sick mother and on his return was deemed to have been re-employed. When his mother died he was not allowed time to attend her funeral. The details are set out at length in the judgment (see the link above) but, suffice to say, the working conditions were truly dreadful.
It’s a very long judgment and an appalling case, but the most interesting part, from a legal perspective, concerns the question of personal liability of the company’s directors. In his judgment, The Honourable Mr Justice Lane began his analysis of the relevant law with a case dating back to 1921, Rainham Chemical Works v Belvedere Fish Guano Company Ltd in which Lord Buckmaster held:
“If the company was really trading independently on its own account, the fact that it was directed by Messrs Feldman and Partridge would not render them responsible for its tortious acts unless, indeed, they were acts expressly directed by them. If … those in control expressly directed that a wrongful thing can be done, the individuals as well as the company are responsible for the consequences.Lord Buckmaster  AC 465
Having considered subsequent case law, Lane J referred to section 172 of the Companies Act which:
imposes important duties on directors to act in good faith so as to promote the success of the company and, in so doing, to have regard to matters such as “the likely consequences of any decision in the long term: the interests of the company’s employees; the impact of the company’s operations on the community; and the desirability of the company maintaining a reputation for high standards of business conduct”. Section 174 of the same Act imposes a duty on the directive to exercise reasonable care, skill and diligence.Paragraphs 118-122
The nature of the breach of contract is directly relevant to the determination of whether, in a particular case, a director has complied with section 172, as regards his or her duty to the company and the ultimate question whether inducing the breach is actionable against the director.
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.
In this example, the fact that supplying horse meat is likely to violate food and trading standards legislation is plainly relevant because it is society’s disapproval of acting in this manner that gives rise to the statutory duty and the breach of that duty is therefore indicative of societal disapproval of what the director has caused the company to do and the resulting reputational damage to the company.
Accordingly, as a general matter, the fact that the breach of contract has such a statutory element may point to there being a failure on the part of the director to comply with his or her duties to the company and, by extension, to the director’s liability to a third party for inducing the breach of contract. Whether such a breach has these effects will, however, depend on the circumstances of the particular case.
He found in this case that, in light of the evidence, the directors were not acting in good faith towards their company. Neither honestly believed that they were paying chicken catchers the minimum wage, that they were paying required overtime and holiday pay and that they were entitled to withhold payments such as those described by Mr Balciauskas. What they did was all about them maximising the profits of the company for their own benefit. Above all they were not acting bona fide as regards the company. They “actually realised” (ref. Lord Hoffman in OBG & another v Allan & others  UKHL 21) that what they were doing involved causing the company to breach its contractual obligations to the employees. “What they did was the means to an end.” As a result Lane J had no doubt in concluding that the directors were jointly and severally liable to the employees for inducing the breaches of contract of the company.
I realise that this is a legally technical decision but its consequences are potentially far reaching. Mr Justice Lane was at pains to point out there is a world of difference between a company not making payments because of cashflow difficulties, as opposed to a deliberate statutory breach (see the quote above). Importantly, many employment rights, such as a statement of particulars of employment, unfair dismissal, discrimination, working hours and holidays, are statutory rights and were directly considered in this case. I can see that this decision could be relied upon widely as providing a basis for employment claims to be brought against company directors as well as the direct employer, the company.