Understanding personal liability in a limited liability company
Directors often believe that they are personally protected from any claims that might be made against their company thinking “That’s what limited liability means”. In most cases, that’s true, but there are exceptions.
I recently obtained judgment against the directors of a company which had unlawfully used my client’s intellectual property in its own business. The directors effectively claimed, “It wasn’t me; it was the company”. The judge concluded that the company was knowingly used as an instrument of fraud. It was an important point, because these gentlemen put their company into liquidation shortly before the case was heard. Judgment against the company therefore would have been worthless.
The recent case of ‘Antuzis v D J Houghton Catching Services Limited and others’ is another example where directors were found personally liable. The words ‘and others’ are important because the ‘others’ were company directors. Mr Antuzis was an employee of D J Houghton’s. He alleged that the company was in breach of contract by treating him in numerous exploitative ways that give ‘gangmasters’ a bad name. Mr Antuzis also claimed directly against the directors that they had ‘induced’ the company to commit these breaches. It was important to get judgment against them in person.
While the case concerned employment contracts, it can be applied to a company breaching its contract with any third party, including customers and suppliers. Even well-run companies do occasionally breach contracts. So, should all directors take cover? Conversely, if you have suffered a breach of contract by a worthless limited company, should you take aim at the directors?
Mr Justice Lane referred to the Companies Act Section 172. In brief this says that a director must act in good faith in a way most likely to promote the success of the company, having regard to the:
- Likely long term consequences for the company
- Interests of company employees
- Impact on the community and environment
- Desirability of the company maintaining a high reputation
A general principal is that directors of a company are liable for offences committed by the company at their direction. However the position is more complex in cases of ‘inducing a breach of contract’. If a director acting bona fide within the scope of his authority causes a company to breach its contract with a third party he does not normally become liable to that third party.
There was nothing in the company’s articles of association that prevented the directors from acting as they did. Articles are deliberately drafted as widely as possible, so “scope of authority” is unlikely to be an issue. The key question is whether the directors were acting bona fide.
Slightly surprisingly Lane J concluded that whether a director is acting ‘bona fide’ should be judged in relation to his duty to the company, rather than any duty to a third party. A cynic might argue that exploiting staff helps improve profitability, so the directors were acting in a way most likely to promote the success of the company. Lane J is no cynic.
He accepted that directors are not always liable for breaches by their company even where they have made the relevant decision; otherwise they would regularly face personal liability for, say, their employment decisions.
There is a world of difference between;
- A director who deliberately chooses to breach a contract with a supplier by delaying payment, because of cash flow problems and
- The director of a restaurant company who decides that the company should breach contracts with its customer by selling “beef burgers” made of horsemeat.
The latter would result in a scandal. It will have detrimental long term consequences for the company, its employees, the community and the company’s reputation. The fact that supplying horsemeat is likely to break food and trading standards legislation is relevant, because it shows that society disapproves of such behaviour.
So far as I am aware no previous decision on director’s liability has turned on the question of whether there will be a “scandal”. I wonder whether a judge and a tabloid editor would always agree over what is scandalous…
Lane J concluded that DJ Houghton’s directors had blatantly caused the company to breach not only contracts of employment, but also regulations designed to protect employees. When the malpractices came to light the company stood ‘exposed as a pariah’. The directors were therefore personally liable for inducing breach of contract.
What conclusion can a director draw? Lane J said that whether a breach has these effects will depend on the circumstances of any particular case. This is true, but not very helpful. My advice is this;
Ask yourself, ‘Will there be a scandal if the press finds out?’ If the answer is ‘yes’ then don’t let your company do it. That’s no doubt good business and moral sense anyway. The new sting is that if you don’t follow this advice then you might pay the price in court.
Stephen Allen, partner