Summary of case, Palmer Birch v Lloyd [2018]

Our commercial litigation lawyers outline an important case recently decided which has implications across various aspects of commercial disputes.

Palmer Birch v Lloyd [2018] EWHC 2316 (TCC) outlines that directors who use a limited company's separate corporate personality as a means of evading a debt unjustly, may still be held personally liable under economic tort.

The case also outlines the danger of acting as a shadow director, suggesting that liability can attach if you are effectively running a company, even if not a named director.

The case outlines the dangers of entering high value contracts with a limited company, without checking its financial stability and not taking security from directors, in the form of personal guarantees or indemnities.

If you are affected by any of the issues, contact Saunders Law on 0203 553 2580 to see how we can help.

Palmer Birch v Lloyd [2018] EWHC 2316 (TCC)

The recent case of Palmer Birch v Lloyd [2018] EWHC 2316 (TCC), allowed a debtor construction partnership to recover monies from a director and shadow director of a limited company, even though the directors were not personally party to the contract, and even though one person was not formally a director of the company. The directors had to pay the debtors even though they had not provided any personal guarantees, and even though the company had already previously been wound up.

Circumstances

A construction partnership, Palmer Birch, contracted with a limited company to undertake extensive refurbishment works to a manor home.

The limited company was run by two brothers, only one of whom was a named director, and another was acting as shadow director. The court found the shadow director was in fact the main decision maker.

The shadow director had historically been providing monies to the limited company to pay the contractors' fees, but he claimed to have run out of money, and stopped providing money to the limited company. As a result the limited company could not pay the construction partnership for a substantial amount of work that it already done, and a substantial debt became due.

The shadow director sought to terminate the agreement between the limited company and the contractor on grounds that the limited company was insolvent and the limited company was later placed into liquidation.

It transpired that the shadow director did later receive monies which could have been used to pay the contractors and complete the refurbishment works to the house, but money was instead provided to the shadow director's successor company, which intended to step in and complete works to the house.

Although the original limited company had already been wound up, the debtor contractors brought a claim against the director and shadow director, alleging various economic torts against them, including that the directors had induced their own limited company to breach the contract, and also alleged unlawful means conspiracy and unlawful interference in economic tort. I.e. that the brothers had purposefully intended to cause them loss.

The court's decision

A key aspect of the case revolved around whether the shadow director's cutting off of funding for the limited company was problematic in the circumstances.

The court found that there was no requirement at all for the shadow director to fund the limited company personally if he didn't want to; the company was a separate legal entity, and the shadow director had not guaranteed or indemnified performance of the company.

The court indicated that if the shadow director had simply not provided money to the company and cut it off, that would have been ok.

What was problematic was that the fact that monies later acquired that could have been used to pay the construction company were diverted to the shadow director's successor company, which intended to take over the work, which had the effect that the limited company would take the benefit of the contractor's work, without having paid for it, and was found to have been engineered deliberately.

It was found that the shadow director's decision to bring the limited company into liquidation, did induce the company to commit a repudiatory breach of the contract as there was no express right to terminate upon liquidation, and further liquidating the company was not in the company's own commercial interests.

The directors argued their conduct was justified on financial grounds, and that the contractor was trying unfairly to get around the limited company's separate legal status by "piercing the corporate veil", but this was rejected by the court, and the court found that the shadow director's liquidation of the limited company, whilst diverting monies, constituted an abuse of the limited company's separate corporate personality. The shadow director alone was held to have induced a breach of contract, not the named director.

However both the shadow director and director were found to have intentionally to have caused loss to the contractors, and unlawful means conspiracy was upheld against both of them. The claim for unlawful interference failed, as the lack of funding provided by the shadow director was not in of itself unlawful.

In summary, the way in which the limited company was wound up to avoid a debt was held to be inequitable, which rendered both the director and shadow director personally liable.

On a practical note, the case highlights the importance of taking personal guarantees or indemnities from directors of limited companies, in case the company becomes insolvent, and the importance of establishing who is really running the company, the named director, or someone else.

If you are affected by any of the issues above, please call Saunders Law on 02035 532 580 to see how we can help.