What do you do if a company, with which you have a contract, goes into liquidation, owing you, potentially, hundreds of thousands of pounds – with little real prospect of getting anything more than a small dividend, pennies in the pound, at best?
The liquidator might, or might not, bring a claim against the directors under the Insolvency Act, perhaps for breach of duty, or wrongful or fraudulent trading. But even if the liquidator does so, the proceeds of any recovery are likely to be for the benefit of the creditors as a whole.
There have been a number of cases where a claim has been pursued by a claimant against one or more directors, for its own benefit, on common law principles of tort law: entirely outside of the Insolvency Act, with no involvement by a liquidator. These cases demonstrate the perils of contracting with an undercapitalised limited liability company, with no guarantees from the individuals associated with it: and the steps that might be taken to seek redress against those individuals, in tort (the law of “civil wrongs”), instead of contract.
While one inevitably has to consider the legal risks in pursuing any such claim (are the elements of the tort made out, on the facts, to the satisfaction of the judge?), as well as the commercial risks (are the defendants good for the money?), we anticipate that there will be a considerable growth in tort claims against directors of insolvent companies, those involved in funding such companies, and third parties that may have prevented a counterparty from completing its contractual obligations.
Tort can include claims, for example, in deceit and claims alleging that the individual in question was a “joint tortfeasor”, a joint wrongdoer. We discussed those sort of claims in our Autumn 2019 newsletter, by reference to cases such as Contex Drouzhba v Wiseman [2006] EWHC 2708 (QB): a successful claim in deceit against a former director, who was found to be a joint tortfeasor. A similar result, on the basis joint tortfeasor claim, was achieved in Catanzano v Studio London Ltd in 2012: where a senior manager and a general manager of the company were liable, as joint tortfeasors, in a claim for unfair dismissal and sex discrimination.
Other torts might include inducing a breach of contract, unlawful interference and an unlawful means conspiracy. A claim, based on these causes of action, was pursued to trial more recently in Palmer Birch v Michael Lloyd [2018] EWHC 2316 (TCC). The judge, HHJ Russen QC, did not discuss the decision in Contex Drouzhba or Catanzano. He did, however, hold that the individuals were liable to the claimant on various grounds in tort (inducing a breach of contract and unlawful means conspiracy): a remedy, notwithstanding the lack of a contract or guarantee with either of those individuals. As he said, “Whether or not … the individuals concerned … incurred direct tortious liability … is the fundamental point running through the issues I have to decide”.
Proving such a claim is not without difficulties. We will discuss the successful case of Palmer in a little more detail below. By contrast, in Flexidig Limited v A Coupland [2019] EWHC 2578 (TCC), Mr. Simon Lofthouse QC (sitting as a Deputy Judge) dismissed Flexidig’s claim for an injunction to restrain the defendant (Coupland) from carrying out works, based on an argument that Coupland had procured a breach of contract between Flexidig (the sub-contractor) and M&M (the contractor), when M&M engaged Coupland to carry out certain works. Flexidig claimed it had a contractual right to perform and be paid for those works. Mr Lofthouse QC held, on the facts, that Coupland was not responsible for determining which party was in the right, and that it had not persuaded M&M into any alleged breach. A good try, albeit ultimately unsuccessful on the facts.
While proving a claim is not without its difficulties, it is interesting to consider a successful case:
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In Palmer, the claimant was a building firm.It entered into a JCT standard building construction contract with a limited company, which was the employer under the contract.The company owed the claimant a substantial sum of money.
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The company went into liquidation, owing hundreds of thousands of pounds to the claimant: evidently with no real prospect of repayment.Total debts of the company exceeded £11 million, £6 million of which was a debt to one of the brothers against whom the claimant brought proceedings.
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The liquidator did not bring any proceedings against the director of the company under the Insolvency Act.The claimant therefore issued its own proceedings and pursued claims against two brothers, both called Lloyd; one of whom was a director and shareholder, and the other who was the sole funder of the company.This was a claim by the claimant, for its own benefit, on common law principles of tort law – against people with whom it had no guarantee, and no other contract.
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The claimant succeeded in (some of) its claims.HHJ Russen QC, described the two defendants, in admittedly vague terms, as having “stood behind” the company: one as a shareholder and director, and the other as direct and indirect funder.The property which was the subject of the contract, Hilersdon House, was to be (and, since late 2014, has been) the English home of the funding brother.
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HHJ Russen QC held, on the evidence before him, that the brothers had decided that the preferred route for getting rid of the existing and further contemplated financial claims by the claimant, under the JCT contract with the company, was to put the company into liquidation – and that they colluded to act accordingly. They effectively colluded in bringing about the company's liquidation so as to avoid having to pay the claimant builders for the work done on Hillersdon House.
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The court examined the torts of inducing breach of contract, unlawful interference and unlawful means conspiracy, and considered various defences, including justification and the concept of directors as “combiners”.
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The claim based on the tort of inducing a breach of contract succeeded against the brother who was the funder.HHJ Russen QC outlined the different evidential requirements between this and the other two torts (unlawful interference and unlawful means conspiracy).The judge held that the funding brother had crossed the line to inducement when he procured the company’s repudiatory breach of contract by deciding to bring about its liquidation: a company that was his chosen development vehicle, in circumstances where he had regarded himself as the effective client under the contract and had “called the shots” to such an extent that his brother’s voice was almost ventriloquial. The defences to this claim were rejected, on the evidence.
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The unlawful means conspiracy allegation succeeded against both defendants because of their collusion to bring about the repudiatory breach of contract.HHJ Russen QC set out the necessary ingredients of any claim based upon an unlawful means conspiracy that had to be proved, summarised as being:
a. An agreement, or “combination”, between a given defendant and one or more others;
b. An intention to injure the claimant;
c. Unlawful acts carried out pursuant to the combination or agreement as a means of injuring the claimant;
d. Loss to the claimant suffered as a consequence of those acts.
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In relation to the first point, HHJ Russen QC referred to cases where was direct evidence of an agreement from which the conspiracy could be established, but pointed out that, in most cases, the position of the claimant will be such that the court is asked to infer the existence of the agreement, or combination, from the acts of the alleged conspirators. HHJ Russen QC made it clear that unlawful means conspiracy is a serious allegation, which requires cogent evidence.In this case, however, he was satisfied that the evidence supported an inference that brothers had reached agreement to facilitate the company’s liquidation, so that it might escape the JCT contract and avoid the claimant’s claims. That was the requisite intention to injure.The repudiation of the JCT contract was the relevant “unlawful means”. The brother that was a director had been prepared to play his part in implementing the funding brother’s intention that the company be left to flounder without funding: and could not, in these circumstances, be allowed to shelter behind the company to avoid personal liability for his part in the conspiracy.The defences to this claim were also rejected, on the evidence.
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The unlawful interference claim failed. HHJ Russen QC set out the necessary elements of the claim. He identified the key components of the tort as follows:
a. Unlawful acts used against, and independently actionable by, a third party (though the absence of loss suffered by the third party should not be taken to preclude actionability);
b. Interference with the actions of the third party in which the claimant has an economic interest;
c. Intention to cause loss to the claimant by the use of unlawful means; and
d. Loss in fact caused to the claimant.
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A key element of the “unlawful interference” claim is, therefore, the need to prove an intention to cause loss by the use of “unlawful means”.There was, however, nothing unlawful, in and of itself, in the funding brother ceasing to fund the company.
Notwithstanding the potential difficulties – which come with any litigation - we anticipate that there will be a considerable growth in tort claims against directors of insolvent companies, those involved in funding such companies, and third parties that may have prevented a counterparty from completing its contractual obligations.