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Selina Watson
Selina Watson,
ASSOCIATE - SOLICITOR
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Can an individual be held personally liable for a firm's contractual losses?
17 October 2018

In the recent case of Palmer Birch (A Partnership) v (1) Michael Lloyd and (2) Christopher Lloyd [2018] EWHC, the High Court considered the application of the “corporate veil”, justification” and “no loss” defences against allegations of (1) Inducing breach of contract, (2) Unlawful interference and (3) Unlawful means conspiracy in the context of a construction contract dispute.

Background of the case

The claimant building firm specialised in property renovations and entered into a JCT contract with a limited company for the refurbishment of a property (“the Property”), in which the limited company had a leasehold interest. The defendant brothers stood behind the limited company, one as director and the other as its sole funder. The Property subject to the renovations was essentially the sole funder’s main place of residence in the UK, the freehold of which was owned by another company of which the sole funder was the beneficial owner. The limited company did not trade but was funded by this second company.

Details of the claims

To avoid paying the costs of the refurbishment carried out by Palmer Birch, the defendants colluded to bring about the liquidation of the limited company prior to the renovation works being completed. Palmer Birch sued the defendants in their personal capacities, as individuals who stood behind the company, claiming that they had (1) procured the repudiatory breach of the contract by ceasing to fund the project, (2) that this was unlawful interference and (3) that the defendants had unlawfully conspired to procure the limited company’s liquidation. 

What was the case outcome?

In a preliminary trial on liability, the court examined the claims and defences raised, ruling as follows:

  1. Inducing breach of contract

    This claim succeeded against the sole funder who, although he had no liability to fund the contract, had brought about the repudiatory breach by colluding to liquidate the limited company. The court did not accept that the claimant had suffered no loss (a defence argued on the basis that the limited company did not trade and therefore never had its own financial resources). The “justification” defence also failed on the basis that the defendant did not have a requisite “equal or superior right” to protect, such as a separate contractual right of his own.
     
  2. Unlawful interference

    This claim failed as the court found there was no requisite intention to cause any loss by unlawful means. The refusal to continue funding the limited company could be considered immoral but not unlawful.
     
  3. Unlawful means conspiracy
    This claim succeeded against both defendants due to there being evidence to support the fact that the two of them conspired to bring about the limited company’s liquidation, which was the requisite intent to injure. Both defendants made an agreement to facilitate the liquidation with the intention to avoid the contractual costs for their own personal enrichment. Though both defendants denied personal liability and sought to hide behind the limited company, the judge considered it appropriate to pierce the ‘corporate veil’ in this case.  

    The judge also made it clear that parties cannot seek the protection of a corporate veil “which had become largely shredded by a combination of his (the second defendant and sole funder’s) own actions and avoidance of his own director’s duties during the contract”. In addition, the judge clarified that the defence of justification was not available against claims of conspiracy.

What does this mean for you? 

This case demonstrates that where there has been an obvious and deliberate attempt by directors to escape their duties, particularly where they have taken advantage of a company for their own personal gain, the courts will be more willing to pierce the corporate veil and hold the directors personally liable. It may not be enough simply for payments not to have been made, but where both can be proven, tortious claims like those raised in this case are likely to succeed. Businesses on the receiving end of withheld payments and/or a repudiatory breach of contract should therefore carefully consider the possible remedies available to them (by way of these types of claims), and likewise, parties committing torts of this kind should be aware that it may not always be possible to hide behind a limited liability status. 

If you have any questions regarding this case then please get in touch with Selina Watson at [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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