Directors Held Liable For Inducing Breach Of Contract And Unlawful Means Conspiracy Where They Placed Company Into Liquidation To Avoid Outstanding Debt

The Technology and Construction Court has upheld economic tort claims against two directors of a limited liability company who placed the company into liquidation in order to avoid the company having to pay its outstanding debts to a building contractor. The building contractor succeeded in establishing that one of the directors had induced the company to repudiate the building contract, and also that they had conspired to injure the building contractor using unlawful means: Palmer Birch (a partnership) v Lloyd [2018] EWHC 2316 (TCC).

The case highlights the risks for individuals who operate through the medium of an undercapitalised limited liability company, in particular that they may not be able to rely on the protection of the company's distinct legal personality in circumstances where their conduct gives rise to claims under one of the economic torts.

Economic tort claims are not straightforward to establish, in light of the high evidential hurdles that must be met. However, this decision illustrates the potential for bringing an economic tort claim in a relatively novel context, in particular where there is an attempt to abuse the doctrine of separate corporate personality. It seems significant in this case that funds which could have been made available to the company to meet its obligations to the claimant were, instead, diverted to a separate company which was used to complete the works through a different contractor.

Gary Milner-Moore and Catherine Emanuel consider the decision further below.

Background

In 2012 the claimant, a building contractor, entered into a contract with Hillerson House Limited ("HHL") to carry out renovation works on a substantial property in Devon. The two defendants, D1 and D2, who were brothers, were the decision-makers behind HHL (D1 was an appointed director and sole shareholder whereas D2 was a de facto or shadow director). D2 had funded loans to HHL to fund the works, and the property was to be used as D2's English home.

In December 2014, it became clear that D2 was experiencing cash flow issues. HHL failed to pay the claimant sums due under its December 2014 invoice and, by the end of January 2015, HHL owed the Claimant around £444,000.

In March 2015, D2 secured funding from another of his investments and would therefore have been able to pay the sums outstanding. However D2 did not use those funds to pay the claimant. He instead diverted them to a different company owned by D2, which was ultimately...