Directors’ Duties and Personal Liability to Third Parties
Most directors are aware of their general duties under the Companies Act 2006 as contained in Chapter 2 of Part 10. In brief they are:
- To act within powers.
- To promote the success of the company.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare an interest in a proposed transaction or arrangement
In addition most directors have some knowledge of the many criminal offences ands fines that they may be subject to under the Companies Act 2006.
However, it is a common misconception amongst a significant number of company directors that they can have no personal liability to third parties arising from their role as a director. Historically, this has been known by lawyers as ‘hiding behind the corporate veil’.
The truth is this is not always the case as has been shown by a recent decision.
Palmer Birch v Michael and Christopher Lloyd [2018] EWHC 2316 (TCC)
The defendants, Christopher and Michael Lloyd, were the decision makers behind a Limited Company (LC) that employed Palmer Birch to carry out refurbishment and extension works to a property.
Christopher Lloyd was the sole shareholder and director of the LC. His brother Michael was the main controller and decision maker of the LC, and so he was a shadow director of the company. Funding became a problem for the LC during the project and some of the Palmer Birch invoices were unpaid. The funding issues were resolved by the sale of other properties by Michael. However, instead of using the monies to fund the LLC, the LLC was put in liquidation with the intention that the new funds would be put into a new company and a new contractor would complete the works.
However, HH Judge Russen QC found that Michael Lloyd was liable for inducing the LC’s breach of contract (by withholding the funds and liquidating the LC and then continuing the works via the new company). The Judge also found that both Michael and Christopher were liable for an unlawful means conspiracy in plotting to frustrate any claims by Palmer Birch and enjoying the fruits of their unpaid labour.
However, in Spartafield Ltd v Penten Group Ltd and another [2017] EWHC 1121 (TCC) Alexander Nissen QC, sitting as a deputy High Court judge, refused to make the sole director of a defendant company personally liable for costs. The Claimant alleged that the director had effectively pursued some litigation personally (for his own benefit) in the guise of a limited company (which was insolvent) and had also personally funded it to a degree.
The Judge decided that although the director had provided some funds, he was in no sense the real defendant to the proceedings, nor could it sensibly be said that he was funding them solely or substantially for his own benefit.
Accordingly the director was not personally liable for costs.
The moral is, however, that directors should take advice as to the risk of personal liability where there is any room for doubt.
This blog was written by: Michael Stewart
DISCLAIMER: Please note that this post sets out the general position under the general law. It should not be acted upon in any specific circumstances without taking specific legal advice as to those circumstances. Also, it should not be relied upon, acted upon or treated as a substitute for specific advice relevant to particular circumstances. If you do require specific advice please contact us for assistance.
