Directors personally liable for breaching employment contracts

The creation of the limited liability company in the 19^th century has been described by some as the most important invention of the industrial age. But in recent times the protection that limited liability gives to directors has been eroded as the Courts discover new exceptions and Parliament is lobbied to change the law to make directors personally liable.

Perhaps the greatest current threat is HMRC’s lobbying of Parliament to be given powers to serve personal liability notices (PLNs)  on directors where a company does not pay PAYE on time. It already has power to serve PLNs for unpaid national insurance contributions where the failure to pay is considered to be the result of a director’s negligence. In these situations, HMRC acts as the policeman, the Crown Prosecutor, and the Judge. It investigates, decides whether to issue a PLN, and then issues it to the director. Despite concerns expressed by the House of Lords that this process is offensive to human rights law, HMRC says it is compliant because the director always has the right to appeal to the Tax Tribunal.

Whilst Parliament ponders whether to give HMRC these extended powers, the Court has stepped in to say that there are circumstances where directors can be personally liable where the company breaches employment contracts. Whilst the decision is hardly surprising on the facts of the case,  the underlying principles could be of wider application.

The case is called Antuzis and others v DJ Houghton Catching Services Ltd. It involved the employment of migrant workers from Lithuania as chicken catchers. The Court noted that the workers rights had been systematically abused in a variety of ways including unlawful deductions from wages, no holiday pay or breaks from work, no pay for overtime, not being paid on time or at all, and lack of protective clothing.  In short, modern slavery.

As the employer company did not have the means to pay damages to the workers, they sued not only the company but also the directors and won.

The directors tried to defend the claims on the basis of the Said v Butt principle that a director will not be personally liable for inducing a breach of contract by the company if he is "acting bona fide within the scope of his authority".  In considering what acting bona fide means, the Judge concluded that the focus is on the director’s  conduct and intention in relation to his duties toward the company not towards the third party. The Judge considered the fiduciary duty owed by a director under Section 172 Act 2006 to act in good faith so as to promote the success of the company with regard to:

• the likely consequences of any decisions in the long term;
• the interests of the company's employees;
• the impact of the company's operations on the community; and
• the desirability of the company maintaining a reputation for high standards of business conduct.

The Judge also considered the duty of skill & care under section 174.

The Judge concluded that whilst the directors were acting within the scope of their authority, they were in breach of their duties under Sections 172 and 174 because what happened was manifestly not in the interests of the company’s employees.  As a result the directors were liable. The amount to be paid is to be decided at a  later hearing.

Here is where things get interesting. Ordinarily it would be for the company to make claims against its directors for any breach of duty that has caused loss to the company. Here the Judge felt able to make the directors liable to the workers on the basis that they were jointly liable with the company. The approach taken by the Judge was similar to that used on an unlawful means conspiracy claim.

This decision is going to pique an interest amongst Insolvency Practitioners, because it opens up another possible avenue for Liquidators to  bring claims against directors for breach of duty.