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Nick Goodfellow on using the economic torts to claim against the individuals behind insolvent companies

Palmer Birch (a partnership) v (1) Michael Lloyd (2) Christopher Lloyd [2018] EWHC 2316 (TCC)

A question that frequently arises in commercial cases is this: what claims are available against the individuals involved in the management of a company that has entered into insolvent liquidation?

Put another way, can we pierce the corporate veil to bring a direct claim against such individuals?

The recent case of Palmer Birch v Lloyd provides an illustration of a successful attempt to do this in the construction industry, using the economic torts. HHJ Russen QC (“the Judge”) analyses in detail the relevant legal principles regarding the three economic torts relied upon by the claimant in that case:

(1)    Inducing breach of contract;
(2)    Unlawful interference;
(3)    Unlawful means conspiracy.  

The case is factually complex, but the essence of the dispute can be stated (quite) briefly.

The claim concerned the development of a substantial 18,000 sq ft property known as Hillersdon House (“the Property”).

The Property was acquired by a Cypriot company, Seizar Holdings Limited, (“SHL”), and leased to Hillersdon House Limited (“HHL”).

HHL engaged Palmer Birch (a partnership) (“PB”) under a contract to repair, alter and extend the Property for a sum of £5,115,000 (“the Contract”).

The Defendants were two brothers, Michael and Christopher Lloyd.  Christopher was the sole director and shareholder of HHL, but Michael “called the shots”.  The expenditure on the Project was substantially for Michael’s benefit. The Property was to be Michael’s English home.  Michael was the beneficial owner of SHL.  The project was funded by Michael, and by borrowing from Michael’s private bank in London (“EFG”).

In practice, Michael was treated as the client under the Contract, alongside HHL.  The Judge found that Michael acted as a de facto director of HHL.

In December 2014 and January 2015, HHL failed to pay two invoices from PB in breach of contract.

In March 2015, EFG wrote to Michael indicating that it was anticipated that funds would become available from an investment Michael had made in a project known as Buffalo Mall, that had been earmarked for funding completion of the project (“the Buffalo Mall Monies”). 

In April 2015, solicitors acting for HHL gave notice terminating the Contract with immediate effect.  The letter stated that:

(1)    no third-party funder was prepared to extend any existing loan facility or provide any new funding facility to HHL; 
(2)    HHL had no means of repaying its very substantial debt obligations;
(3)    the inevitable consequence was that the company would be placed in liquidation.

In early June 2015, Michael received the proceeds of Buffalo Mall Monies, which exceeded £1.4 million.

In late June 2015, HHL was placed into creditors voluntary liquidation.  A successor company (“CSEL”) was established, with Michael now as sole director and shareholder, to replace HHL in completing the project.

Against this backdrop, the Judge made factual findings that:

(1)    by early January 2015, Michael had fully in mind the negotiating leverage available to HHL as a limited liability company, with no cash resources of its own;
(2)    by the end of January 2015, Christopher and Michael had decided that the preferred route of getting rid of HHL’s financial claims was to liquidate it, and colluded to act accordingly;
(3)    Christopher’s collusion was such that his actions extended beyond his constitutional role as director of HHL;
(4)    HHL’s purported termination of the Contract in April 2015, was a repudiatory breach of contract.

The Judge upheld the claim against Michael for inducing breach of contract, on the basis that his actions had induced the repudiation of the Contract in April 2015.  The Judge also found that Christopher and Michael conspired to use these unlawful means (i.e. the repudiatory breach) to cause loss to PB.  The claim based on the unlawful interference tort was rejected.

There are three aspects of the Judge’s decision that are of particular interest. 

Aspect (1): Michael’s actions by making funds available to CSEL instead of HHL to complete the project amounted to inducement of a breach of contract 

The Judge found that Michael ‘crossed the line’ from action which merely amounted to prevention and constituted inducement.  The Judge considered that his actions caused HHL to repudiate by making funds available to CSEL to complete the project that not only could, but should, have been made available to HHL.  The Judge considered that Michael’s actions could be categorised as a “diversion” of funds away from HHL (see [359]-[361]).

This finding is of interest because it raises an interesting question as to where one draws the line between actions of prevention and inducement.  For example, see the pre-OBG decision of Gdanska SA v Latvian Shipping Co and others (No 3) [2002] EWCA Civ 889, which supports the proposition that where a parent company does not place a subsidiary in funds so that the subsidiary is unable to meet its contractual obligations, this does not amount to inducement for the purpose of the tort.

When analysing the law, the Judge relied on the case of Marex Financial limited v Sevilleja [2017] EWHC 918 (Comm) (overturned on appeal on other grounds) in support of the proposition that dissipation of a company’s funds, brought about by a defendant and resulting in a breach, may be sufficient to trigger liability under the inducement tort.

Of course, the facts of the case did not involve Michael actually dissipating funds from HHL in the strict sense, but rather changing his well-established pattern of previous conduct (i.e. by funding the project himself through HHL) and using a different corporate funding vehicle.  Nonetheless, it is apparent that the Judge viewed this as sufficient to amount to an act inducement.

Precisely where the ‘inducement line’ is crossed in the case of third party funders, is not easy to define.  Taking a step back, it seems likely the broad ‘merits’ of this case are likely to have been a factor in the ultimate decision here.

Aspect (2): No defence of justification to the unlawful means conspiracy tort

The Defendants argued that the defence of justification (available as a defence to the inducement tort) was also available as a defence to an unlawful means conspiracy.  Reliance was placed on the dictum in JSC BTA Bank v Khrapunov [2018] 2 WLR 1125 that the ‘real test’ as to what constituted unlawful means is “whether there is a just cause or excuse for combining to use unlawful means” (paragraph 11).

The Judge rejected this argument, which upon a proper reading of paragraphs 10 and 11 of Khrapunov, was hardly surprising.  The Judge interpreted the Supreme Court decision as meaning that any ‘justification’ arguments will be wrapped up with the issue of what amounts to ‘unlawful means’ for the purpose of the tort, but that there is no separate defence of justification [189].  The Judge interpreted the Supreme Court as saying that “there may be categories of unlawfulness which a combiner may be excused from agreeing to perpetrate either because of the classification of the unlawful act…or because it is too incidental to the claimant’s position to be actionable…”.

Aspect (3): Puppet company director personally liable for conspiracy

The conspiracy claim was not put as a conspiracy between Michael and HHL, but rather one between Michael and his brother Christopher personally.  The Defendants argued that Christopher could not be liable because he was merely acting in his capacity as a director.  See MCA Records Inc v Charly Records Ltd [2003] 1 BCLC 93, in which Chadwick LJ observed a director who does no more than carry out his constitutional role within the company will not ordinarily be liable with the company in conspiracy (cited at [209]).

This argument was rejected as applying on the facts because of Christopher’s actions in permitting Michael to act as a de facto director, which he would not have done had he been acting “constitutionally”.

On this basis, where a director is merely imposed as a ‘puppet’ for a company to be run by someone else, if that company uses unlawful means to cause loss to others, the director is potentially exposed to liability in his personal capacity.

Nick Goodfellow (2009 call) specialises in commercial litigation and has extensive experience of claims against company directors involving allegations of deceit, breaches of fiduciary duty and the economic torts.

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