No place to hide? Contractor able to recover from individuals behind insolvent company

In Palmer Birch v Lloyd & Anor, a construction company successfully brought a claim for unpaid fees against two individuals who stood behind the limited liability company that the construction company had contracted with. Palmer Birch had pursued the individuals in tort: the essence of its claim was that the individuals had conspired to bring about the company's liquidation to avoid paying its outstanding debts to Palmer Birch.

The case explores the fine line between prevention of performance and inducement of breach of contract, and highlights the need to exercise caution when dealing with limited liability companies, particularly where such a company is apparently reliant upon third party funding or is clearly undercapitalised. The case makes clear that directors who act in deliberate disregard of their duties may be personally liable in tort and cannot hide behind the corporate veil. 

Background

Palmer Birch is a construction business specialising in the refurbishment of houses. In January 2012, Palmer Birch entered into a contract with Hillersdon House Ltd (HHL) to undertake repair, alteration and extension works to a 14 bedroom manor house and surrounding gardens known as Hillersdon House.

Christopher Lloyd was the sole shareholder and director of HHL. Michael Lloyd was a direct and indirect funder of the building works. Michael was non-UK domiciled, and by his own evidence had deliberately not become a director of HHL in order to distance himself from its affairs for tax reasons. Hillersdon House was owned by a separate company in respect of which Michael Lloyd was the beneficial owner. 

Palmer Birch gave evidence that it regarded Michael Lloyd as its client despite the contract being with HHL, and the Judge considered that Michael Lloyd was effectively a shadow or de facto director because of the control he conducted over HHL's affairs. Christopher Lloyd's voice as a director, in contrast, was "almost ventriloquial". 

As the works progressed, Michael Lloyd advanced money to HHL to pay the invoices submitted by Palmer Birch. However, two invoices issued in December 2014 and January 2015 were not paid. At this time Michael Lloyd was experiencing funding issues. It was not disputed that the non-payment constituted a breach of the contract. 

Michael Lloyd subsequently received monies through the sale of other properties. These monies would have been enough to pay the outstanding Palmer Birch invoices had they been advanced to HHL for that purpose. However, Michael Lloyd did not advance the money to HHL and instead set it aside for use by a separate company in respect of which Michael Lloyd was the shareholder and director. 

In early 2015, Michael and Christopher Lloyd determined that they would place HHL into voluntary liquidation. HHL gave notice purporting to terminate the contract in April 2015 on the basis that it was soon to be in liquidation. The Judge considered this notice to constitute a repudiatory breach of the contract. 

HHL was put into voluntary liquidation in June 2015 before the works were complete, and soon afterwards a separate company controlled by Michael Lloyd took over the works at Hillersdon House.

Palmer Birch brought proceedings claiming that it was underpaid for work carried out under the contract. Palmer Birch alleged that Michael Lloyd had induced HHL's repudiatory breach of contract, and that Michael and Christopher Lloyd together had conspired to bring about HHL's liquidation. 

The decision

Palmer Birch brought claims on the basis of three economic torts:

1. inducement to breach contract
2. unlawful interference; and
3. unlawful means conspiracy

Inducement to breach contract

Palmer Birch alleged that Michael Lloyd had induced HHL's repudiatory breach of contract by:

1. failing to advance funds to HHL; and
2. diverting funds from HHL and procuring its liquidation.

In respect of the failure to advance funds, the Judge considered that the absence of any obligation on Michael Lloyd to pay any funds to HHL meant that there was no relevant inducement. There is a fine line between acts of inducement and mere acts of prevention of performance. Michael Lloyd was not contractually obliged to advance funds to HHL, and so incurred no tortious liability in respect of HHL's failure to fund the contract. Michael Lloyd was under no obligation to "feed the coffers of a limited liability company" to enable it to meet its contractual obligations.

However, the Judge considered that the decision to place HHL into liquidation and to continue the works on Hillersdon House through a separate company did constitute an inducement to breach the contract. The repudiatory breach of the contract was actively brought about by Michael Lloyd as a result of this decision. Michael Lloyd's conduct had "crossed the line" between mere prevention of performance and inducement. Liquidation was not in HHL's commercial interest, and money was available to pay Palmer Birch, but had been diverted. A critical factor in the Judge's finding was that the funds had not been merely withheld, but had been transferred to a successor company when they should have been made available to HHL in the circumstances. 

Unlawful interference

A claim for unlawful interference exists where there is a wrongful interference by the defendant with an economic interest of the claimant, with an intention to cause loss to the claimant. The tort requires the use of means which are unlawful. 

Palmer Birch was not successful in making out a claim in unlawful interference against Michael Lloyd because the Judge did not consider that Michael Lloyd's decision to cease to fund was "unlawful". 

Unlawful means conspiracy

The Judge did, however, find both Michael and Christopher Lloyd liable for the tort of unlawful means conspiracy. 

The court found that the Lloyd brothers had reached an agreement to cause HHL to act in breach of contract. The brothers had decided that the preferred route for avoiding financial claims by Palmer Birch, while at the same time reaping the benefit of Palmer Birch's work to date, was to place HHL into voluntary liquidation. The court considered that they had done so with the intention to inflict loss on Palmer Birch.   

Christopher Lloyd's conduct as a director could not be described as conduct within the scope of his constitutional role within HHL. He therefore acted in a way that exposed him to liability under the tort of unlawful means conspiracy. 

Justification

The Judge also considered whether the defence of justification arose in respect of the various causes of action. 

His Honour concluded that the defence of justification was only available in respect of the tort of inducement to breach contract. That is because this is a tort of secondary liability, that is, it depends on a primary liability (breach of contract). Inducement to breach contract might be justified where, for example, a party has to protect an "equal or superior right". The justification defence failed on the facts because Michael Lloyd had no "equal or superior right" to that of Palmer Birch, and was instead motivated by purely commercial self-interest. 

The Lloyd brothers also sought to rely on justification as a defence to the unlawful means conspiracy claim. However, the Judge considered that the defence did not arise in respect of the remaining causes of action which are torts of primary liability (i.e. they do not depend upon an underlying breach of contract). 

No loss

The Lloyd brothers also argued that Palmer Birch suffered no loss because HHL was impecunious. They argued that there could be no liability in tort where Palmer Birch had suffered no loss.

There will be a separate quantum trial to quantify damages payable to Palmer Birch, where this issue will be examined. It will be interesting to see how the court deals with this issue and whether it prevents Palmer Birch from recovering damages. 

Practical implications

The case highlights the caution contracting parties should exercise when dealing with limited liability companies, particularly where such company is undercapitalised or reliant upon third party funding. In such a case it is prudent to obtain a guarantee from the director, funder or other individual apparently standing behind the company.

Similarly, individuals operating through a limited liability company should take note of their potential liability in tort in circumstances where the company is not in a position to meet its financial obligations. Directors who deliberately avoid their duties may be personally liable in tort and cannot hide behind the corporate veil. 

It is not always necessary for claimants to attempt to "pierce the corporate veil" to obtain relief, and claimants should consider possible causes of action in tort when seeking to bring a claim. It may be possible to pursue the directors directly in tort on the basis of their own conduct.

Authors: Tom Cummins and Lucy McKenzie

Case referred to: Palmer Birch v Lloyd & Anor [2018] EWHC 2316 (TCC)