The chickens come home to roost: director personally liable for procuring a breach of contract

A recent case has decided that a director and company secretary were personally liable (jointly and severally) to people their company had employed in conditions of modern slavery.

The High Court recently decided that a director and company secretary were personally liable, jointly and severally, to people their company had employed as chicken catchers in conditions of modern slavery. The liability was for inducing DJ Houghton Catching Services Limited (the Company) to breach their employment contracts (Antuzis & Ors v DJ Houghton catching Services limited [2019] EWHC 843 (QB)).

Normally directors who act in good faith to promote the success of a company are not personally liable to third parties, it is the company’s liability. Here, the defendants could not rely on this as they were found to have not acted in good faith as they were knowingly in breach of certain duties owed to the Company.

This is a useful clarification of what acting in good faith means in this context and a reminder to directors about their potential liability for wrongful actions taken on behalf of a company.

Background

The claimants were Lithuanian nationals employed by the Company as chicken catchers and they brought claims against the Company and its director and company secretary as a result of the exploitative conditions under which they worked. The claimants were made to work extremely long hours with little rest between shifts and were paid far less than the statutory minimum for the number of hours they worked. Their wages were frequently withheld as a disciplinary measure and subject to unlawful deductions for ‘employment fees’ and rent for housing in which they were effectively forced to live. The claims were for express and implied breach of their contracts of employment.

Summary judgment was entered for the claimants. The court also considered the preliminary issue of whether the defendants were personally liable, jointly and severally, for the Company’s breaches of contract.

Directors’ liability for inducing breach of contract

The general principle is that directors of a company are liable for the torts (wrongful acts causing harm or loss, including inducing a breach of contract) of the company, committed at their direction.

An exception to this principle is the so-called rule in Said v Butt ([1920] [3] KB 497) that an officer will not be held personally liable for causing a breach of contract between their employer and a third party if he or she is acting in good faith within the scope of their authority.

The Houghton case clarifies that acting in good faith for these purposes relates to the director’s conduct in relation to his duties towards the company (and not towards any third party). As such if a director is in compliance with their legal duties to the company and within the scope of their authority the Said v Butt exception will apply. But, if the breach arises as result of a director failing to comply with his legal duties to the company then he could be personally liable.

In the Houghton case, although the defendants were acting within the scope of their authority (under the articles of association), they were found to be in breach of their duties under sections 172 (duty to promote the success of the company) and 174 (duty to exercise reasonable care, skill and diligence) Companies Act 2006, as what they had done had clearly not been in the best interests of the Company or its employees.

To be liable for inducing the Company to breach the employment contracts the defendants also had to know that they were inducing a breach of contract. The court decided that both defendants actually realised that what they were doing involved causing the Company to breach its contractual obligations to the claimants. The court would have come to the same decision if the defendants had turned a blind eye or were recklessly indifferent. Here, they knew full well what they were doing was wrong.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.