Liability for economic torts by shareholders in their personal capacity
by John Strange & Emma Halton
A recent High Court case¹ demonstrates that directors or shareholders can be directly liable for the consequences of actions taken by their company. While separate legal personality of companies is a foundation of company law, there are other routes to hold individuals to account for their actions, if they are found to have abused that doctrine.
The claimant, a building contractor, entered into a contract with Hillerson House Limited (“HHL”) for the renovation of a property. One defendant (“D1”) was a director and sole shareholder of HHL, and the other (“D2”) was a de facto director and sole funder of HHL. D2 had access to funds which he could have contributed to HHL to allow it to pay the claimant’s outstanding invoices. However, D2 instead diverted the funds to another company he owned with the intention of using a different contractor to finish the renovation. HHL terminated the contract with the claimant and went into insolvent liquidation. The termination of the contract with the claimant was found to be a repudiatory breach.
- Inducing breach of contract (intentionally procuring a breach of contract between the claimant and a third party, without reasonable justification, causing loss to the claimant)
The claim for inducement of breach of contract succeeded against D2 only. The court drew a distinction between “inducement” to breach and “prevention” of a third party’s performance of a contract. D1 was not liable in respect of his failure to fund, in the absence of any legal obligation to do so, thereby preventing performance. However, D2’s act of diverting funds away from HHL to another company to pay a new contractor, while taking the benefit of the claimant’s work, constituted inducement.
- Unlawful means conspiracy (a combination or agreement between two or more persons to cause damage to another, using unlawful means and with an intention to cause damage)
The claim based on unlawful means conspiracy succeeded against both D1 and D2. The court held that they had colluded to facilitate HHL’s liquidation, to escape the contract with the claimant whilst securing completion of the works through a new contractor. In the court’s judgement, this clearly established intent to injure the claimant. The court rejected D1’s argument that he was, at all times, acting as director and agent of the Company and could not be personally liable. The court concluded that the corporate veil “had become largely shredded by a combination of his own actions and abnegation of his own director’s role”.
¹Palmer Birch (A Partnership) v Lloyd  EWHC 2316 (TCC)