Directors personally liable for company’s breach of employment contract (UK)
If you have recently read the headline, say, “Directors personally liable for company’s breach of employment contract” and now quail in anticipation of a whole new avenue of attack on your business, fear not. All is not as it seems.
This week’s Antuzis –v- DJ Houghton Catching Services Limited concerned a group of Lithuanian nationals who were sorely abused by DJHCS in terms of excessive hours, unlawful deductions, failure to pay holidays or the minimum wage and a number of other respects. Their timesheets were doctored to understate dramatically the number of hours worked, they sometimes went unpaid altogether and there was suggestions of physical intimidation. They worked as chicken-catchers in conditions which the High Court found to be “gruelling and exploitative”. Visiting inspectors had been actively misled.
So far, so what? – these are all claims which would normally be brought against the employing company, not its senior management. The difficulty for Mr Antuzis and his colleagues was that by the time their claim reached the High Court, DJHCS’ operations had shrunk from the once-proud “biggest chicken-catching operation in the south of England” to one man and a minibus with no apparent prospects of corporate survival. Even if they won their claims against DJHCS, therefore, they would receive next to nothing. In the circumstances they had also named as Defendants the two senior managers of the company, Mr Houghton himself and a Ms Judge. But how could the management be liable for the obligations of the company? Surely the whole point of operating through a limited entity is to protect management from such claims?
The outstandingly unappetising case of Rainham Chemical Works –v- Belvedere Fish Guano Company Limited said in 1921 that directors would be liable for torts committed by a company at their direction. However, where breaches of contract are concerned, Said –v- Butt the previous year established that directors would only be liable if they were not acting in good faith within the scope of their authority. In a comprehensive demolition of their credibility (their evidence was totally bizarre, nonsense, an obvious untruth, thoroughly unsatisfactory, hopeless and devoid of meritsaid the Judge before he ran out of printable adjectives) the Court decided that there was “no iota of credible evidence” that Mr Houghton or Ms Judge possessed an honest belief that they were acting lawfully and within the terms of their authority. The question then was whether the underpayments and deductions by DJHCS were dictated by Houghton and Judge in good faith. The High Court took a brief squint at the Companies Act 2006 in which Section 172 requires directors to act “in good faith so as to promote the success of the Company” and to include in that consideration the likely consequences of their decisions for the interests of the Company’s employees, its local community and its business reputation. Section 174 imposes a duty on directors to act with reasonable skill and diligence.
The Judge found that Houghton and Judge (no relation) were both in breach of those requirements – DJHCS had lost almost all its staff, had shrunk to a shadow of its former self and its reputation in local chicken-catching circles had been completely trashed. It followed that the good faith element required to protect the directors from corporate liability was not present. They therefore became liable for inducing DJHCS to breach its contractual and statutory duties to Antuzis and his colleagues, the measure of the damages being the total amount of the underpayments and unlawful deductions.
The Decision in this case makes a jolly good read. The Hon, Mr Justice Lane was clearly having a ball and you can quickly pick up more about the art of chicken-catching than you ever thought you would need – only one in each hand, for example, and to be held by both legs at the same time, not just the one. Its legs, not yours. However, what this case does not do is open the floodgates to personal exposure for directors whenever their company finds itself in breach of its contracts of employment, even if the breach is of an obligation also imposed by statute such as the minimum wage or WTR holiday pay or rest periods. It is only where there is unlawful deliberate action to the obvious detriment of the employer that the exposure arises.