Found you! – Peering behind the corporate veil


Author: Christian Charles, Tim Reinhard


Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com)

Tim Reinhard, Trainee Solicitor, Fladgate LLP (treinhard@fladgate.com)


 

For over a century, it has been well settled in English law that a company has its own legal personality entirely separate from that of its shareholders and directors who are, by virtue of the “corporate veil”, protected from being personally liable for the company’s debts and other obligations. Attempts to look behind the corporate veil and pursue claims against individual shareholders and directors are therefore largely unsuccessful.

However, the recent case of Palmer Birch v Lloyd & Anor [2018] EWHC 2316 (TCC) shows that the court can and will allow claims to be made against directors and shareholders in the appropriate circumstances.

Background

Palmer Birch was employed by Hillersdon House Limited (HHL) to carry out the refurbishment of a large residential property. Christopher Lloyd was the sole director and shareholder of HHL while his brother, Michael Lloyd, was the funder and de facto controller of the company. The property was owned by another company controlled by Michael.

HHL had been incorporated specifically for the project and allowed Michael to recover VAT paid on the cost of the building works. The company was not trading and had no assets.

At an advanced stage of the building works and following a growing number of disputes between the parties, HHL purported to terminate the contract and subsequently went into liquidation.

Palmer Birch intimated claims for non-payment of interim certificates and payment for works performed and materials delivered prior to the date of termination. Since HHL had no assets, Palmer Birch brought a claim against Christopher and Michael Lloyd personally for the economic torts of inducing a breach of contract, unlawful means conspiracy and unlawful interference.

Decision

At a preliminary trial on liability, HHJ Russen QC upheld the claims for the economic torts of inducing a breach of contract and unlawful means conspiracy.

The Judge found that Christopher and Michael Lloyd had intentionally colluded to bring about the liquidation of HHL in order to avoid the contract and escape any further liability to Palmer Birch. In reaching his decision, the Judge noted that whilst Michael had no obligation to continue funding HHL, there was money available to meet HHL’s payment obligations and liquidating HHL was plainly not in the company’s best interests. This was particularly striking as Michael had incorporated and made funds available to another company, Country Sporting Experience Limited, which would later assume HHL’s role as employer on the project.

The Lloyds had argued that the claim should fail on a number of bases, including that Palmer Birch was attempting to “pierce the corporate veil” by pursuing the directors and shareholders of the proper contracting entity. The Judge rejected those defences and found that the Lloyds had intentionally brought about the liquidation in order to break the contract with Palmer Birch and continue the project using a different company.

Comment

It is rare for parties to bring claims not against a defaulting corporate entity, but by that entity’s shareholders and/or directors, particularly for the economic torts of inducing a breach of contract or unlawful means conspiracy. Given the long-standing corporate veil principles, such claims are notoriously difficult to substantiate and most parties will choose to bring claims directly against the corporate entity in breach of contract. As such, this decision provides welcome guidance on the circumstances in which these claims are likely to succeed.

On a more practical note, whilst the facts of this case are extreme, it serves as a cautionary tale for individuals who seek to use corporate structures to limit or avoid personal liability. The courts will not be afraid to look at the reality of the situation and will not allow those who abuse corporate structures to escape liability by hiding behind the corporate veil.

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