The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. AKA, not the responsibility of the shareholders and directors.

Whilst generally upholding the corporate veil, the courts are still prepared to “side-step” it where separate corporate personality is being abused and there is unlawful means conspiracy.

In the recent case of Palmer Birch v Lloyd & Anor [2018] EWHC 2316 (TCC), the Court found company directors liable where separate corporate personality was being abused and they conspired by way of unlawful means to intentionally inflict financial loss on the claimant.

Background

The defendants, Christopher and Michael Lloyd, were the decision makers behind HHL, a limited liability company that employed Palmer Birch to carry out refurbishment and extension works to Hillersdon House.

The sole shareholder and director of HHL was Christopher Lloyd. His brother, Michael Lloyd, was the main decision maker, and the director/ shadow director of the company.
Money was advanced to HHL by Michael for the payment of Palmer Birch’s invoices during the construction project. However, invoices due on the 15 December 2014 and 20 January 2015 were unpaid by HHL as Michael had exhausted his funds.

Funding issues were effectively resolved when Michael later received payment from the sale of other properties. This money was enough to pay off the invoices owed to Palmer Birch and complete the project on Hillersdon House. Those funds were not transferred to HHL. They were set aside for HHL’s successor company, CSEL, whose shareholder and director was Michael Lloyd.
On 22 April 2015, HHL gave notice to terminate the contract it had with Palmer Birch on the basis that it would soon be in liquidation. It was made clear that there would be no distribution made to Palmer Birch on liquidation.
As there was no clause providing for a right to terminate on insolvency on the part of HHL, this was a repudiatory breach. HHL then entered into creditors’ voluntary liquidation on 25 June 2015. CSEL would commence business soon after, and step in to complete works on Hillersdon House.
As a result of the above events, Palmer Birch brought proceedings against Christopher and Michael Lloyd for, inter alia, inducing HHL’s breach of contract, unlawful interference and unlawful means conspiracy.

Judgement
HHJ Russen QC held that Michael Lloyd was liable for inducing HHL’s breach of contract and that both brothers were liable for unlawful means conspiracy.

Inducing breach of contract
The Court held that the withholding of money from HHL when there was no obligation to make money available did not itself induce a breach of contract but was mere prevention of performance.

What did qualify as inducing a breach of contract, was the decision of Michael to place HHL into liquidation, which was found on the facts to have occurred no later than January 2015, and to continue works under the successor company, CSEL. This induced the repudiatory breach of the contract because liquidation was not in HHL’s commercial interest. Money was available to meet the payments but had been diverted.

The situation on the facts of the case was to be distinguished from merely withholding money because the funds had been transferred to a successor company whose business and operation was identical.

As HHJ Russen QC points out, there is a ‘potentially significant distinction between the deprivation of funding to the contract-breaker and the dissipation of assets or funds from that party.’ Although there was no legal obligation to fund HHL, the funds ought to have been made available in the circumstances.

The argument that the claimants were attempting to pierce the corporate veil was also rejected. The defendants attempted to substitute HHL with CSEL by its diversion of funds and liquidation of HHL. The effect of this was that the defendants obtained the benefit of the work that Palmer Birch had done while avoiding HHL’s debt.

The defendant’s actions were not ‘a reflection of HHL’s separate corporate personality but an abuse of it.’

Unlawful means conspiracy

It was also held that the defendants were liable for unlawful means conspiracy. It was found that their plan was to be rid of any potential claims by Palmer Birch while continuing to enjoy the works to date. Their preferred route to achieve this was via the voluntary liquidation of HHL. There was no doubt that in doing so they had also intended to inflict loss on Palmer Birch.

In so finding this, HHJ Russen QC also held that there was no separate defence of justification. This was in response to the defendants’ interpretation of the phrase ‘just cause or excuse,’ in JSC BTA Bank v Ablyazov (No.14) [2018] UKSC 19.

He stated that the use of the phrase ‘just cause or excuse’ was already part of the analysis in establishing whether there was an unlawful means. Justification was not a discrete defence because it was dealt with in the finding of the elements of unlawfulness and intention.

As was established in Quinn v Leathem [1901] AC 495, provided the conspiracy is the means by which intentional harm is inflicted, the unlawfulness resides in the fact of the conspiracy itself. It is in this sense that there can be no just cause or excuse for the conspiracy.

In summary

In this instance, there was a clear abuse of corporate personality by the defendants. If money had merely been withheld, no liability would have attached for inducing a breach of contract. It is therefore vital for contractors to ensure that they receive guarantees from directors, funders and other associated persons to protect against the risk of the employer company’s insolvency.

This matter established other important points of law. First, in cases where a contract has been breached due to the absence of funds, it supports drawing the line between prevention and procuring breach by the determination of whether funds have merely been withheld or whether they have been diverted away. Palmer establishes that a diversion of funds away can constitute inducing a breach of contract.

Second, the case makes clear that there is no separate defence of justification for unlawful means conspiracies despite the use of the phrase ‘just cause or excuse’ in JSC BTA Bank v Ablyazov (No.14) [2018] UKSC 19. Justification is already assessed through the elements of intention and unlawful means.

If you are in a position similar to either of the two parties above; a company director or shareholder who requires advice, or indeed a contractor who has been wronged, contact Griffin Law today. We will be able to help.