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Building firm entitled to pursue individuals behind insolvent company

A construction firm was entitled to pursue the two individuals behind a company which had been liquidated while owing the firm money for works carried out, the High Court has ruled.04 Oct 2018

Palmer Birch brought claims against Michael and Christopher Lloyd based on three categories of economic tort: breach of contract; unlawful interference; and unlawful means conspiracy. It argued that the Lloyds had colluded to bring about the insolvency of employer firm Hillersdon House Ltd (HHL) in order to avoid paying it for the work.

Civil fraud and asset recovery experts at Pinsent Masons, the law firm behind Out-Law.com, said that the case was an interesting one, as rather than 'pierce the corporate veil' in order to disregard the separate legal personality of the company, the court instead found the Lloyds liable in respect of their own conduct.

"It is notoriously difficult to persuade the English courts to disregard the separate legal personality of a company, sometimes referred to as 'piercing' or 'lifting' the 'corporate veil'," said Alan Sheeley. "However, this case serves as a reminder that it is sometimes not necessary to do this in order to obtain relief against the individuals behind a company."

"Palmer Birch was not contending that the HHL directors should be held accountable for the company's breach of contract. Rather, it was suing them directly in tort in respect of their own bad faith conduct. This goes to show how important it is to seek early legal advice on the appropriate causes of action, especially in cases where the wrongdoers can be expected to seek to rely on the corporate veil," he said.

Palmer Birch is a construction business specialising in the refurbishment of large houses. In January 2012, it contracted with HHL under a JCT standard building contract to renovate a property, described by the court as Michael Lloyd's English residence. Michael was the sole funder of HHL while his brother, Christopher, was the company's sole director, something which the court heard had been done to preserve what at the time was Michael's non-domiciled status. The judge ultimately concluded that "Christopher's voice as a director was almost ventriloquial".

HHL did not trade, had no independent financial resources and had effectively been set up in order to allow Michael to recover all or most of the VAT paid on the cost of the building works. Any dispute over whether or not the corporate structure used was legitimate had been settled at an earlier hearing. The company was placed in voluntary liquidation in June 2015 after it became unable to pay its debts.

The building contract contained provisions enabling Palmer Birch, but not HHL, to terminate the contract in the event of HHL becoming insolvent. A letter sent by HHL's solicitors to Palmer Birch in April 2015 purporting to terminate the contract was therefore a repudiatory breach. It was Palmer Birch's case that Michael had induced HHL to breach the contract, while Michael and Christopher had conspired to bring about the liquidation of the company.

His Honour Judge Russen QC, sitting as a judge of the High Court, found in favour of Palmer Birch on the allegation of inducement of breach of contract. While Michael Lloyd was not legally obliged to fund HHL in order to enable it to meet its contractual obligations, his actions "crossed the line" from prevention to inducement when by his actions he brought about the liquidation of the company. His conduct was "not a reflection of HHL's separate corporate personality but an abuse of it", the judge said.

The allegation of unlawful interference failed, because there was nothing 'unlawful' about Michael Lloyd's decision to cease to fund HHL. The judge did, however, uphold the unlawful means conspiracy allegation against both Michael and Christopher Lloyd, as there had been "collusion" between the brothers to bring about the repudiatory breach of contract by liquidating the company.

The judge noted that an allegation of conspiracy was a "serious" one, which required "cogent evidence … on the balance of probabilities". However, the evidence in this case "safely supports the inference that by no later than late January 2015 Michael and Christopher had reached an agreement to bring about the liquidation of HHL so that it might escape from the contract and thereby avoid meeting [Palmer Birch's] existing and anticipated claims".

"The evidence also clearly shows that Christopher was prepared to play his part in implementing Michael's decision that HHL should be left to founder without recourse to any further funding," the judge said.

"The key finding in this case was that the defendants deliberately brought about the company's liquidation in order to leave Palmer Birch high and dry on outstanding invoices," said Andrew Barns-Graham of Pinsent Masons. "Directors who abnegate their duties in such a way will generally be personally liable in tort and will not be able to hide behind the company whose separate legal personality they have abused."