A company has its own legal existence separate from its owners, directors and most senior management.
If you break your leg in a supermarket after a nasty incident involving three supermarket trolleys and a discarded tub of houmous, you would bring a claim against the supermarket, not the unfortunate individual whose job it was to mop up spillages, and certainly not the director who was sitting in an office hundreds of miles away at the time of the mishap. When then could a company director be held personally liable for acts committed in the name of the company? If, for example, an act of negligence was committed at the director’s behest, that would go beyond the company trading on its own account. In the very unlikely event that the director phoned up the store and told employees to mop the floor with houmous because it would help customers slide to the tills quicker, the director might be held personally liable for directing the employees to do something negligent.
In Antuzis and others -v- DJ Houghton Catching Services Ltd, there were no supermarkets, no slips or trips (or any other type of negligence) and, most disappointingly, no houmous. Instead there was a group of claimants employed as chicken-catchers who alleged that their employer had acted in an exploitative manner by making them work extremely long hours and paying them less than the amount prescribed by law in terms of minimum wage as well as unpaid overtime and holiday pay. The payslips they were given bore little resemblance to the amount they actually received, payments were routinely withheld for alleged transgressions and other deductions were made.
The company had lost a case a few years previously arising from similar facts and (following a failed inspection) had a licence revoked that related to its employment practices. The judge who heard the company’s evidence in this case was equally unimpressed with its explanations, finding that the company had deliberately and systematically recorded hours worked incorrectly. The High Court concluded there was no realistic prospect of the company successfully defending breaches of the employees’ contractual and statutory rights.
However, having found the company liable, the other issue before the court was whether the sole director could be held personally liable for directing others to breach the contracts of the employees (an ‘inducement to breach’). The finding that there had been deliberate and systematic breaches of minimum wage and other statutory provisions was significant, as these had been put in place by Parliament specifically to protect vulnerable workers from exploitative employers.
By virtue of the Companies Act, directors are under a statutory duty to act in good faith so as to promote the success of the company and, in doing so, they should have regard to the likely long-term consequences of any decision taken in respect of the company’s employees, the impact of the company’s operations on the community and the desirability of the company in maintaining a reputation for high standards of business conduct. There is also a statutory duty on a director to exercise reasonable care, skill and diligence in their actions.
By deliberately and systematically transgressing the statutory pay provisions, the director (and sole shareholder) along with the company secretary were not acting in good faith and, therefore, not in the best interests of the company or its employees. The High Court went as far as stating that they had “wrecked the company’s reputation in the eyes of the community”.
As well as ‘good faith’, the statutory duties imposed on directors deliberately make reference to other broad terms such as ‘promoting the success’ of the company and the need to ‘exercise independent judgment’ or ‘reasonable care and skill’. Using these terms may encourage greater reflection by a director before taking a decision, but it certainly allows greater discretion for the courts to determine what constitutes (for example) ‘good faith’. However, it will generally be as clear to an individual director as it was to the judge in this case whether an action was taken in good faith or not, and deliberately producing incorrect or misleading records would not be.
What does this mean for your business?
It could be argued that any method deployed, whether fair or foul, promotes the success of the company if it maximises profits for its owners, but that would be short-sighted and will not discharge the statutory duty if the directors are not acting in good faith.
This decision attempted to resolve a legal issue that has persisted for almost a century, regarding personal liability in cases of ‘procuring a breach of contract’. Following this decision, it is clearer that personal liability of a director will only arise if there has been a breach of a fiduciary or other personal legal duty.
Contrast this with a genuine payroll mistake (if not rectified), which could potentially still lead to action against the company, but probably not the individual director.
In Antuzis there was clear and deliberate wrongdoing by the director with regard to the statutory duties relating to the employees’ pay and this amounted to a breach of good faith, which gave rise to personal liability by the director. Just as it is clearly negligent to direct employees to mop a supermarket aisle with houmous because of the likelihood of injury arising, directing others to breach the statutory provisions relating to pay and working-hours is likely to amount to an inducement to breach of contract.
For any director who has found the duties on directors contained within the Companies Act to be worded in an abstract way, this decision provides some clarity about the type of conduct that would give rise to personal liability.
A link to case can be found here
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.