Catching chickens and inducing a company's breach of contract: when can directors be personally liable for the company's acts

The general principle, applied for the last century across common law jurisdictions, is that a director of a company is not personally liable for inducing a breach of contract by that company, provided he acted within the scope of his authority. The recent case of Antuzis & Ors v DJ Houghton Catching Services Ltd & Ors [2019] EWHC 843 (QB) (Antuzis) has clarified the scope and application of this principle and its interplay with a director’s fiduciary duties as codified under the Companies Act 2006 (CA 2006).

Introduction

One might ask what chicken catchers, Lithuanian enforcers and horse meat burgers have to do with the development of the law around the personal liabilities of directors: the answer is set out in Antuzis.

The case of Said v Butt [1920] [3] KB 497 established an exception to the general rule that an agent, including a director, will be personally liable if he commits a tort in the course of his agency. In Said v Butt, the agent in question escaped liability for procuring a breach of contract because he was acting “bona fide within the scope of his authority.”

However, there has been little subsequent explanation as to what “bona fide within the scope of his authority” means for company directors. In Antuzis, Mr Justice Lane provided useful clarification about how this principle applies to directors, who often have to balance potentially conflicting interests in order to act in accordance with their duties under sections 172 and 174 CA 2006.

The claimants

Mr Antuzis was one of several claimants employed as chicken catchers by DJ Houghton Catching Services Ltd (the Company). Mr. Antuzis and his co-claimants were from eastern European countries (mostly Lithuania) and came to be employed by the Company by responding to a newspaper advertisement. Unfortunately, upon their arrival to the UK, Mr. Antuzis and his fellow employees were subjected to deplorable working conditions, in breach of statutory protections. This treatment came to an end when the police and the Gangmasters Licensing Authority raided their living quarters in 2012.

The claimants subsequently brought a suit against the Company as their employer for breach of contract and, in order to increase the ability to recover damages, against its sole shareholder and director (the Second Defendant) and the company secretary (the Third Defendant) for inducing the Company’s breach of contract, in relation to the employment contracts of the individuals concerned. In April 2019, Mr Justice Lane gave summary judgment against all three defendants.

The Judge’s analysis

In reaching his decision, Mr Justice Lane first decided that the director’s conduct is to be assessed by reference to his duties towards the company and not the third party. Although not the focus of the enquiry, the nature of the breach as between the company and the third party is still relevant: the breach and its consequences may directly inform whether the director has breached his or her duties towards the company, including those in s172 CA 2006.

Adopting a memorable analogy, Mr Justice Lane stated:

“[t]here is, plainly, a world of difference between, on the one hand, a director consciously and deliberately causing a company to breach its contract with a supplier, by not paying the supplier on time because, unusually, the company has encountered cash flow difficulties, and, on the other hand, a director of a restaurant company who decides the company should supply customers of the chain with burgers made of horse meat instead of beef, on the basis that horse meat is cheaper. In the second example, the resulting scandal, when the director’s actions come to light, would be, at the very least, likely to inflict severe reputational damage on the company, from which it might take years to recover, if it recovered at all.”

In both instances the director has achieved a financial saving for the company, but supplying horse meat is a breach of statutory duty, indicative of societal disapproval of what the director has caused the company to do and of the resulting reputational damage. The fact that the breach of contract has a statutory element was said by Mr Justice Lane to point to there being a failure on the part of the director to comply with his or her duties to the company and, by extension, to the director’s liability to a third party for inducing the breach of contract.

In Antuzis, the Company was found to have breached its statutory duties to its employees. However, procuring a breach of a contract with a statutory element is not alone sufficient to find that directors are personally liable for inducement of that breach. “If it were, then directors would, in the employment field, regularly face personal liability because many aspects of employment contracts have a statutory element.” There must also be a breach of director’s duty.

Fiduciary duties

It was accepted that the Third Defendant, as company secretary, had a comparable common law fiduciary duty to that of the Second Defendant (the sole shareholder and director of the Company) to act bona fide in what she considered was in the best interests of the Company.

Section 172 CA 2006 imposes important duties on directors to act in good faith so as to promote the success of the company and, in so doing, to have regard to matters such as “the likely consequences of any decision in the long term; the interests of the company’s employees; the impact of the company’s operations on the community; and the desirability of the company maintaining a reputation for high standards of business conduct”. Section 174 CA 2006 imposes a duty on directors to exercise reasonable care, skill and diligence.

Although the Second and Third Defendants acted within the scope of their authority and apparently in order to maximise the profits of the Company, it was found to be beyond doubt that they acted in “egregious violation” of sections 172 and 174 CA 2006 because they knew that they were “completely unable as a matter of law” to cause the Company to treat the claimants as it had (paying below the minimum wage, withholding overtime and holiday pay, and withholding payments as “punishment”). Moreover, in acting as they did “they wrecked [the company’s] reputation in the eyes of the community” in their relentless pursuit of greater profits.

Comment

The decision is a timely reminder of the scope of section 172 CA 2006. The directors in this case being focused on generating short term profits, failed to take the holistic view of “success” that section 172 CA 2006 requires, including taking into account the long term likely consequences of any decision, the interests of the company’s employees and maintenance of the company’s reputation for high standards of conduct.

Ultimately, a director has discretion as to how to exercise the powers conferred upon him or her and a director must form a belief as to what will promote the company’s success in good faith, having actually considered the company’s interests.

Some may argue that the reasoning in Antuzis is simplistic, given the myriad of issues that a director can and will have to balance in order to form his belief that he is acting to promote the success of the company; and that there is scant consideration of whether the Second and Third Defendants actually believed that the best way to promote the success of the Company was to focus on its short term interest. Instead, Mr Justice Lane applied an objective assessment finding that their knowledge that the Company was breaking the law was sufficient to make any argument that sections 172 and 174 CA 2006 had not been breached, untenable.

Antuzis is a decision that arose in relation to employment contracts but directors should be wary of how the decision in Antuzis might affect them in the wider context.