The High Court has confirmed that directors of a company can be personally liable for inducing the company to breach an employment contract if they are not acting in good faith in relation to their duties towards that company
Background Directors' duties
Directors of a company are liable for the torts of the company committed at their direction (Rainham Chemical Works v Belvedere Fish Guano Company Ltd,  AC 465). However, the position is different where the unlawful act is procuring a breach of contract, where a director of a company would not be liable for inducing a breach of contract by that company if he or she had been acting in good faith within the scope of his or her authority (Said v Butt  3 KB 497).
Under the Companies Act 2006 (CA) "a director must act in the way he/she considers, in good faith, would be most likely to promote the success of the company" (s.172, CA). This includes a list of non-exhaustive factors which the directors must consider, such as the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct. Under s.174 CA, "a director of a company must exercise reasonable care, skill and diligence".
Directors and company secretaries are under comparable common law fiduciary duties to act in good faith in the interests of the company.
The Claimants were Lithuanian nationals employed to work on farms, catching chickens for slaughter. They contended that their employer, DJ Houghton Catching Services Ltd (Company) had treated them exploitatively, in breach of various statutory obligations. They brought claims for breach of express or implied terms of their employment contracts arising from alleged unpaid wages, unlawful deductions and fees and the lack of holiday pay on the basis that:
- They worked long hours and were paid less than the statutory minimum prescribed by the Agricultural Wages Act 1948 and the Orders made under it;
- Frequently, they were not paid the sums recorded on their pay slips (which they alleged were calculated on a fictional basis);
- There was no attempt to pay holiday pay or overtime pay at the prescribed rates to which they were entitled and unlawful deductions were made for "employment fees" and for rent of premises at which they were required to reside.
The Claimants brought claims in the High Court against the Company as well as the Company's company secretary (Ms Judge) and the Company's owner and sole director (Mr Houghton).
Preliminary issue: Were Ms Judge and Mr Houghton personally, jointly and/or severally liable to the Claimants for the Company's breaches of contract?
The High Court held that Ms Judge and Mr Houghton could be personally liable for inducing the Company to breach the Claimant's employment contracts because they had not acted in good faith in relation to the Company, as required by the rule in Said v Butt.
Referring to the case of OBG Ltd and A/or v Allan and others  UKHL, the judge found that neither Ms Judge nor Mr Houghton had honestly believed that they were paying the minimum wage, overtime and holiday pay, or that they were entitled to withhold payments. The judge remarked that he was "in no doubt whatsoever" that they actually realised that their actions caused the Company to breach its contractual obligations to the Claimants. In a particularly critical paragraph of the judgment, the judge commented that:
"I am in no doubt whatsoever, having heard the evidence, that both of them "actually realised" that what they were doing involved causing [the Company] to breach its contractual obligations towards the claimants. What they did was the means to an end. There is no iota of credible evidence that either [Ms Judge] or [Mr Houghton] possessed an honest belief that what they were doing would not involve such a breach. On the contrary, the evidence is overwhelmingly to the contrary. At all material times, each knew exactly what he or she was doing."
By inducing the Company to commit statutory breaches of employment law in this way, the High Court found that Ms Judge and Mr Houghton had both ruined the reputation of the Company and had caused the Company to lose its gangmasters' licence which it needed to employ workers. Consequently, they were found to be jointly and severally liable to the Claimants for inducing the breaches of contract committed by the Company.
Summary judgment: Did the Company have a real prospect of being able to defend the claim?
The court can give summary judgment where it considers that either party has no real prospect of succeeding or defending the claim or issue and, in both cases, there is no other compelling reason why the case or issue should be disposed of at a full trial. In this case, The High Court found that the Company did not have a realistic prospect of succeeding in defending any of the Claimants' claims of underpayment of wages, unlawful deduction of wages in relation to employment and accommodation fees, unpaid wages and unpaid holiday pay. In particular:
- Underpayment of wages: The judge found that the evidence was "simply overwhelming" that Ms Judge and Mr Houghton operated in a "deliberate and systematic manner" so that the Claimants were working significantly more hours than those recorded on payslips. The Company's payroll manager gave evidence that "the calculations she applied to arrive at the number of hours that a chicken catcher had worked were not merely notional but entirely fictional."
- Employment fees: Ms Judge adopted what the judge described as an "absurd position" in her evidence by asserting that the chicken catchers would ask her, unprompted, to deduct wages at £50 - £350 per week as an employment fee.
- Accommodation fees: The Claimants were housed in accommodation holding 11 people to one house and accommodation fees of £40 per week were deducted from their wages, contrary to legislation restricting the amount payable for accommodation to £33.74 (at the relevant time in 2012). Although it was asserted that part of the £40 related to council tax and water rates, no supporting documentary evidence was supplied.
- Unpaid wages: The Claimants gave evidence that Ms Judge and Mr Houghton would withhold wages for invalid reasons such as holding parties and drinking alcohol and then use this as leverage so that the Claimants would not leave, in the hope that they would receive the withheld pay at some point in the future.
- Holiday pay: Although supervisors and senior employees were permitted to take holiday, this was not the case for the Claimants and there was no documentary evidence to show that they had been paid any holiday pay.
On the face of it, this case perhaps appears rather alarming for company directors, suggesting that they could be found personally liable whenever the company is in breach of its contracts of employment. However, this is not the case. It is important to view this decision in the context of the unusually extreme circumstances of this case and to remember the general principle in Said v Butt, which is still good law.
Therefore, it is still the position that a director is not generally liable for inducing a breach of contract where they are acting in good faith towards the company. This case simply establishes that, if the breach of contract has a statutory element, that may suggest a failure on the part of the director to comply with their duties to the company, potentially making them liable to a third party (such as their employees) for inducing the breach of contract. However, for a director to have been found to have failed in their duties in this way, there has to be evidence of their unlawful and deliberate action and how this was clearly detrimental to the company. Unusually, that was able to be established in this case, based on the facts and the judge's critical view of the witness evidence provided by Ms Judge and Mr Houghton, leading to a finding that they both lacked credibility.
Nevertheless, this case is a useful reminder of the extent of obligations that fall upon the shoulders of company directors in relation to employment law. As well as the statutory breaches involved in this case, directors can be personally liable for unlawful discrimination committed by them in the course of their employment, with claimants often pursuing discrimination claims against both a company and its director(s). Potentially, this can result in directors being held either jointly or severally liable with the company for any sum claimed, or, more unusually, should a company decide to run a defence without involving the director, even being held liable for the full sum.
Another area of personal liability for directors which has been highlighted in recent case law is whistleblowing. In the recent case of Timis v Osipov, the Court of Appeal held that two non-executive directors could be held personally liable for dismissing a whistleblower, on the basis that one of them gave the instruction to dismiss and the other one carried out that instruction. Both were found to be jointly and severally liable with the company for the extensive losses that the claimant (who used to be the CEO) had suffered as result of his dismissal.
On a more positive note, claimants will always want to pursue their claims against whoever has the deepest pockets to satisfy any potential claim, which is usually the company itself. Therefore, personal claims against directors are more likely to be limited to where employees are concerned that a company may not have the funds to satisfy any claim (which was the case in Osipov as well as in this case) who may then want to protect their position by claiming against individual directors as well.
This article was drafted by Rachel Flavell, Trainee Solicitor