Case update (1): Personal liability of company directors

What do we already know?

We updated you in our June 2016 Newsletter Government reforms (1): Modern slavery – dont ignore it! that a UK ‘chicken-catching’ business (DJ Houghton Catching Services Ltd) had been found civilly liable for victims of trafficking and modern slavery. It was the first legal ruling against a British gangmaster business for modern slavery offences.

The High Court ordered the company to pay £1M compensation to Lithuanian workers for:

• failure to pay the agricultural minimum wage;
• charging of prohibited work-finding fees;
• unlawfully withholding wages; and
• depriving the workers of facilities to wash, rest, eat and drink.

The workers had been sent to catch chickens at farms across the country, and were subjected to appalling living and working conditions. They were forced to work shifts without respite, slept in the back of a mini bus, and worked immensely more hours than those recorded on their payslips.

What’s new?

Two directors of DJ Houghton Catching Services Ltd (Mr Houghton and Ms Judge) have been held personally liable for breaches of the employment contracts of a second group of former employees’. The two directors were held personally liable because they deliberately acted unlawfully to the obvious detriment of the company and acted outside of their authority.

The contractual breaches included the failure to pay applicable minimum wages, charging of unlawful ’employment fees’, failure to pay holiday pay and the arbitrary withholding of wages.  This decision opens the way for the workers to claim compensation directly from the couple and the amount owed will be decided at a subsequent hearing.

For further detail please read on.

Summary: Can the directors of a limited company be personally liable for its breaches of an employment contract?

Yes, held the High Court in Antuzis v DJ Houghton (available here).

Facts:  The Lithuanian claimants were employed in the UK by DJ Houghton Chicken Catching Services Ltd (the company) to work at various farms across the UK as chicken catchers. Their working conditions were dreadful. They worked long hours, being deprived of sleep and toilet breaks. They were paid less than minimum wage and often had pay withheld or docked for unknown reasons. No attempt was made to pay their holiday pay or overtime and they were prevented from taking holidays and bereavement leave.

The Lithuanian employees brought claims for breaches of their employment contract against the company.  However, by the time the employees brought their claims, the company was in a precarious financial position. Even if they won their claims against the company, therefore, they would receive little compensation. In the circumstances the employees also named as defendants the two senior managers of the company, Mr Houghton (director) and  Ms Judge (company secretary), which meant the employees had a greater chance of recovering their losses from them.

The High Court held that the directors were personally liable for the contractual breaches. Although the Court accepted the legal principle that a director is not ordinarily personally liable for inducing breach of contract where the director acts “bona fide within the scope of his authority”, it concluded that Mr Houghton and Ms Judge were not acting in this manner. They knew that their actions amounted to a clear breach of their duties under section 172 (duty to promote the success of the company) and section 174 (duty to exercise reasonable care, skill and diligence) of the Companies Act 2006. The High Court held that “what they did was not in the best interests of the company or its employees. On the contrary (…) they wrecked its reputation in the eyes of the community.” The Court found beyond doubt that they did not believe that the employees’ remuneration arrangements were lawful and were therefore personally liable for the breaches of contract.

Implications:  The case is a useful reminder that, whilst a company can indemnify directors against third party claims and purchase insurance to limit the risks associated with carrying out director duties, there are still situations where personal liability for directors cannot be excluded.

However, although this decision is worrying news for company directors, it does not open the floodgates to personal exposure for directors whenever their company finds itself in breach of its contracts of employment.  It is only where there is unlawful deliberate action to the obvious detriment of the employer that the exposure arises. This is the case even if the breach is of an obligation also imposed by statute such as the minimum wage or Working Time Regulation holiday pay or rest periods.