Peeking around the corporate veil

The recent decision of the Technology and Construction Court in Palmer Birch (A Partnership) v Lloyd & Anor [2018] EWHC 2316 (TCC) (24 September 2018) will make for interesting reading both for those who seek to hide behind the corporate veil provided by a limited company and those who find themselves out of pocket as a result of that protection.

The circumstances in which the protection offered by a limited company will be removed and the corporate veil lifted were considered by the Supreme Court a few years ago in Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34. In that case, the Supreme Court decided that the veil should only be lifted where a private individual had an existing liability that he or she sought to avoid by subsequently making use of a limited company. However, there is more than one way to fix a private individual with liability for the debts of his company, as the TCC has now clarified.

Facts

Mr Michael Lloyd had a variety of business interests, including the development of a stately home called Hillersdon House, which he hoped would become both his lavish personal residence and a business, offering a taste of a luxury countryside lifestyle to willing punters. He engaged a contractor, Palmer Birch, to carry out significant works at the property with a contract value in the millions of pounds. The parties to the contract were Palmer Birch and Hillersdon House Limited (“HHL“), a special purpose vehicle (“SPV“) company incorporated solely for the purpose of the works. Mr Lloyd did not provide any form of personal guarantee.

Mr Lloyd was keen to ensure that he had limited connections with the UK for tax reasons. Consequently, the sole director and shareholder of HHL was his (trusted) brother, Mr Christopher Lloyd, and the property under development was owned under a complex corporate structure, of which Michael Lloyd was the ultimate beneficiary. In evidence, it was clear that Michael Lloyd called the shots in relation to HLL and the development and everyone understood that he was the boss.

Towards the end of the project, funds dried up, apparently pending the sale of Buffalo Mall, an asset belonging to Michael Lloyd in Kenya. In the meantime, Palmer Birch had delivered two valid invoices in relation to the works to HHL but they had not been paid. In response to demands for payment, HHL sought a discounted negotiated settlement on a without prejudice basis; purported to terminate the contract with Palmer Birch and then placed the company into voluntary liquidation. HHL had no assets to speak of and, consequently, Palmer Birch stood to lose a substantial sum in relation to the project. Michael Lloyd then set about completing the works at the property using his newly incorporated company, Country Sporting Experience Limited, making use of the proceeds from sale of Buffalo Mall. This obviously didn’t go down well with Palmer Birch.

In order to secure a recovery, Palmer Birch brought claims against the brothers in tort in their personal capacity, alleging that the conspired to place HHL into liquidation in order to avoid paying up. They did not bring a claim in the insolvency of HHL, as one might expect in these circumstances.

The Decision

Following some initial procedural skirmishes, the Court decided that the Lloyd brothers had engaged in an unlawful means conspiracy with a view to injuring Palmer Birch. Crucially, as money had become available following the sale of Buffalo Mall, valid invoices were outstanding at that time and the Lloyd brothers admitted that they were payable; the Court decided that the decision by Michael Lloyd to divert his money away from penniless HHL to Country Sporting Experience Limited constituted the procurement by Mr Lloyd of a fundamental breach of contract by HHL. This ultimately gave rise to his personal liability in conspiracy and appears to have produced a very welcome result for Palmer Birch: the Court fixed the brothers personally with liability for the company debts they were hoping to avoid; perhaps peeking around the corporate veil on this occasion, rather than lifting it.

Comment

Entering into a valuable contract with an uncapitalised SPV company with little or no assets is risky business. However, in circumstances where contractors are bidding for work in a competitive market place, sometimes personal guarantees from directors of SPV companies can fall by the wayside, as in this case, even if they are wealthy.

This detailed decision of the Technology and Construction Court, which involves a thorough examination of the legal authorities and economic tort claims not often litigated, will give hope to contractors who are not expecting a recovery from an insolvent employer. It also serves as a cautionary tale for private individuals who divert funds away from an SPV company towards the end of a project in order to avoid paying for work. It also shows how a recovery may sometimes be possible with a bit of lateral thinking by innovative lawyers.