Corporate Law Update

• The High Court finds the director and secretary of a company jointly liable with the company for numerous breaches of minimum employment conditions
• A joint Parliamentary committee gives its recommendations on the proposed regime for registering beneficial owners of overseas entities

Director and secretary jointly liable for company’s breach of contract

The High Court has held that the director and company secretary of a company were jointly liable for the company’s failure to pay the minimum wage, holiday pay and overtime.

What happened?

Antuzis v DJ Houghton Catching Services Ltd concerned a company that had employed several Lithuanian nationals at various farms to catch chickens in preparation for slaughter.

Although the company issued the employees with payslips recording their pay, in reality there were a number of serious irregularities:

• The amounts set out in the payslips as payable to the employees had been calculated on a “fictional basis” and did not reflect the employment arrangements with the individuals.
• Wage payments were often withheld as a form of “punishment” for alleged “transgressions”.
• The company did not pay the employees the minimum wage required by the agricultural workers legislation in force at the time, nor did it pay them overtime or holiday pay.
• The company made deductions on account of rent for the premises at which the employees were effectively required to reside. The rent exceeded the maximum permitted under the legislation.
• One employee had been denied a leave of absence on account of bereavement.
• In employing the individuals on the farms, the company was operating a business regulated by the Gangmasters (Licensing) Act 2004, but it did not have a licence to do so.

Each of these irregularities amounted to a breach of legislation or the employees’ employment agreements. The employees claimed against the company for damages and unpaid wages, but they also brought proceedings against its director and secretary.

This was, incidentally, not the first instance of non-compliance by the company. Similar claims had been brought against it (successfully) in 2016. However, in that case, the director and secretary had admitted joint liability with the company. In this case, they contested it.

The court therefore had to decide whether the director and secretary were personally and jointly liable for the company’s breaches, and, if so, whether to grant the employees summary judgment.

What did the court say?

The court found the employees’ evidence “overwhelming” and noted that the director and secretary had been running the company in a deliberate manner that amounted to “systematic abuse”.

The more difficult question was whether the director and secretary were jointly liable. According to the case of Said v Butt, a company’s officers will not be jointly liable for a company’s breach of contract if they acted in good faith and within the scope of their authority.

However, it is not clear what “acting in good faith” means. The most recent guidance we have is the case of Ridgeway Maritime, which suggests that an officer will not be acting in good faith if they act in breach of their service agreement or some other legal duty to the company.

Here, the judge said the director and secretary had been acting within the scope of their authority.

However, in directing the company to commit the irregularities, the director had breached his statutory duties under the Companies Act 2006 to promote the company’s success (section 172) and to use reasonable care, skill and diligence (section 174). He had not honestly believed he was behaving properly and so had not been acting in good faith. He was therefore jointly liable for the company’s breaches.

Interestingly, the court found that the secretary was also jointly liable for the same reason, including because she had breached sections 172 and 174.

What does this mean for me?

In some ways, the decision is unsurprising. The company and its officers showed flagrant disregard for the company’s statutory and contractual obligations. The fact that this was the second time a claim of this kind had been brought against the company will not have helped.

The judge’s comments on the company secretary’s liability are interesting and potentially significant.

We know that, as an officer, a company secretary owes certain duties to their company, including a duty of loyalty and a duty to act with care and skill. But the statutory duties in the Companies Act (including sections 172 and 174) are expressed to apply to directors, not secretaries. Here, the judge effectively extended them to the secretary.

In this case, the officers’ actions were so egregious that it is hard to see how the secretary could not have been in breach of duty in some way or other. In other circumstances, however, the position may be more nuanced. For example, is a company’s secretary required to think about the company’s customers, suppliers and employees, as well as the community and the environment, when discharging their duties? Are they required to exercise independent judgment? Should they formally declare their interests in transactions at board meetings?

For public companies, these questions take on particular importance, as the role of the company secretary is becoming increasingly integral to corporate governance and culture. To the extent they are not already thinking about these things, company secretaries may wish to begin doing so. It is also worth remembering that a company's secretary will almost certainly be covered by its directors' and officers' (D&O) liability policy (although, in this case, the secretary's unlawful acts would not have been covered by a D&O policy).

The key takeaway for directors is to take care when leading their company into a breach of contract. In directing a company to renege on its contractual obligations, directors create potential liabilities for the company and they run the risk of breaching their duties. There will be times when this is justified and the directors can say they acted honestly, in good faith and in the company’s wider interests.

However, a director who intentionally or recklessly leads their company into serious and unjustified liabilities may find themselves having to reach into their own pocket.

Parliament issues recommendation on proposed overseas entity registration regime

A joint committee of the UK Parliament has published a report on the Government’s proposed overseas entity beneficial ownership (OEBO) regime.

Under the regime, an entity registered outside the United Kingdom would be required to file details of its controllers and beneficial owners in a public registry. The requirement would apply only if the overseas entity intends to acquire, own or dispose of land or participate in a public tender in the UK.

The OEBO regime would be based on the UK’s current persons with significant control (PSC) regime, which requires UK entities to disclose details of those people who hold more than 25% of their capital or voting rights, can control their management, or can in some other way exercise significant influence or control over them.

The Government published draft legislation for the regime in the form of a Bill in July 2018. You can read more about that Bill in our Corporate Law Update here.

The committee’s report contains several technical recommendations on the Bill. At this point, the key substantive recommendations from the committee are as follows:

• The committee has suggested lowering the threshold for control from 25%, although it has not suggested an alternative threshold. It also recommends “mirroring” this threshold under the domestic PSC regime (which, by implication, would involve lowering the PSC thresholds as well).
• The Government should produce guidance on the meaning of “significant influence or control”, as it has done for the PSC regime.
• Overseas entities should be required to update their beneficial ownership information before disposing of land. (The Bill currently contemplates that entities would only need to update their information annually.)
• Introducing a mechanism to allow people who view the public register to “flag” suspicious or potentially incorrect information about beneficial owners. However, given that Companies House will be maintaining the OEBO register, it seems more likely to us that any steps to verify the identity and accuracy of beneficial owners may well be implemented as part of and alongside the proposal to impose identity checks on company directors and PSCs. See our Corporate Law Update from last week for more information.
• Introducing civil penalties for non-compliance, which would supplement the proposed criminal penalties and may be easier to enforce.