Mark Chassy v Left Shift IT Limited

A director is not ordinarily personally liable for causing a company to breach its contracts. Personal liability for inducing breach requires more than knowledge that the company cannot pay. The director’s conduct and intention towards the company are central, including whether the director acted in good faith to promote its success and complied with statutory duties. The nature of the breach and its consequences may be relevant, especially where statutory protections or serious reputational harm are involved, but a statutory breach does not automatically establish bad faith. Employees who continue working while wages are deferred do not thereby waive accrued contractual rights without a clear election, variation, or estoppel. Section 13 Employment Rights Act 1996 does not rewrite the common law rules on waiver, forbearance or estoppel.

The claimant sued his former employer for unpaid salary, pension contributions, expenses and holiday pay. He also pursued assigned claims belonging to four former employees. Claims were brought against two directors on the basis that they had induced the employer’s contractual breaches and had breached duties under the Companies Act 2006.

The defendants relied on waiver, variation, election and estoppel, and sought a set-off for alleged deletion of commercially valuable Slack data. The third defendant was an undischarged bankrupt but the trial proceeded against him subject to an undertaking restricting enforcement. The central issues were the sums due, the effect of the alleged employee conduct, the directors’ personal liability and the alleged data loss.

1. Directors’ liability. The ordinary rule is that directors are not personally liable for procuring a company’s breach of contract when acting properly in the company’s interests. The relevant inquiry focuses on the director’s conduct and intention towards the company, rather than towards the contracting third party. Breach of the duties in sections 172 and 174 of the Companies Act 2006 may provide the necessary basis for personal liability, but causing a company to breach a contract, including an employment contract, does not by itself establish bad faith.
2. The nature of the contractual or statutory breach and its consequences may inform whether the director acted in the company’s interests. The deliberate exploitation of vulnerable workers, falsification of records and conduct causing serious reputational damage were materially different from directors attempting to preserve a company during cash-flow difficulties. The present directors had sought investment and intended the company to survive. Their failure to pay wages, pensions, holiday pay and expenses therefore did not establish breach of duty or personal liability.
3. The requirements for inducing breach identified in OBG Ltd v Alan were satisfied in relation to knowledge and intention only in the abstract legal test, but the claim against the directors failed because the necessary bad-faith gateway was not established. The directors were de facto directors during the relevant periods and owed the statutory duties.
4. The employees’ continued work did not amount to waiver, election, contractual variation or waiver by estoppel. Election requires a choice between mutually exclusive rights. Variation requires the ordinary requirements of contract formation. Estoppel requires a clear representation, reliance and inequity in permitting withdrawal. At most, the employees deferred payment temporarily; they did not surrender their contractual rights.
5. Section 13 of the Employment Rights Act 1996 provides a specific statutory remedy for unauthorised deductions but does not exclude or reformulate common-law waiver, forbearance or estoppel in contractual proceedings. Unpaid holiday remained payable in lieu under regulation 14 of the Working Time Regulations 1998.
6. The employer was liable for the unpaid sums, including salary, pension contributions, expenses and holiday pay. The claimant failed to establish deliberate deletion of commercially valuable information or recoverable loss. Statutory interest was awarded at 3 per cent, and the parties were directed to agree the final sum after addressing tax consequences.