This is the next in my series of blogs for the Director’s Friend.
In order to obtain an order from the court that a director is personally liable for wrongful trading under section 214 of the Insolvency Act 1986 (the ‘Act’) the Liquidator or Administrator have to not only prove the elements of wrongful trading, but they must demonstrate how the wrongful trading caused an increase in the company’s net deficiency. That is its losses.
That is the company should objectively have been placed into Liquidation at X date. It was not. The net deficiency has increased as a consequence – by how much? No evidence = no personal liability.
In summary, this is a claim for personal liability against a director of a company. The claim is made up of the following:
- The company is insolvent and is in Liquidation or Administration;
- A person has been a director of that company at any time; and
- At some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration.
The court, on the application of the Liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.
The court shall not make a declaration if that person took every step with a view to minimising the potential loss to the company’s creditors as they ought to have taken.
That takes into account:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
- the general knowledge, skill and experience that that director has.
A recent appeal case heard by David Foxton QC on appeal from Registrar Jones (Brooks and another (Joint Liquidators of Robin Hood Centre plc (In Liquidation) v Armstrong and another  EWHC 2893 (Ch)) the directors successfully appealed the amount of compensation payable by them.
The Registrar in the earlier decision had held that the directors had been guilty of wrongful trading; that the net deficiency of the company had on the evidence increased and that as a consequence the directors had to contribute £35,000.00 to the company’s assets.
That was in circumstances where the directors were facing a claim in a sum in excess of £700,000.00.
The directors were faced with a number of dates on which it was claimed that they knew or ought to have known that the company was facing insolvent liquidation. The Registrar found that the directors had that knowledge on one date, but were not wrong to continue to trade until a later date. That was because up to that later date the directors were taking steps to minimise further losses to creditors.
Essentially, the Liquidators were found on the facts to have failed to make out their case that there had been an increase in the net deficiency (losses) of the company during the period of wrongful trading. This is fundamental irrespective of losses caused to individual creditors.
No increase in the net deficiency = no case.
Following this decision, it shows that a Liquidator or Administrator must show that the wrongful trading alleged actually caused losses to creditors of the company.
From a director’s perspective, it shows that there are risks when you are a director of a company that is or maybe trading insolvently to you personally. However, with the early and right advice this can be mitigated or even perhaps with the assistance of Robin Hood defeated…
I understand, however, that the Liquidators have applied for permission to appeal this decision – watch this space.
WRONGFUL TRADING AND DIRECTOR DISQUALIFICATION
The well-advised director will also be mindful of the risk in section 10 of the Company Directors Disqualification Act 1986 that states:
‘(1) Where the court makes a declaration under section 213 or 214 of the Insolvency Act 1986 that a person is liable to make a contribution to a company’s assets, then, whether or not an application for such an order is made by any person (emphasis added), the court may, if it thinks fit, also make a disqualification order against the person to whom the declaration relates.
(2) The maximum period of disqualification under this section is 15 years.’
The directors of the company were perhaps fortunate that the Registrar chose not to also exercise the jurisdiction to disqualify the directors from acting for a period of time.
WHAT TO DO NOW
If you are faced with insolvency issues with your company, a wrongful trading claim for personal liability or director disqualification proceedings please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost.
If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.
Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.
Until the next time…
THE DIRECTORS FRIEND