- Created by: Francesca Marks
- Created on: 13-01-17 15:44
What if company is insolvent?
Insolvency Act 1986- can be cash flow insolvent- cant pay debts when they fall due. Balance sheet insolvent- assets dont meet liabilities.
BNY Trustee 2013- balance sheet insolvency, depends on how far away the liability is. Reluctant to make insolvent.
Who enforces? Shareholders no longer interested. s212- misfeasance. If misfeasance by director allows remedy to be bought by liquidator or adminstrator or any creditor. Creditor has all the rights of liquidator- Sandu v Sidu 2009. Right to bring a claim for any duty.
Bona fide for the benefit of the creditors and not the company. When does that change take place? BTI 2014 and Sequana 2016- need to be more than simply the risk of insolvency. Have to be on verge of insolvency or precarious position.
Fraudulent preference- s239 Insolvency Act- if fraudulently pay one creditor over the others, can set aside fraudulent preference.
Re DKG Contractors 1990- paid off one creditor at a time when there was doubtful solvency. Was breach of duty of good faith. Also fraudulent preference.
Re Pantone 2002- DKG only applies to fraudulent preferences. If not fraudulent preference, there is no general breach from paying one before the other. Duty to all creditors.
Colin Gwyer 2003- test is 'was the director acting in benefit of the creditors as a whole?' Objective. Reasonable person? However s172 subjective.
Hellard v Carvallio 2013- needs to be subjective as s172 is and is what director thinks best. If they never thought about it it becomes objective.
GHLM Trading v Maroo 2012- need to distinguish between breach and remedy. Breach if pay off one creditor even if dont think for creditors good as a whole. Remedy needs to be repaid. If not fraudulent, needs to be evidence of loss or gain to directors. If no evidence, then no remedy.
Two liabilities only if solvent-
Fraudulent trading- s213 of IA. Business carried on with intent to defraud creditors.
Anyone who is knowingly a party is liable to compensate anyone whos lost.
Morphitis v Bernascni 2003- restorative damages, not punative.
Morris v State Bank of India 2003- liable if actually know or deliberately didnt know. Not constructive notice.
Criminal offence. Joint and several liability. Liability to compensate- Re Overnight 2010.
Very hard to catch. Cork report said didnt really work. Concerned with people who trade too long. Came up with wrongful trading- 1986 IA s214.
Only applies to directors and winding up and adminstration. Limited to formal insolvency. Liable to contribute. ss2 has criteria. Negligence- reasonable person. Needs to be established at a fixed point. Standard of care same as s174.
Classic case- Re Produce Marketing 1989- 1981- company traded at a loss and had done since then. 1986 bank refused to honour any more checks. 1987 draft accounts were produced for 4/5 4/6. Signed off in 1987 and company clearly insolvent. Auditors warned directors might be liable...
if continued. Tried to deal with supplier. Insolvent. Liquidator going for wrongful trading. Minimum standards for all directors no matter company size. Need to have up to date accounts. Accounts were a year out of date. Were judged on what they ought to known so wrongful trading back dated to 1986. Liable to compensate for wrongful trading.
After this directors over reacted and had advised to wind up companies that were fine. Courts began to step back. Need 'rescue culture'. Shouldnt be penalised for reasonable attempts to save.
Re Sherborne Associates 1995- established liquidator has to show exact time wrongful trading began. If directors aware of problem and have rescue plan and trys to sort out, this is good evidence against wrongful trading. Doctrine of reasonable reliance applies.
Re Brian D Pearson 1999- two directors, one runs the other doesnt. Accounts showed increasing losses and assets were worthless and should have known. Temporary cash flow shortage was wrong. No such thing as non playing directors.
Rubin v Gunner 2004- formed in April. Until October had genuine belief in sufficient funding. In those 6 months, no wrongful trading.
Re Cubelock 2001- wrongful trading is about continuing to trade, not starting up. Many company's start insolvent. That's not wrongful. Continuing when unreasonable to do so is.
Ward v Perks 2007- company trading for 10 months. Never ceased to be balance sheet insolvent. But although directors should've been aware, the accountants had predicted a promising future. Creditors didnt press for another year. Need to guard against directors going down at first sign of trouble so no wrongful trading.
Singla v Hardman 2010- director signed contract to make film. Had no assets. No committments from anyone, and went insolvent. Judge said director decided wouldnt be liable so put risk on company. Abused the corporate structure.
Roberts v Frolich 2011- developing building site. Never properly funded. Director had willfully blind optimism. No reasonable belief.
Brooks v Armstrong 2015- 1) judge director by his function, have minimum standards. 2) not hindsight, don't look back. Judge only on foresight, what were directors prospects. Failure to act on rational expectation. 3) no statutory duty not to trade at a loss. Might well be reasonable to trade self out of trouble. 4) defence subsection 3- s214(3)- if took all reasonable steps to prevent insolvency. When they find wrongful trading the burden of proof shifts to the director.
Grant v Ralls 2016- even if have wrongful trading, if it made no difference there is no liability. If the loss would've happened anyway. Liquidator needs to show causal connection between loss.
Only the most serious cases are brought.
Whats the penalty?
Re Produce Marketing 1989- compensatory, not penal. Liquidator needs to show exactly what was lost. That is why you need to have a fixed point when it starts to quantify.
2 people can be liable even if not properly appointed- shadow and defacto directors. ss7 of 214 IA- says expressly applies to shadow directors.
Shadow directors- s251 CA + IA- A person in accordance with, whos direction and instructions, the directors of a company are accustomed to act. Someone whos controlling the board. Doesn't apply to professional advice.
Re Hydrodam 1994- four requirements to be a shadow director from Millet- 1) need to establish actual directors 2) did the defendant direct them as how to act as directors? 3) did they act in accordance? 4) were they accustomed to it? Must have no input of their own- were puppets. Not enough to just be a member of the board. Needs to be more than that.
Trying to narrow the provision.
Re PFTZM 1995- in liquidation- could he get hold of people who had been in liquidation of insolvency? Creditors gave conditions on money, does that make shadow directors? No, simply preserving their debts, as the directors werent obliged to follow it if they didnt want to.
Sec of State v Deverell 2000- (Definitive case on this)- to protect public from people who manipulate companies, shouldnt be restricted. Not necessary to show covers who sphere of corporate activity. Can have actual director input. No need to show link, just need facts. No need to show subservice. Question of fact ultimately. CoA said shadow directors can be upfront and open.
Ultraframe- how many of board need to be acting in accordance? Should be governing majority.
s70(5)- fiduciary duties apply to a shadow director.
De factor directors- not statute. Courts have applied liability to them as if they were full directors. Kind of opposite of shadow. Not properly appointed. Judicial creation.
Richborough Furniture 1996- 2 ways to be a defacto director. 1) if sole person in control. 2) acting on an equal footing with other directors. Look at what person is doing- is it something that could only be done by a director?
** v Laing (+ Hickling) 1996- Laing said can cease to be a defacto director, if stop doing it you stop being one. Hickling said if not sure if director or manager, give benefit of the doubt theyre not.
De facto directors
** v Tjolle 1998- lady had been represented to clients as director but she wasnt. Had no access to financial information and only ever did employee tasks. Never ran company. Her title was motivational. She wasn't a de facto director. High water mark.
Re Kaytech 1999- rejected the two types. Said is it someone who has a real influence on corporate governance? Not the business, the company.
Holland v HMRC 2011- SC- H was sole director of a company. That company was sole director of another company. Only human involved was H. Was H a de facto director of the second company? Well who else made the breaches? He was the only one who could authorise. Majority said no. Collins said shouldnt increase categories of de facto director. Created where had defective appointment. Had been extended and he didnt agree. Minority said that was too formal and he was the only one involved.
Smithton v Townsley 2014- Collins was ratio of Holland. Musn't artificially create a category. Question of evidence, did he act as a director? Much vaguer than it used to be. Can be both.
Everything applies to all these people.
How does insolvency effect directors duties? Disqualification of directors- criminal offence to act as a director if disqualified. Introduced in 1986.
Company Directors Disqualification Act 1986- amended many times. 2014 Small Business Act changed it.
1) s7(a)- whenever theres insolvency, the liquidator is under a stautory duty to Secretary of State. New. Sets out conduct of each director and anything that would suggest possible disqualification. Includes shadow and defacto directors.
2) s6)- Secretary of State may petition court for disqualification. Court has to decide- has the conduct made them unfit to be concerned in the management of a company? If they make that finding of fact, the court must impose a disqualification order, minimum of 2 years. Maximum of 15. New section- s8(2)(a)- if you disqualify a director, if you can show another person caused them to do that (acting in accordance with instructions) that person can also be disqualified. Thats wider than shadow director- can be a one off instruction.
3) now under s15(a)- court has additional power. If makes a disqualification order it can make a compensation order (new) if can show they've caused loss to individuals.
Must be made within 2 years of disqualification order. Must state amount of loss. Specific individual or general creditor find. The person concerned can apply to reduce it. Maybe replacement for wrongful trading. If liquidator brings claim for wrongful trading and fail they have to pay costs. Here the secretary of state brings so no loss.
Secretary of State has 2/3 years to bring the claim after insolvency. Need to consider public interest. Can be given court leave to apply outside the time limit- SoS v Gifford 2012- given four years as very complex and strong.
At one stage threatened to flood the courts. Quasi criminal. Courts invented guilty plea- s1(a) of Insolvency Act. New one. Can give disqualification undertaking. Accept disqualification, stated period and effective as an order.
s8(a) can apply to have undertaking set aside.- Jonkler 2006- 2 director company. J was the junior one and less responsible. Gave an undertaking. Major character didnt. Department didnt proceed against him. J went to court and said had special circumstances and this was one.
Official Reciever v Kay 2009- refused to give a disqualification order when only the minor one was being targetted.
Schedule 1- said factors to look at are 1) how much did you cause the insolvency- nature, extent and how much harm caused? 2) are there any breaches of duty or misfeasance or other statutory obligation.
Dawson 1987 and Churchill 1988- D- must be breach of standards of commercial morality or gross incompetence.
Re Sevenoaks Stationers 1990- 1) civil trial but has to be conducted with fair procedure. All the evidence and judge summed up and added prosecutions. Didnt give the defence a chance to answer. Judges cannot interpret own charge sheet, has to be on case presented by the Sec of State. 2) all glosses are irrelevant. Single question- Is person unfit to be concerned with the management of a company?
Put into categories for teaching-
Wrongful trading- incompetence. McTigue 1996- director paid those who asked hardest. Didnt have a plan.
Not wrongful trading- Creegan 2002- 1) cause company to trade whilst insolvent and 2) no
reasonable prospect of paying creditors. Need both- stronger than wrongful trading.
Blackwood 2005- having one doesnt automatically lead to disqualification.
Gray 1995- mental element- 1) all need to show is that directors ought to have been aware they couldnt pay the debts (objective). 2) doesnt matter if they've learnt their lesson. Irrelevant because all about protecting the public. Dont want people exploiting limited liability. Judged on date of liquidation.
Supervision cases- lack of any control-
Continental Assurance 1996- non exec directors. Failure to control the board was regarded as so incompetent as to warrant disqualification.
Re Kaytech 1999- claimed he didnt know he was director. Said he was a defacto director. Public interest requires disqualification.
Official Reciever v Vass 1999- resident director of 1000 company's on channel islands. Can't be a non playing director.
Reasonable reliance- Re Bradcrown 2001- a defence but must be reasonable reliance. He had abdicated all responsibility so not reasonable.
Re Barings 1999- bankrupted bank. Best explanation. Protecting public. Incompetence to a high degree in a management role is enough. Had no control on the guy who lost billions. Cannot delegate everything.
Breach of duty-
CS Holidays 1997- series of breachs of enough.
If you're a director and things are going wrong, should you resign? Does failure to resign make unfit?
Gash 1997- said would be a good idea to resign, especially if youre giving advice and theyre taking no notice. But does depend on facts. If thought could change their mind, it might not be.
Goldberg 2004- there are no categories. This is the only test. Do not categorise. Each case depends on own facts.
How long to disqualify for?
Re Sevenoaks 1990- 3 bands. 2-5 years for minor cases. 6-10 years more serious, breaches of duty, more serious acts. 11-15- very serious. Includes second offences.
Re T and D Services 1990- 10 years. Company becoming insolvent. Director owed money by company. Pays himself first and no one else. Buys company for far less than worth.
Re Travel Mondial 1991- phoenix syndrome. Repeatedly making companies and them going bust. Three sucessive travel agents. 9 years.
Re Swift 735 1993- can extend the period.
Sec of State v Rosenblatt 2016- example of serious one. Didnt pay VAT and claimed it back. Knowingly involved in this fraud. Judge said very serious case- 13 years.
Mitigation- can you mitigate the sentence?
Griffiths 1988- put it in one of those bands and then can mitigate. Depends on age, length of...
time to bring proceedings, did you admit it?
SoS v Black 2006- admition of guilt reduced period.
Can make an exception for a particular company- s17- Maybe a family company and without that person the company may fold. It is a balancing act.
Collins 2000- 3 factors to balance. 1) whats the need of this person? 2) how do we protect the public? 3) musn't subvert the purpose of the disqualification.
R v Seager 2009- if break the order, you get put in prison.