MORE BAD NEWS IF YOU’RE A COMPANY DIRECTOR – WHERE IT’S ALL GONE WRONG AND HOW TO AVOID PERSONAL BANKRUPTCY – PART 2.

The Director’s personal liability

This is Part 2 of notes on company directors’ personal liability. Go to https://www.philipholliday.com/uncategorized/company-insolvencies-rise-by-almost-a-fifth-directors-personal-liability/ for Part 1

20:20 vision hindsight

I’ve never met a company director that wasn’t outraged that a liquidator was alleging personal liability for the failed company’s debts. And I’ve yet to meet one I felt had been dishonest. The dishonest ones are out there but they are a minority. Mostly, they are hard working people caught in the bright light and 20:20 vision of hindsight.

For example: a liquidator’s clerk hungrily looks for something to give to the litigation funder. They find remuneration taken as a dividend wasn’t supported by distributable profits and claim it back. The fact that the liquidator in question was a department of the accountancy practice that advised tax efficiency of dividends was quietly overlooked.

But 20:20 vision hindsight is a common argument and mostly ignored by the litigation funder’s lawyers. They take the view that such hindsight is still right and the director wrong. So, what can you do?

S1157 Companies Act 2006

A judge has a statutory power to relieve directors of liability for breach of duty in certain circumstances. S 1157 of the 2006 Act provides:

1)If in proceedings for negligence, default, breach of duty or breach of trust against:

(a)an officer of a company, or

(b)a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit….

Go to: https://www.legislation.gov.uk/ukpga/2006/46/section/1157/2008-05-26 for the full section.

Sadly, it’s one of those provisions that’s known for its failure to apply rather than the initial source of comfort it might be for the beleaguered director. That’s probably because nearly all directors claim that they have acted “honestly and reasonably”. If every judge accepted that, nothing else would work.

It’s therefore a rare case where a judge will exercise S1157 discretion.

Tools in the Liquidator’s Box

At first sight, there is a formidable array of tools in the Liquidator’s box. Starting with the Companies Act 2006, you have the following duties:

S171 – to act within powers;

S172 – to promote the success of the company;

S173 – to exercise independent judgment;

S174 – to exercise reasonable care, skill and diligence;

S175 – to avoid conflicts of interest;

S176 – not to accept benefits from third parties; and

S177 – to declare interest in proposed transaction or arrangement.

Then, S 212 of the Insolvency Act 1986 empowers the court to compel (amongst others) a director to repay or account for money by way of compensation if there has been misfeasance or breach of fiduciary or other duty as the court thinks just.

That’s a pretty wide ranging and all-encompassing collection of obligations. It doesn’t take a particularly creative clerk in an insolvency practitioner’s office, poring over the companies’ financial records, to find cause for complaint.

So, what can you do?

The first thing to observe is that it’s such a wide-ranging collection of obligations that, by counsel of perfection, almost anyone can be caught by it. Of course, it’s different if fraud or deceit are involved. If not, there’s always consideration of what was reasonable in the circumstances. No two cases are the same and every case turns on its particular facts.

Then, it’s generally accepted by commentators on both sides of the litigation fence that the wording of Ss. 171 – 177, though well meaning, is too vague and needs revision. Until that happens, the discussion of a director’s personal liability can go either way.

Critically, what you must not do is fear the (sometimes) 10-page long letter before action from the litigation funder’s solicitors when it drops on your mat. 90% of it has been written from template and sent to 100s of other directors in your position. It’s an industrial process and needs to be seen that way. Of course, that’s not to say that it can be ignored but get experienced advice before you reply.

And, it hardly needs to be said, be aware of these possibilities before you call in the liquidator. Be prepared and be proactive towards what has become a routine part of the insolvency process.

Philip

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