The Directors Friend - Director's Personal Liability for Costs

THE DIRECTORS FRIEND BLOG

‘Directors personal liability for costs’

This is the next in the series of blogs for the Directors Friend blog.

The case

In the recent case of Mullaley and Company Limited and (1) Regent Building Services Limited (2) Christopher White [2017] EWHC 2962 (Ch) heard by David Stone sitting as a Deputy High Court Judge considered (amongst other issues) an application for injunctions to prevent the presentation of a winding up petition.

Summary

The company Mullaley & Co. Limited (the ‘Company’) by way of opposing a Statutory Demand issued by Regent / Mr White brought the proceedings due to the threat to wind it up made by the same.

That was in circumstances where Regent Building Services Limited (‘Regent’) / Mr White chose not to use the option to pursue a contested debt in the usual way under Part 7, rather than using the Statutory Demand procedure for uncontested debts.

Responding to a Statutory Demand by a company

In the Directors Friend earlier blog this area of law was explained briefly. Essentially an application should be made to Court within 18 days of service of the Statutory Demand (if, in the meantime it is not withdrawn). The application should set out the detail of why the debt is disputed or there is a cross claim. This should be put across in good faith and has sufficient substance to justify it being determined in a normal civil action.

The debt in this case was disputed by the Company on the basis that (at paragraph 14) that:

  1. The debt was not assignable without the Company’s consent, which it has never given;
  2. Some of the amounts that made up the debt had been paid, or were not at that stage due; and
  3. The Company contested the ability of Regent / Mr White to claim the debt on behalf of the (alleged) assignor.

Correspondence between the parties had elicited 3 different copies of an Asset Purchase Agreement (‘APA’) all of which were subject to criticism for various reasons.

A winding up petition was presented against the alleged Assignor and any APA post that date would have been void under section 127 of the Insolvency Act 1986 (discussed here). In any event a third party had a fixed and floating charge over the assets of the Assignor (paragraph 16).

The judgment

The judge set out that the:

  1. Courts power to grant an injunction in these circumstances stems from its jurisdiction to prevent an abuse of process (per paragraph 41);
  2. Court does have to go into the argument sufficiently to be able to form a view about whether the dispute to the debt or the cross-claim put forward in good faith and has sufficient substance to justify it being determined in a normal civil action (per paragraph 42);
  3. Threshold for establishing that a debt is disputed on substantial grounds in the context of a winding up petition is not a high one for restraining the presentation of the winding up-petition (per paragraph 43); and
  4. Hurdle is a low one. Winding up procedure should not be pursued on the basis of a debt which is disputed in good faith, and where that dispute is of sufficient substance to warrant determination in the usual way (per paragraph 44).

The judge found at paragraph 51 that:

… any of these three disputes on its own would have been sufficient to grant an injunction to restrain Regent/Mr White from presenting a winding up petition against Mulalley. Together they are compelling.

The injunctions were granted.

Unfortunately for Mr White it was found that his conduct was unreasonable and an order for indemnity costs was made against Regent and him. That is payment of costs in full!

The Directors Friend comments

It is telling that the ‘Agent’ as stated by the judge at paragraph 49(b) in all of the APA’s was Rigil Kent Corporate Rescue Limited now Rigil Kent Corporate Acquisitions and Turnaround Limited. This company was placed into Provisional Liquidation on 19 December 2017 and compulsorily wound up on 28 February 2018. The Insolvency Service press release dated 08 January 2018 is here.

The press release states:

All of the companies were part of a scheme and business model which purported to provide advice and business recovery services to directors of insolvent companies.’

Whilst Regent / Mr White did have the benefit of legal advice at an earlier stage of the case it is notable to see the ‘Rigil’ name here.

It was also unsurprising that in the circumstances that the injunctions were granted where the threshold is not a high one.

Therefore, the lessons for a well-advised director would be:

  1. Obtain the right professional advice at the right time from a regulated firm;
  2. Make sure that in attempting to collect a debt that you / the company use the right process to do so; and
  3. Make sure that your conduct as a director in litigation with driving the actions of the company is not unreasonable or that director may be at risk of personal liability for costs.

WHAT TO DO NOW

If you are faced with:

  • worrying insolvency issues with your company;
  • a claim against you for misfeasance / breaching your duties as a director to a company or any claim for personal liability; and / or
  • director disqualification

then please talk to me today on +44 (0)1992 558411.  That is in order to protect your position without delay.  The earlier that you speak with me the more that I can likely help.

The Directors Friend is a Hertfordshire / London based solicitor and a full member both the Insolvency Lawyers Association and the Association of Business Recovery Professionals.

Until the next time...

 

THE DIRECTORS FRIEND

 


The Directors' Friend: – Facing Personal Liability for 'Wrongful Trading' - Call for 'Robin Hood'

This is the next in my series of blogs for the Director’s Friend.

SUMMARY

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.

SECTION 214

In summary, this is 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:

  1. 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
  2. the general knowledge, skill and experience that that director has.

BACKGROUND

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 [2016] 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.

FINDINGS

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.

COMMENT

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.

YOUR ADVISER

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