Home Knowledge Court of Appeal Reverses Ruling that Directors Personally Liable for Debts Arising from Reckless Trading

Court of Appeal Reverses Ruling that Directors Personally Liable for Debts Arising from Reckless Trading

The Court of Appeal has overturned a High Courtruling from 2015 that a former director of a car dealership was personallyliable to a customer who paid the company for three vehicles in the weeks priorto the company’s liquidation where the cars were ultimately not delivered tothe customer due to the company’s liquidation.


The customer had agreed to purchase threevehicles from Appleyard Motors Limited (In Liquidation) (“Appleyard”) and hadtransferred the full price of the vehicles to Appleyard’s bank account.Appleyard sourced the vehicles through another car dealership, however, whenAppleyard sought to transfer the funds to the other dealership its bank refusedto facilitate the transfer. Consequently, the other car dealership refused toprovide the vehicles to Appleyard and Appleyard was unable to deliver thevehicles to its customer. Appleyard sought to engage with its bank but havinglost its support it ceased trading and went into liquidation shortlythereafter.

Appleyard had faced difficulties in the yearsleading up to its liquidation, including the withdrawal of a significant carstocking facility from a third party dealer. It was however established by thedirectors that they had obtained professional advice regarding the company’sposition, including the replacement of the stocking facility, and had secured alimited guaranteed stocking facility with the other dealership.

Following the commencement of theliquidation and the inability of the liquidator to return the funds to thecustomer, the customer brought an action to have the directors of Appleyardheld personally liable for the company’s debt. As previously reported here, the High Court found the directors guilty of reckless trading underSection 297(A) of the Companies Act 1963 and determined that they should bepersonally liable to the customer.

The appeal

One of the directors found to be personallyliable appealed the decision to the Court of Appeal.

In overturning the High Court’s decision, theCourt of Appeal applied a modified form of the test under Section 297A to thatapplied by the High Court. The Court of Appeal held that having regard to thegeneral knowledge, skill and experience that may reasonably be expected of aperson in the position of the director, he ought to have known that his actionsor those of the company would cause loss to a creditor. It was notenough that, viewed objectively, the director ought to have known that hisactions or those of the company might cause loss to a creditor.

The Court of Appeal held that the loss to thecreditor must have been foreseeable to a high degree of certainty. Mr JusticeHogan, delivering the Court of Appeal’s judgment, found that while it was clearthat Appleyard’s financial situation was perilous and it took an “enhancedrisk” with the funds by accepting advance payment before the vehicles weredelivered, the director had no reason to believe that the decision of the bankto cut off support to the company was imminent or even threatened. In suchcircumstances, the director could not have known that the receipt of the monieswould cause loss to the customer and accordingly, it could not be held that theconduct of the director amounted to reckless trading for the purpose ofascribing personal liability under the Companies Act 1963.


The judgment appears to have vindicated theefforts of the directors to restructure the company in the period leading up toits liquidation. It is authority for the proposition that recklessness on thepart of a director, for the purpose of holding that director personally liablefor the debts of a company, will require knowledge that the actions of thedirector would in fact cause loss to creditors not that theymight so do.

Contributed by Ruairi Rynn

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