Court of Appeal Reverses Ruling that Directors Personally Liable for Debts Arising from Reckless Trading
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The Court of Appeal has overturned a High Court ruling, which found a company's directors personally liable for debts arising from reckless trading, on the grounds that the loss suffered was unforeseeable and accordingly the conduct could not be deemed reckless trading
The Court of Appeal has overturned a High Court
ruling from 2015 that a former director of a car dealership was personally
liable to a customer who paid the company for three vehicles in the weeks prior
to the company's liquidation where the cars were ultimately not delivered to
the customer due to the company's liquidation.
Background
The customer had agreed to purchase three
vehicles from Appleyard Motors Limited (In Liquidation) ("Appleyard") and had
transferred the full price of the vehicles to Appleyard’s bank account.
Appleyard sourced the vehicles through another car dealership, however, when
Appleyard sought to transfer the funds to the other dealership its bank refused
to facilitate the transfer. Consequently, the other car dealership refused to
provide the vehicles to Appleyard and Appleyard was unable to deliver the
vehicles to its customer. Appleyard sought to engage with its bank but having
lost its support it ceased trading and went into liquidation shortly
thereafter.
Appleyard had faced difficulties in the years
leading up to its liquidation, including the withdrawal of a significant car
stocking facility from a third party dealer. It was however established by the
directors that they had obtained professional advice regarding the company's
position, including the replacement of the stocking facility, and had secured a
limited guaranteed stocking facility with the other dealership.
Following the commencement of the
liquidation and the inability of the liquidator to return the funds to the
customer, the customer brought an action to have the directors of Appleyard
held personally liable for the company's debt. As previously reported here, the High Court found the directors guilty of reckless trading under
Section 297(A) of the Companies Act 1963 and determined that they should be
personally liable to the customer.
The appeal
One of the directors found to be personally
liable appealed the decision to the Court of Appeal.
In overturning the High Court's decision, the
Court of Appeal applied a modified form of the test under Section 297A to that
applied by the High Court. The Court of Appeal held that having regard to the
general knowledge, skill and experience that may reasonably be expected of a
person in the position of the director, he ought to have known that his actions
or those of the company would cause loss to a creditor. It was not
enough that, viewed objectively, the director ought to have known that his
actions or those of the company might cause loss to a creditor.
The Court of Appeal held that the loss to the
creditor must have been foreseeable to a high degree of certainty. Mr Justice
Hogan, delivering the Court of Appeal's judgment, found that while it was clear
that Appleyard's financial situation was perilous and it took an "enhanced
risk" with the funds by accepting advance payment before the vehicles were
delivered, the director had no reason to believe that the decision of the bank
to cut off support to the company was imminent or even threatened. In such
circumstances, the director could not have known that the receipt of the monies
would cause loss to the customer and accordingly, it could not be held that the
conduct of the director amounted to reckless trading for the purpose of
ascribing personal liability under the Companies Act 1963.
Comment
The judgment appears to have vindicated the
efforts of the directors to restructure the company in the period leading up to
its liquidation. It is authority for the proposition that recklessness on the
part of a director, for the purpose of holding that director personally liable
for the debts of a company, will require knowledge that the actions of the
director would in fact cause loss to creditors not that they
might so do.
Contributed by Ruairi Rynn
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