Jersey Company Law Series: Directors' Liabilities In Insolvencies And The Disqualification Of Directors

KEY TAKEAWAYS

• When a company is at risk of insolvency directors need to be clear as to their duties and understand to whom they are owed

• If a liquidator or the Viscount uncovers evidence of wrongful or fraudulent trading the Royal Court may order that a director is personally liable for the debts of the company or to contribute to the assets of the company

• A person may be disqualified from acting as a director in Jersey on an application to the Royal Court for a period of up to 15 years

This guide will consider the options that are available to a liquidator or the Viscount, when they are administering the affairs of an insolvent Jersey company in a creditors' winding up or a désastre, to take action against directors as well as looking at the risks to directors if they are found to have breached their duties and the consequences that may arise.

Insolvent companies

Even though the powers of directors cease on the appointment of a liquidator, except where their continuance is sanctioned by either the liquidation committee or the liquidator, directors have a duty to co-operate with a liquidator and to provide such information concerning the company and its business, dealings, affairs and property as the liquidator requires. A liquidator will particularly scrutinise and seek an account from the directors concerning transactions that appear to have been carried out at a time when the company was insolvent or where it appears that the transaction led to the insolvency of the company.

Failure to co-operate with a liquidator is an offence under the Companies (Jersey) Law 1991 (the "Companies Law"), it is also an offence to fail to co-operate with the Viscount under the Bankruptcy (Désastre) Law 1990 (the "Désastre Law"), which is punishable through a fine, a period of up to six months imprisonment or both.

Given the arsenal of statutory powers and remedies available to a liquidator or the Viscount during a winding up ordésastreand that the actions of directors will fall within the scope of a liquidator's investigations coupled with consequential risk of disqualification, directors should know and understand their duties and position prior to and after a company enters into an insolvency process.

Wrongful trading

The Companies Law and the Désastre Law provide that a liquidator or the Viscount can make an application to the Royal Court for an order that a current or former director be found be personally responsible, without any limitation of liability, for any or all debts of the company arising from when the director knew that there was no reasonable prospect, on the facts known to them, that the company in question would avoid a creditors' winding up or a declaration endésastreor was reckless as to whether the company would avoid a creditors' winding up or a declarationen désastre. This is known as wrongful trading.

Under Article 177(3) of the Companies Law, it is possible for a director to avoid liability for wrongful trading if they can show that they took reasonable steps with a view to minimising the potential loss to the company's creditors. To this end, the Court inWight v Chappell [2024] EWHC 1417 (Ch), which although it is an English case provides useful guidance given the similarities between the English and Jersey law on wrongful trading, held:

What constitutes reasonable steps taken by a director will depend on the circumstances of the case.

The case ofIn the Matter of Restore Builders Limited, En Désastre[2024] JRC 290, is a landmark judgment in Jersey as it is the first case in which the Royal Court has made a wrongful trading order against a director of a Jersey company. The director of the company had accumulated personal debts of nearly £1 million before he incorporated the company, and the Royal Court found that the incorporation of the company was simply used as a tool by the director to avoid his impending personal bankruptcy.

The Royal Court further held that the director knew or ought to have known that there was no reasonable prospect that the company would avoid bankruptcy, even at the time of its incorporation. It also held that no defence was available, as the director had failed to take reasonable steps to avoid minimising the potential loss to the company's creditors. The Royal Court particularly noted that individuals should not be able to "play fast and loose" with the relevant insolvency rules and provisions.

Fraudulent trading

Under the Companies Law and the Désastre Law, persons who were knowingly parties to the carrying on of a business with the intent to defraud the creditors of the company or for fraudulent purposes, may on the application of a liquidator or the Viscount, be found by the Royal Court to be liable for fraudulent trading and ordered to make such contributions to the company's assets as the Royal Court thinks proper.

There would be 'intent to defraud' where the company continues to incur debt when there is, to the knowledge of the directors, no reasonable prospect of the creditors receiving payment for such debts.

Article 178(4) of the Companies Law provides that where a fraudulent trading order is made the Royal Court can also direct that any creditor of the company may have its priority status altered so as to rank it after all other debts of the company and any interests on those debts. The same power is also applicable in the case of a wrongful trading claim.

Disqualification of director

Under Article 78 of the Companies Law, the Minister for External Relations, the Financial Services Commission or the Attorney General may apply to the Royal Court for an order that a director should not, without the leave of the Royal Court:

• be a director of a company or in any way be concerned or take part in the management of a company

• be a member of council of a foundation or in any other way be concerned or take part in the management of such a foundation

• or, in Jersey, in any way whether directly or indirectly be concerned or take part in the management of a body incorporated outside Jersey

The Royal Court may disqualify the person from acting as a director for a period of up to 15 years.

The Attorney General has issued guidance in relation to matters that may lead him to make an application for the disqualification of a person being a director. The following are some key examples of the factors which may trigger an application for the disqualification of a director by the Attorney General:

• failure by the director to co-operate with a liquidator or the Viscount where the company is subject to winding-up or a declarationen désastre

• failure by the director to account for company property or to deliver the same to any liquidator or the Viscount where required to do so

• negligent completion by the director of a statement of solvency

• where the Royal Court makes an order that there has been:
  • a transaction at an undervalue
  • the giving of a preference
  • an extortionate credit transaction
  • wrongful trading in respect of a director
  • fraudulent trading in respect of a director

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.