An interesting case involving sections 213 (fraudulent trading) and 214 (wrongful trading) of the Insolvency Act 1986, which are similar to sections 255 and 256 of the BVI Insolvency Act 2003. Could a director of an English company escape liability under section 214 where she prevailed upon by her partner to be a director and where she had not been and was not expected to be responsible for the business and affairs of the company, in which she was wholly uninvolved?
Background
The joint liquidators of two companies (C1, C2), wholly owned by X, sought declarations under sections 213 (fraudulent trading) and 214 (wrongful trading) of the Insolvency Act 1986 ("the IA86") to require directors X and Y to contribute to the companies' assets. The joint liquidators also brought proceedings for the making of irregular payments. X was the sole director of both companies, except for a period of four months when Y was C2's sole director with X acting as C2's de facto director. Although Y, X's life partner, was C2's sole director during this period, she was not involved in its business and affairs. Both companies entered compulsory insolvent liquidation after unopposed winding-up petitions by a local authority for unpaid National Non-Domestic Rates Tax ("NDR").
Findings
- Had there been fraudulent trading in keeping the first and then second companies alive while facing a significant liability for unpaid NDR?
For liability under section 213 of the IA86, the court must find an intent to defraud a creditor or creditors, involving actual dishonesty and real moral blame according to the objective standards of fair trading among ordinary, decent, commercial people. Creditors need not know they may become creditors, but it must be shown the director should have appreciated that a debt or obligation would be owed, not that he could escape liability by a subjective belief in his own honesty.
X was an experienced director and he alone conducted the companies' fraudulent trading at the local authority's expense, knowing the companies could not pay NDR obligations without genuine belief debts would be paid. Intending to repeat past tactics, he incurred unpaid liabilities having no real or honest belief that those debts would be discharged and no real expectation of a reduction or discount, planning to abandon and dissolve the companies and resume business via new "phoenix" companies. It was appropriate to order that he contribute to the liquidations of both companies a sum sufficient to meet the "totality of the loss" incurred.
- Did the respondents efforts to trade through their troubles amount to wrongful trading and, if so, what was the quantum of liability?
Under section 214 of the IA86 the applicant must show that the respondent was a director (including shadow director) of a company in insolvent liquidation, and that at some time before the winding-up, the respondent either "knew or ought to have concluded" that there was "no reasonable prospect" of avoiding either insolvent liquidation or administration, and yet from that point, that person did not take "every step" that he or she ought to have taken. As with section 213 of the IA86, the purpose of a contribution is compensatory and not penal.
X knew, and Y should have realised, C2 was doomed to insolvent liquidation. As C2's sole director, Y had a duty to understand its affairs but failed to take even basic steps, which would have revealed C2's inability to pay NDR debts. Her claim that she did not know anything about C2's business or affairs during her short tenure as a director of C2 would not save her. X's section 214(3) IA86 defence collapsed given his section 213 IA86 fraudulent intent, incompatible with minimising creditor losses. The section 214 IA86 remedy was irrelevant for X due to the section 213 IA86 relief but required Y to contribute the increase in C2's net deficiency during her directorship, undiminished by her limited role, as she accepted the position and neglected to inform herself about the business.
- How should irregular payments be identified in the claim for misfeasance?
Directors are under a duty to apply the company's assets only for proper purposes, and to account for their use. Where they receive them directly, the burden falls on the director to show that each payment was made properly. The Court can draw inferences from oral and documentary evidence (or its absence). In this case, the absence of documentation for the challenged payments pointed to them having been dispersed improperly. X would therefore be liable to cover all these amounts and Y would be liable to compensate the company in the aggregate amount dissipated whilst she was a director.
- Was there any basis for the court to grant relief to the second respondent under section 1157 of the Companies Act 2006?
Section 1157 of the Companies Act 2006 entitles a defendant to apply to the court for relief where they have acted honestly and reasonably. Y relied on this section arguing that she had been prevailed upon to become a director of C2 against her wishes, that she had been a director for a comparatively short time, and that during that time she had neither been nor had she been expected to be responsible for the conduct of C2's business, in which she was wholly uninvolved. The Court found that complete inactivity by a director was by definition unreasonable and precluded such relief.
Stacks Living Ltd v Shergill [2025] B.C.C. 309
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