Potential legal liability for directors of insolvent companies

Potential legal liability for directors where their company may be Insolvent will be a cause for concern for all directors of limited companies. This has been highlighted in two recent landmark legal cases, the first in 2015 in the matter of Brooks and Willetts, (Joint Liquidators of Robin Hood Centre PLC) v Keiron Armstrong and Ian Walker EWHC 2289 (Ch).
In this case, the judge held that it was up to the directors of the insolvent company to prove that they took “every step” to minimise the potential loss to creditors “as soon as” they knew the company would not reasonably avoid liquidation.

This is a change from the previous assumption that is it was for the liquidator to prove that the director(s) had not taken every step that was required. The judge in this case said the legislation did not say the liquidator was required to prove that every step had not been taken and therefore he took the opposing view and threw liability onto the directors. In a situation where a director may be aware of a large tax bill or perhaps a large contingent trading debt or employee liability crystallised as a result of a court ruling, or where a company’s income is likely to be lost as a result of changes in legislation, the director must now be able to demonstrate that they have taken every step in a reasonable time frame to bring the company position round to solvency or have ceased trading if that is appropriate.

The very recent case of Ball (liquidator of PV Solar Solutions Ltd) and another -v- Hughes and another EWHC 3228 (Ch) in January 2018, the judge found that two directors who had taken money owed to themselves by the company at a time when it was of ‘dubious insolvency’ should have had consideration for the position of the company and the effect of their decision to take the money on the creditors of the company.

In this situation, the directors had the choice of paying their remuneration with the deduction of PAYE, but chose to pay themselves by means of a reduction in their director’s loan accounts. While the directors sought to defend their position by stating that they were owed wages and they were applying the duo-matic principle i.e. that they were the sole shareholders of the company and therefore could be deemed to have passed the necessary resolutions to pay themselves these moneys, the judge rejected that defence. This again throws focus on the position of directors in situations where they are aware that large creditors are unpaid, particularly where there are large debts due to HMRC, even though trade accounts have been paid.

There are a number of areas where directors need to take precise advice on their position in a scenario where they believe that their company may be moving towards insolvency.
Should you wish to seek further advice contact Colin Saville 0113-868-1203 or fill out our contact form on our website