RECOVERIES FROM DIRECTORS AND OTHER COMPANY OFFICERS
There are a number of different circumstances where a director of a company may be liable to recoveries by the liquidator or creditors of a company. In summary, those circumstances may be categorised into three areas:
It is possible for a company to bring a claim against a director for negligence, misfeasance, breach of statutory duty or breach of fiduciary duty under the common law. The Act provides a mechanism for these types of claims to be brought by creditors, contributories, the official receiver or the liquidator [note 1]. So far as concerns those types of actions, this Part will cover only the procedure for the official receiver to bring actions under the Act although, invariably, many of the considerations will be the same for claims brought by creditors, etc.
The official receiver when investigating the affairs of a company [note 2] should be aware of any potential recoveries that may benefit the company where there has been a breach by the director or where there is a debt owing to the company from a director. The official receiver, as liquidator, will need to establish that the director(s) has committed a breach or owes the company money and attempt to establish the amount of compensation or debt that is due. The official receiver will also need to check that any breach has not been sanctioned by the company (see paragraph 75.130).
The evidence that is likely to be appropriate will vary from breach to breach and from company to company and it is not easy to give specific guidance. Studying the examples of breaches and comparing the actions of the director to the requirements the law should assist (see paragraphs 31.4B.73 and 31.4B.74).
Unlike other forms of antecedent recoveries (see, for example, preferences and transactions at an undervalue – see Chapter 31.4A), recoveries of the type covered by this Part are not ‘recoveries’ at all in the strict sense of the word, as the court does not necessarily seek to restore the company to a position that it would have been in had a transaction not have taken place; rather the court will seek to have the director (or other liable person) pay compensation for the loss to the company caused by his/her action/inaction. It is not intended that the payment should be punitive (that is, to punish the director) [note 3].
A director has a duty to act in the best interests of the company and not, for example, to seek personal profit when carrying out his/her role as director.
Where a director has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary duty (including a duty of care [note 4]) in relation to the company [note 5], the official receiver, as liquidator, can bring a claim in the court, for the court to examine the director’s conduct and compel him/her –
These provisions apply equally to any officer of the company (including a shadow director [note 8] and a de-facto director) [note 9] [note 10] or a company secretary, and the order for compensation may be apportioned between the directors as the court sees fit [note 11].
Assuming that there is evidence supporting the fact that a recovery/claim may be made against a director of the company (see paragraph 31.4B.71), the official receiver may pass the matter to The Service’s antecedent recovery contractor (see Part 1).
The Companies Act 2006 provides a statement of a director’s duties, which are split between general duties and specific duties, as follows:
To promote the success of the company (see paragraph 75.90)
To exercise independent judgement (see paragraph 75.92)
To exercise reasonable care skill and diligence (see paragraph 75.93)
To avoid conflicts of interest (see paragraph 75.94)
Not to accept benefits from third parties (see paragraph 75.97)
To declare an interest in a proposed transaction or arrangement with a company (see paragraph 75.98)
Specific statutory duties
To declare an interest in existing transactions or arrangements (see paragraph 75.103)
To have the company approve a substantial property transaction (see paragraph 75.108)
To have the company approve loans or quasi-loans (see paragraphs 75.110)
To have the company approve a payment for loss of office (see paragraphs 75.120)
To obtain a trading certificate (see paragraph 31.4B.88F)
In connection with the company’s purchase of its own shares (see paragraph 31.4B.88E)
Whilst this list is not exhaustive and other actions of a director may constitute a breach, it should give some indication of the areas in which the official receiver should direct his/her enquiries (see paragraph 31.4B.69).
The following are examples of behaviour the commission or omission of which could be classed as misfeasance or a breach of duty:
Where a director is subject to an application for recovery, the court may grant relief (allow a lesser amount of some/all of the compensation to be paid) if the director was shown to have acted on professional advice [note 27] [note 28], though the court would be unlikely to grant relief to the director if to do so would leave a position where he/she benefitted from the loss caused to the company or creditors [note 29].
It is open to the director to personally seek a contribution from any professional advisors in these circumstances [note 30].
A director of a company is considered to be a trustee for property of a company that comes under his/her control [note 31]. A director who has misapplied, retained or otherwise become accountable for property of a company must make good any resultant losses to the company and/or any personal gains [note 32].
The official receiver, as liquidator, may seek a recovery from a director following misconduct defined in the Act, namely:
If it appears that any business of the company has been carried on with intent to defraud creditors of the company or of any other person, or for any fraudulent purpose, the court may, on the application of the liquidator, declare that any persons (not just company officers) who were knowingly parties to the carrying on of the business in the manner mentioned above are liable to make such contributions to the company’s assets as the court thinks fit [note 35].
For a successful recovery action under the provisions relating to fraudulent trading, it is necessary to demonstrate that there was an intent to defraud [note 36].
Where a director, former director or shadow director [note 38], knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, and took the decision to carry on trading, the court, on the application of the liquidator, may declare that the director is liable to make such contribution to the company’s assets as the court thinks proper [note 39] [note 40].
Simply allowing the company to continue to trade when insolvent would not put the director in contravention of these provisions. It must be shown that he/she ought to have known, or concluded, that there was no reasonable prospect of avoiding insolvent liquidation [note 41].
Information regarding wrongful; trading as a matter of unfit conduct can be found in Chapter 38 of the Enforcement Investigation Guide.
The court will not make an order requiring a director to make a contribution to the assets of the company in connection with wrongful trading if it is satisfied that the director, knowing that there was no prospect of avoiding insolvent liquidation, took every step with a view to minimising the potential loss to the company’s creditors as he/she ought to have taken [note 42]. In reaching this conclusion, the court will take into account the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as that director [note 43] and the actual knowledge, skill and experience of the director [note 44].
In addition, the court must be satisfied that the company’s position was worse as at the date of liquidation than it was when there was knowledge of insolvency to make an order for contribution [note 45]. It is possible that not all directors could be found liable as each individual’s role and knowledge will be separately assessed by the court [note 46].
Where a director takes the decision to continue trading, the court may grant relief (allow a lesser amount of contribution to be paid) if he/she were acting on professional advice [note 47].
Remuneration might be in the form of a straight salary, or might be benefits in kind such as a company car, health plan or pension contributions.
It has been held that if there is the power of a company to award remuneration to its directors, remuneration cannot be challenged solely on the basis that it was not to the benefit of the company [note 48]. The court, however, did give examples of general circumstances where a challenge might be appropriate:
Generally, excessive remuneration is remuneration which goes beyond what is reasonable in all circumstances. Reasonableness might be measured in terms of what the company could afford [note 48a] [note 48b] and, whilst this is a useful rule of thumb it should be applied with care and without an over-reliance on hindsight.
The director should have reasonable grounds for believing that the company can or will be able to (see paragraph 31.4B.83b) afford the remuneration (whether on its own or through a third-party). If not, the remuneration should be deferred or taken as loans (see paragraph 31.4B.84).
The decision to fix remuneration rests with the company where it operates under Table A of the Companies Acts 1948 or 1985 [note 48e] [note 48f] (see Chapter 75, Part 6). Where the directors allow or fail to stop the company paying unreasonable remuneration, this might be a matter of misfeasance leading to a civil recovery.
Where the company operates under Table A of the Companies Act 2006 [note 48g], it is the directors who fix the remuneration. Any remuneration fixed that is unreasonable might similarly be considered misfeasance, for which a recovery might be appropriate.
Remuneration that is reasonable when the decision is taken to fix it might become unreasonable following a change of circumstances (for example a change in the company’s financial position) [note 48h]. If so, the remuneration should cease, or the company should stop trading [note 48i].
When deciding whether remuneration fixed retrospectively is reasonable, it is necessary to take account of the ascertainable facts when the director took the decision to fix the remuneration and not the position of the company during the period to which the remuneration relates.
Remuneration cannot be justified, and would be considered to be excessive, if the company cannot afford to pay the tax due on that remuneration.
Where a company officer owes money to the company under a contract or other arrangement (such as an overdrawn loan account), this should be pursued through the normal channels for debt recovery (see Chapter 31.1, Part 3) and not, for example, as a matter of misfeasance [note 49].
In addition, the official receiver should consider if any other company officers may be liable under a breach of duty if the loan was not made with the consent of the company (see paragraph 75.110).
Where a company uses a prohibited name (see paragraph 31.4B.87), a person will be personally responsible for any debts incurred when he/she was involved in the management of the ‘new’ business and/or incurred at a time when he/she was acting or willing to act on the instructions of the person restricted from using the name (see paragraph 31.4B.88) [note 50].
Where only part of the business was conducted under a prohibited name, the person will be liable only for those debts incurred under the prohibited name [note 51].
The person will be jointly and severally liable for the relevant debts with the company [note 52], and liability is automatic – there is no need for a court order or conviction. Where the official receiver is liquidator of the successor company, he/she should seek a recovery from those liable (see paragraph 31.4B.88).
When a company goes into insolvent liquidation, the Act [note 53] provides that any person who has been a director or shadow director of that company in the 12 months prior to the making of the winding-up order [note 54] is not allowed to use (see paragraph 31.4B.88) the name (known as a prohibited name – see paragraph 31.4B.87) of the company for a period of five years from the day the company went into liquidation [note 55].
A company name becomes a prohibited name if [note 56]:
Apart from the person restricted from re-using a prohibited name (see paragraph 31.4B.85) obtaining the permission of court to re-use the name [note 58] [note 59], there are three cases where a director will be able to use the name without incurring personal liabilities:
An application for permission to re-use a company name must be served on the Secretary of State at least 14 days before the hearing [note 63].
Such applications are dealt with by Intelligence and Enforcement Directorate (http://intranet/IES/Intelligence%20and%20Enf/Intelligence%20and%20Enf.htm) who will contact the official receiver in relevant cases to seek any views on the application.
Clearly, where a director wishes to re-use the name it is likely that the name will have some value to the director and the official receiver should consider transferring the goodwill in the name for consideration. For further information on the sale of goodwill see paragraphs 31.10.83 to 84. Such a transfer could be conducted on an informal basis – by an exchange of letters – if the purchasing director were content to proceed in that way. The Secretary of State can advise the court of any prospective sale and the court may make the granting of permission conditional on the payment being made.
Where a person is:
That person will be liable for any debts incurred when he/she was involved in the management of the company and/or incurred at a time when he/she was acting or willing to act on the instructions of the disqualified person [note 64].
The person will be jointly and severally liable for the relevant debts with the company [note 65], and liability is automatic – there is no need for a court order or conviction. The creditor(s) may pursue the person for settlement of his/her debt.
Where the official receiver is liquidator of a company where there has been a breach of a disqualification, he/she should seek a recovery from those liable (see paragraph 31.4B.72).
Where a private company wishes to purchase its own shares, the company’s directors must make a statutory declaration specifying the amount of permissible capital payment for the shares in question and stating that there will be no grounds on which the company could be found unable to pay its debts, and will carry on business for at least a year [note 66].
If the company is wound up within a year of re-purchasing shares out of capital, and the aggregate amount of the company’s assets is not sufficient for the payment of its debts and liabilities and the expenses of winding-up, any director who signed the declaration may be liable to contribute to the assets of the company [note 67].
The directors are jointly and severally liable with the shareholders whose shares were repurchased for the amount received as consideration on the repurchase [note 68]. A director may be able to avoid such a liability if he/she can show that he/she had reasonable grounds for forming the opinion set out in the statutory declaration [note 69].
In circumstances where the director is obliged to make a contribution under these provisions, the official receiver should pass the matter to Moon Beever (see Part 1).
A company registered as a public company (plc) on its original certificate of incorporation must satisfy the Registrar of Companies that it meets the requirements for share capital for such a company before it may commence trading [note 70]. The company does this by sending a Form SH50 (http://www.companieshouse.gov.uk/forms/generalForms/SH50_application_for_trading_certificate_for_a_public_company.pdf) to the Registrar containing a statement of compliance signed by a company officer [note 71]. If the Registrar is satisfied with the information provided, he/she will issue a certificate – often known as a trading certificate [note 72].
A company re-registering from a private company to a public company does not have to apply for a trading certificate.
If a company does business or exercises any borrowing powers without obtaining a trading certificate (see paragraph 31.4B.88F) and then fails to comply with obligations in connection with that activity within 21 days of being called to do so, the directors of the company are jointly and severally liable to indemnify the other party to the transaction in respect of any loss or damage suffered by him/her by reason of the company’s failure to comply with those obligations [note 73].
It is possible for those disadvantaged following breaches of statutory provisions by directors of a company to seek redress for their losses from the director personally. Particular examples of this are as follows:
A company can declare a dividend only if it has sufficient distributable reserves, as defined by the Companies Act [note 74]. Any unlawful dividends are repayable by the shareholders in receipt of the payment [note 75]. In deciding whether the distribution is unlawful, it is irrelevant if the company was solvent at the time of the distribution [note 76] and ignorance of the law is no defence [note 77].
Where the directors authorise or fail to stop an unlawful dividend payment being made, this would be misfeasance in respect of which a civil recovery may be made [note 77a].