Directors: The Risk of Personal Liability for Subsequent Company Debts
Directors are reminded of the risk of being personally liable for their subsequent company’s debts incurred during the period of breach of the rules, following a High Court decision.
Under s216 of the Insolvency Act 1986, a person who is a former director of a company which has gone into insolvent liquidation is prohibited from being involved in the management of a company with a similar name. (There are exceptions to the rule, but none applied in this case).
A breach of s216 is a criminal offence and, importantly, s217 imposes personal responsibility for relevant debts and liabilities of the new company that are incurred during the period of the breach.
So how has the court applied this in practice?
In this case1, the court ruled that a director in breach of s216 will be automatically and personally liable under the Act for such debts and liabilities – including those incurred in proceedings to which they were not a party. This is significant because it widens the definition of “relevant debts” for the purposes of s217.
S217 defines “relevant debts” as “debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company…".
The court gave the phrase " relevant debts of a company" its ordinary meaning, such that it includes a liability established by proceedings against the company – a view informed by the context of the provisions under ss216 and 217.
The court pointed out that both parties agreed that the legislative purpose of the Act is to protect creditors of the new company and, to that end, to penalise defaulting directors. It ruled that as drafted, it was unnecessary for liability to be established in separate proceedings against the director.
The defaulting director will, by definition, have (or has had) a close connection with the company and are, therefore, likely to be aware of any proceedings against the company. The court said such a director would be able to apply to be joined as party to those proceedings if appropriate.
It did not hesitate in stating that Parliament intended any risk to lie with the director rather than the creditor: “There is no reason to import a requirement that the creditor must establish the company's liability against the director when they have already established that liability as against the company.”
What does this mean?
Directors involved in second companies will want to avoid personal liability for debts and liabilities that fall found of the above provisions (not to mention potential criminal prosecution).
If you are a director of a company that has a similar name to a previous company now in liquidation and of which you were a director, it would be prudent to take specialist legal advice to ensure your interests are protected.
1PSV 1982 Limited and Sean Anthony Edward Langdon [2021] EWHC 2475
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