I wanted to draw your attention to a recent case (the decision was handed down on 8th September) relating to the liability of directors in terms of section 217 of the Insolvency Act, 1986 (the “Act”) for their breach of the terms of section 216 of the Act (the provisions relating to restrictions on the re-use of a company name). The case is PSV 1982 Limited -v- Langdon ( EWHC 2475 (Ch)).
Whilst the case is English and there are large areas of the judgement that relate to English-specific law (estoppel, etc.) the relevant provisions relate to the whole of the UK and the judgement, it seems to me, covers one particular area that is equally relevant in Scotland – the determination of the loss to which section 217 relates.
In this case, Langdon was a director of a company which went into insolvent liquidation. He was also a director of a number of other companies with substantially similar names. A creditor of one of these other companies was pursuing a claim and obtained judgement against that company after it went into administration. This is a relatively common scenario: a company is involved in a high-value litigation; the company is either suffering external cash flow pressures or obtains legal advice on the prospects of success and can no longer afford or continue to defend the action; the directors consider that the company can no longer avoid insolvency and an insolvency process is commenced; the creditor obtains the authority of the Court to pursue its claim and obtains judgement in its favour.
As all insolvency practitioners know, it is seldom the case that the defence to a pending action against the insolvent company is considered worth pursuing after insolvency. As a result, a judgement in favour of the creditor can be obtained without opposition and that claim is, as a result, almost incapable of rejection at the stage of adjudication of claims (there may be certain, limited grounds to reject a claim based upon a judgement but these are very much fact-specific).
In the PSV case, the creditor had grounds to pursue the director of the insolvent company in terms of section 217 (and this was accepted, although arguments in mitigation were put in defence) and the judge was concerned with a number of preliminary issues, one of which was the creditor’s valuation of its claim. Not surprisingly, the creditor valued its claim at the judgement amount in its action against the company but the director argued that the valuation of the claim was a live issue and open to the court in the current proceedings to determine. Whilst, as I have said, an administrator or liquidator of a company presented with a judgement against that company has little alternative but to accept the claim at the level of the judgement, the director in this case argued that he was entitled to challenge the valuation of the claim. The judge disagreed.
The result of this decision, which seems to me to be a correct analysis of the legislation is based upon a reading of both sections 216 and 217 of the Act. Whilst a judgement (decree in Scotland) is only binding against the parties to the action, section 217 of the Act defines “relevant debts” as:
“such debts and other liabilities of the company as are incurred at a time when that person was involved in the management of the company”.
A director is not personally liable for the debts of a limited company, per se, there must be some additional step (in this case, the provisions of section 217 of the Act) to bring home personal liability. If the director is in breach of section 216 of the Act they have, of course, committed a criminal offence (section 216(4) of the Act). The judge considered that, as a result, their conduct meant that the amount of the claim against the company is determinative of the personal liability.
The judgement does, as I have said, also deal with the English law principles of privity and estoppel. I mention this because, if the judge had not rejected the director’s contention with regard to the valuation of the claim, he would have accepted that both these principles would allow the director to contest the valuation of the claim. There is, therefore, a chance that the judgement will be appealed in an attempt to overturn the judge’s interpretation of section 217 and therefore allow the director to open up the judgement obtained against the company to analysis. Watch this space!