High Court considers reckless trading for the first time in years

For the first time in over five years the High Court has provided a judgment on what constitutes reckless trading by directors of insolvent companies. This has been a notoriously difficult case to make by creditors (and liquidators) because the burden of proof was traditionally so high.Mark Woodcock  and Jack Cronolly look at this recent judgment and its implications for lending institutions, liquidators and creditors generally. The burden of proof was high because a succ...

For the first time in over five years the High Court has provided a judgment on what constitutes reckless trading by directors of insolvent companies. This has been a notoriously difficult case to make by creditors (and liquidators) because the burden of proof was traditionally so high.

Mark Woodcock  and Jack Cronolly look at this recent judgment and its implications for lending institutions, liquidators and creditors generally.

The burden of proof was high because a successful claim made against directors for reckless trading exposed them to personal liability for the debts of their company which is a rare exception to the principle of limited liability afforded under Company law. Consequently, lawyers have been reluctant to recommend this course of action to creditors or liquidators of a company and this is reflected by the fact that there is only one reported judgment finding directors personally liable for the debts of a company for reckless trading since the legislation was introduced in 1990.

The Legislation

The 1990 Companies Act introduced the concept of reckless trading to this jurisdiction for the first time. The legislation provided that a director who carried on the business of a company in a reckless manner could be held personally responsible without any limitation of liability, for all or part of the debts of the company. Unhelpfully for creditors, the legislation provided a “get out clause” which allowed a court to find a director guilty of reckless trading but relieve him of personal liability where it was satisfied that the director had acted honestly in relation to the conduct of the affairs of the company.

Judicial Interpretation

The two well-known cases of Frederick Inns in 1991 and Heffernan Kearns in 1993 provided the first judicial interpretations of reckless trading. These cases set the burden of proof so high that they deterred liquidators from seeking to rely on it as a remedy to swell the assets of a company and creditors from availing of it to recover debt. There was no substantive analysis of reckless trading by the High Court again for nearly twenty years until the case of PSK Construction in 2009. Unfortunately, the judgment in this case did nothing to encourage lawyers to consider an action for reckless trading as a realistic remedy available to creditors or liquidators of insolvent companies.

Appleyard Motors Judgment

In January 2015 the High Court delivered a well-reasoned decision on reckless trading and the civil liability of guilty directors. During the course of the judgment the court held that while the directors had acted honestly and responsibly up to about a month before the company actually went into liquidation, it considered their failure to take professional advice regarding the future of the company after that date and their failure to take appropriate measures to protect creditors or alternatively to take steps to wind up the company as of that date as irresponsible conduct in the light of all the information that they had in relation to the company. In effect, the court chose a date upon which any objective analysis of the affairs of the company would have concluded that it had no future and therefore be wound up. Thereafter the directors should have taken steps to windup the company while making arrangements to protect creditors who dealt with the company until the liquidation could be arranged. The court specifically held that the directors failed to keep the interests of creditors to the fore which was clearly required of them given the precarious state of the company. The court held that while there was no evidence that the directors were knowingly reckless, they could be deemed to be reckless having regard to all of the information available to them and having regard to the general knowledge, skill and experience that may reasonably be expected of persons in their position, and that they ought to have known that their actions would cause loss to creditors of the Company.

Conclusion

The introduction of the prohibition on reckless trading in 1990 was to encourage directors to perform their duties in such a way that losses to creditors would be limited when the directors knew or ought to have known that a company’s trading position is precarious. The interpretation of this principal has traditionally been such that the creditors of insolvent companies carry such a high burden of proof that damages for reckless trading failed to be a realistic remedy available to them. The judgment in Appleyard Motors will shatter that perception and is surely good news for lending institutions, liquidators and importantly for creditors generally.