The Court of Appeal has overturned a High Court ruling from 2015 that a former director of a car dealership was personally liable to a customer who paid the company for three vehicles in the weeks prior to the company's liquidation where the cars were ultimately not delivered to the customer due to the company's liquidation.

Background

The customer had agreed to purchase three vehicles from Appleyard Motors Limited (In Liquidation) ("Appleyard") and had transferred the full price of the vehicles to Appleyard’s bank account. Appleyard sourced the vehicles through another car dealership, however, when Appleyard sought to transfer the funds to the other dealership its bank refused to facilitate the transfer. Consequently, the other car dealership refused to provide the vehicles to Appleyard and Appleyard was unable to deliver the vehicles to its customer. Appleyard sought to engage with its bank but having lost its support it ceased trading and went into liquidation shortly thereafter.

Appleyard had faced difficulties in the years leading up to its liquidation, including the withdrawal of a significant car stocking facility from a third party dealer. It was however established by the directors that they had obtained professional advice regarding the company's position, including the replacement of the stocking facility, and had secured a limited guaranteed stocking facility with the other dealership.

Following the commencement of the liquidation and the inability of the liquidator to return the funds to the customer, the customer brought an action to have the directors of Appleyard held personally liable for the company's debt. As previously reported here, the High Court found the directors guilty of reckless trading under Section 297(A) of the Companies Act 1963 and determined that they should be personally liable to the customer.

The appeal

One of the directors found to be personally liable appealed the decision to the Court of Appeal.

In overturning the High Court's decision, the Court of Appeal applied a modified form of the test under Section 297A to that applied by the High Court. The Court of Appeal held that having regard to the general knowledge, skill and experience that may reasonably be expected of a person in the position of the director, he ought to have known that his actions or those of the company would cause loss to a creditor. It was not enough that, viewed objectively, the director ought to have known that his actions or those of the company might cause loss to a creditor.

The Court of Appeal held that the loss to the creditor must have been foreseeable to a high degree of certainty. Mr Justice Hogan, delivering the Court of Appeal's judgment, found that while it was clear that Appleyard's financial situation was perilous and it took an "enhanced risk" with the funds by accepting advance payment before the vehicles were delivered, the director had no reason to believe that the decision of the bank to cut off support to the company was imminent or even threatened. In such circumstances, the director could not have known that the receipt of the monies would cause loss to the customer and accordingly, it could not be held that the conduct of the director amounted to reckless trading for the purpose of ascribing personal liability under the Companies Act 1963.

Comment

The judgment appears to have vindicated the efforts of the directors to restructure the company in the period leading up to its liquidation. It is authority for the proposition that recklessness on the part of a director, for the purpose of holding that director personally liable for the debts of a company, will require knowledge that the actions of the director would in fact cause loss to creditors not that they might so do.