The High Court has found two former directors of a car dealership in Dublin, Appleyard Motors Limited (In Liquidation) (Appleyard), personally liable to a former customer who paid for but did not receive three vehicles in the weeks leading up to the company’s liquidation. This case is particularly noteworthy as it is only the second time a director has been held personally liable for a company’s debts for reckless trading.

The customer had agreed to purchase three vehicles from Appleyard and had transferred the full price of the vehicles to Appleyard’s bank account. Appleyard had sourced the vehicles through another car dealership, however, when Appleyard sought to transfer the funds to the other dealership the bank refused. Appleyard sought to engage with the bank but having lost its support it ceased trading and went into liquidation later that month.

Appleyard had faced difficulties in the years leading up to its liquidation, including, the withdrawal of a significant car stocking facility. It was however established that Appleyard had obtained professional advice regarding the replacement of the stocking facility and the future of the company and had secured a limited guaranteed stocking facility with the other dealership.

The Court endorsed previous decisions that acknowledged the desirability that companies should be provided with a reasonable opportunity to trade out of their difficulties. However, given that the “financial position of the company was deteriorating, not improving, and with no reasonable prospect in sight for improvement”, the Court held that the directors were under an obligation to keep the overall position under review and, in particular, “to keep creditors’ interests to the fore”.

The Court concluded that the directors were deemed to have engaged in reckless trading as, having regard to all of the information available to them, and to the general knowledge, skill and experience that may reasonably be expected of persons in their position, they ought to have known that their actions or those of the company would cause loss to its creditors.

Whilst the legislation governing reckless trading provides for a ‘get out clause’ where a director can satisfy the Court that he/she acted honestly and responsibly, the Court concluded in this case that the directors had failed to act honestly and responsibly throughout. The Court accepted that the directors acted honestly and responsibly up to a certain date when the guaranteed stocking facility was put in place. However, the Court suggested that the directors placed too much reliance on that facility and failed to obtain further professional advice regarding the future of the company. The directors should have taken appropriate measures to protect creditors or alternatively, have taken steps to wind up the company after that date in light of the deteriorating financial position of the company and the failure to secure either a long term stocking facility or outside investment.

The Court held that such conduct was, whilst honest, not responsible in light of all the information available to the directors. Consequently, the Court declared that the directors were personally liable for the amount paid for the vehicles to the customer.

Whilst we understand that the case may be subject to an appeal, it provides a useful illustration of how a court will examine the conduct of directors of insolvent or potentially insolvent companies and underlines the importance of keeping creditors’ interests to the fore and obtaining professional advice when a company is in financial difficulty and not just on an ad hoc basis.