Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Under the Act, directors can be held culpable for ‘wrongful trading’ (ie, that a director knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation but nonetheless continued to trade). The court may make an order declaring the director to be liable to make such contribution (if any) to the company’s assets as the court considers appropriate, but only if it is satisfied that, at the relevant time, the director knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation. The court may also disqualify the person from:

  • being or acting as a director of a company or limited liability partnership;
  • being or acting as a liquidator, provisional liquidator or administrator of a company or limited liability partnership;
  • being or acting as a supervisor of a voluntary arrangement approved by the company or limited liability partnership; or
  • in any way, whether directly or indirectly, being concerned in the promotion, formation or management of a company or limited liability partnership, for such period, not exceeding fifteen years, as may be specified in the order.
Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

The Act outlines offences relating to conduct before and during liquidation and criminal proceedings relating to those offences. These offences include, but are not limited to, concealing property of the company; concealing and falsifying any company document; fraudulent removal of any part of the company’s property; disposing, pledging or pawning property of the company. Civil suits to recover company property or assets can also be instituted against the directors and officers of a company.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

The Act outlines that, where a director or officer or former director or officer of a company is charged with offences involving transactions to defraud creditors of a company in liquidation, they shall not be liable if the conduct alleged to constitute the offence occurred more than five years before the commencement of the liquidation and if they prove that at the time of the alleged offence, they did not have any intent to defraud the company’s creditors. Under all other scenarios, the director shall have a defence if they prove that they had no intention to conceal the state of affairs of the company or to defeat the law. An additional defence is that the director took such steps to avoid potential loss to the company’s creditors as he or she ought reasonably to have taken, in a claim for wrongful trading.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

Not in all circumstances. On the appointment of a liquidator, all the powers of the directors cease (and are transferred to a liquidator), except so far as the liquidation committee, or if there is no such committee, the creditors, sanction their continuance.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

The powers of the directors vest in the liquidator or provisional liquidator (or supervisor) when a liquidator is appointed. They do, however, retain a residual right to challenge the liquidation process.