(b) Wrongful trading does not involve dishonesty but, nonetheless, it still makes particular individuals potentially liable for the debts of their companies. Section 214 applies where a company is being wound up and it appears that, at some time before the start of the winding up, a director knew, or ought to have known, that there was no reasonable chance of the company avoiding insolvent liquidation. In such circumstances, then, unless the directors took every reasonable step to minimise the potential loss to the company’s creditors, they may be liable to contribute such money to the assets of the company as the court thinks proper. In deciding what directors ought to have known, the court will apply an objective test, as well as a subjective one.
As in common law, if the director is particularly well qualifi ed, they will be expected to perform in line with those standards.
Additionally, however, s.214 of the IA 1986 establishes a minimum standard by applying an objective test which requires directors to have the general knowledge, skill and experience, which may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company.
The manner in which incompetent directors will become liable to contribute to the assets of their companies was shown in Re Produce Marketing Consortium Ltd (1989), in which two directors were held liable to pay compensation from the time that they ought to have known that their company could not avoid insolvent liquidation, rather than the later time when they actually realised that fact. Interestingly, the common law approach to directors’ duty of care has been extended to accommodate the requirements of s.214 (Re D’Jan of London Ltd (1993)).
It is clearly apparent that both Gram and Hen will be personally liable under s.214 for the increase in Ire Ltd’s debts from £10,000 to £100,000. However, as a director of the company Fran will also be liable to contribute to the assets of the company under s.214. |
