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Delinquent Director Pays for Insolvent Trading

In a stern caution to the business community that trading when insolvent can have severe consequences, a delinquent director who authorised substantial payments to himself and others when his company was in dire financial straits has been held personally liable to repay the cash.

Following competitive tendering exercises, the company had engaged in private finance initiatives to build and run two waste recycling and energy production plants on behalf of local authorities. Both projects had been struck by intractable difficulties and the company had fallen into liquidation.

The liquidators launched High Court proceedings against the company’s principal director, utilising the misfeasance procedure contained within section 212 of the Insolvency Act 1986. On behalf of the company’s creditors, they sought recovery of sums that had been paid out of its account at the director’s behest over a three-year period.

In upholding the liquidator’s arguments, the Court found on the basis of accountancy evidence that, throughout the relevant period, the company’s trading position was such that it was unable to pay its debts as they fell due and that the sum of its assets was exceeded by its liabilities.

Payments totalling more than £2.8 million had been made by the company when it was insolvent without any consideration being given to the best interests of creditors as a whole. £507,000 of that sum had been paid out for the director’s own benefit, whilst other amounts were paid to unsecured creditors and an individual who was not an employee of the company.

Noting that, at the time the payments were made, the company had no projects on foot, no live revenue stream and no realistic prospect of obtaining any, the Court found that no intelligent and reasonable businessman would have considered them justified.

The director was ordered to repay the relevant sums to the company. However, so as to prevent excessive recovery, the Court attached appropriate provisos to the order to reflect the fact that the payments made to unsecured creditors, although unreasonable, had been in satisfaction of genuine liabilities.

Hellard & Anr v Carvalho. Case Number: 10416 of 2011