Dangerous Company: what to consider and what to avoid when suing or defending company directors

A salutary reminder of the dangers of not getting your claim straight when suing directors has come in the form of Global Corporate v Hale [2017] EWHC 2277 (Ch). In that case the applicant took an assignment of liquidators’ claims against directors of a failed company. The assignment was described as relating to a “potential debt owed to the company comprising alleged illegal dividends and/or transactions at an undervalue” (under s. 847 of the Companies Act 2006 and/or s. 238 of the Insolvency Act 1986 respectively). In fact, the assignee also wanted to bring a claim which went wider, for example to include claims that could be brought by the “misfeasance summons” process (under s. 212 of the Insolvency Act 1986) and/or the giving of a preference (under s. 239 of the Insolvency Act 1986). The court held that the assignment was not wide enough to cover these latter causes of action. The rest of the claim failed on the facts: the “unlawful dividends” claim because as a matter of law no dividends had been declared and the “transactions at an undervalue” claim because no such payments had been made.  So the assignee was left empty handed (and I suspect with emptier pockets, if it was ordered to pay costs).

The case got me thinking about some of the dangers inherent in bringing claims against directors for breaches of their duty to the company, and how they can be avoided. The message is that you need to do full research about the potential causes of action and who possesses them before taking a step such as issuing a claim form, entering into a standstill or an assignment.  If you are defending a director, you need to go carefully over what the claimant suing the director has done to see whether they have fallen into any of the core errors.

Five key areas occurred to me:

  1. Check that you understand who is the right party to bring a claim. This is a theme I have warned about before in the context of standstills but since it particularly bedevils the company and insolvency area it is worth repeating it here.
  2. If the claim still belongs to the company, a good place to start finding your cause of action against the directors is s. 171 to 178 of the Companies Act 2006. These set out the core duties of directors, such as a duty to act within powers, a duty to exercise reasonable care, skill and diligence, a duty to avoid conflicts of interest and so on.
  3. If claims have passed into the hands of an insolvency practitioner (or you think they may have done), it always pays to sit down and go through the list of causes of action. Again, a good place to start is s. 213, 214, 239 and 240 of the Insolvency Act 1986 (which provide the remedies for wrongful and fraudulent trading, transactions at an undervalue and preferences). Re-read the “misfeasance summons” procedure under s. 212 (which provides a mechanism for insolvency practitioners to bring directors before the court for their breaches of the Companies Act 2006 referred to at para 2 above). Make sure that you have identified the full spread of potential causes of action under the statutory provisions. Check that you have identified who has the right to bring such a claim.
  4. Make sure that you have understood and grappled with the sorts of remedy provided by  relevant parts of the Companies Act 2006 and/or Insolvency Act 1986. These provisions can be complex. For instance, the remedy for transactions at an undervalue and/or preferences is that the court can “make such order as it thinks fit for restoring the position to it what it would have been” if the company had not entered into a relevant transaction at an undervalue or given a relevant preference.  This sort of remedy is apt to cause complications when you are taking or granting an assignment. What sort of claim are you trying to assign?
  5. If you are thinking about a contribution claim, think about whether you can satisfy the “Royal Brompton” test (i.e. the “triangle” requiring that both the defendant and the Part 20 defendant owed a duty to the original claimant). This requirement is prone to creating particular difficulties in the directors’ sphere, particularly where there is an insolvency practitioner who is bringing one of the claims under the Insolvency Act (Cohen v Davies [2007] 2 BCLC 274). Can you satisfy the Royal Brompton test if there is a mixture of (i) duties owed to a company in one part of the claim and (ii) insolvency practitioners bringing claims under the Insolvency Act in their own name in the other? Have both parties caused the “same damage” if you have a mix of remedies under the various provisions of the Companies Act 2006 and Insolvency Act 1986?

There is a surprising lack of definitive law and guidance on many of the above points. Often they have only been raised in the reported cases at the strike out stage, with matters settled before the court had to decide the point. However, Global Corporate v Hale is a good example of how an inappropriately narrow assignment or other technical defect can bring a claim to a halt before it goes anywhere.

If you’d like to find out more about these topics, my webinar on Company and Insolvency Law in claims against Accountants, Auditors and Directors is being broadcast by MBL on 10 January 2018. Click here for more details.

Article written by Helen Evans.

Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.