Civil and Criminal Liabilities for Directors and Officers of Insolvent Companies

Criminal & Civil Liabilities for Jon Barclay, Partner Directors and Officers of Insolvent Companies AO Hall Advocates July 2009 © AO|HALL 2009

Who is an officer? CGL s532: “officer”, in relation to a company, includes a director, liquidator, manager, secretary, receiver and administrator NB not an exclusive definition © AO|HALL 2009

Who is a director? CGL s131: In this Law “director” includes an alternate director and any person occupying the position of director, by whatever name called. Gower and Davies: “The board of directors is the most important decision-making body within the Company”. © AO|HALL 2009

Types of director? • Executive • Non-executive • Alternate • Nominee • etc. © AO|HALL 2009

Shadow directors CGL s132: (1) In this Law “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. (2) A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity. © AO|HALL 2009

Shadow directors (2) Not true directors Treated for certain purposes as equivalents • may be disqualified: CGL s427(1)(b) • may be liable for wrongful trading: CGL s434, 435 • may be prosecuted for CGL offences: CGL s515(1)(b) © AO|HALL 2009

De facto directors “A de factor director… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself.” - Re Hydrodam (Corby) Ltd, [1994] 2 B.C.L.C 180, per Millet J at 183 © AO|HALL 2009

Directors’ duties – sources • The CGL • Other enactments • Common law © AO|HALL 2009

Who can hold directors to account? • criminal/regulatory authorities • the company • the officeholder • creditors? © AO|HALL 2009

Main duties owed to the Company • to observe M&A • to exercise reasonable skill and care • fiduciary duties © AO|HALL 2009

Potential insolvency: the interests of creditors • members’ interests recede • creditors’ interests become paramount • creditors can “control” insolvency process • unpaid creditors have incentive to pursue directors © AO|HALL 2009

The moment of insolvency The solvency test – CGL s527 • able to pay debts as they became due • value of assets greater than liabilities • any other solvency requirements are satisfied © AO|HALL 2009

Consequences of insolvency (1) • authorisation and making of distributions • authorisation and payment of dividends • recovery of unauthorised distributions • residual personal liability of directors • redemption of shares in open-ended schemes © AO|HALL 2009

Guernsey Insolvency Process • Désastre • Declaration of Insolvency • Administration • Receivership • Winding up © AO|HALL 2009

Can the company continue to trade? • Duty of care and skill • Fiduciary duties • Wrongful trading © AO|HALL 2009

Wrongful trading: CGL s434 Continue trading when: • no reasonable prospect of avoiding insolvent liquidation • director has actual or constructive knowledge • includes shadow directors • liquidators, creditors and members may apply • Court may order such contribution as it thinks proper • potential disqualification order © AO|HALL 2009

Wrongful trading: defences (1) No knowledge • actual knowledge • constructive knowledge: CGL s434(4) • meaning of “no reasonable prospect of avoiding insolvent liquidation”? © AO|HALL 2009

Wrongful trading: defences (2) Acted to minimise loss to creditors: CGL s434(3) • from the moment director had knowledge • took every step • with a view to minimising potential loss to creditors © AO|HALL 2009

Fraudulent trading (1) The criminal offence: CGL s432 • any person • carrying on business of a company • knowingly • with intent to defraud creditors • or for any fraudulent purpose • unlimited fine or ten years or both © AO|HALL 2009

Fraudulent trading (2) Civil Liability: CGL s433 • only in winding up of company • liquidator, administrator, receiver, creditor or members may apply • Court may order such contribution as it thinks proper • potential disqualification order © AO|HALL 2009

Other potential liabilities Criminal/regulatory • CGL • Money laundering offences • Directors’ disqualification • Regulatory sanctions Civil • breach of trust • negligence/breach of duty • deceit • conspiracy © AO|HALL 2009

Exemption and Indemnification CGL s157(1): no exemption clauses CGL s157(2): no direct or indirect indemnities except - D&O insurance - QTPIPs © AO|HALL 2009

Indemnification from the Company: QTPIPs Third party liabilities except: • associated companies • fines • regulatory penalties • criminal defence costs • application for s522 relief NB what value if Company is insolvent? © AO|HALL 2009

D&O Insurance • wider cover • no cover for intentional acts! • be aware of other exclusions • underwriter’s rating? • access to policy © AO|HALL 2009

Court’s general power to grant relief CGL s522 • proceedings against officers or auditors • negligence, default, breach of duty or breach of trust • acted honestly and reasonably • in all the circumstances, ought fairly to be excused. Court may grant partial or total relief, on such terms and conditions as it thinks fit. Pre-emptive applications are possible. © AO|HALL 2009

Criminal & Civil Liabilities for Jon Barclay, Partner Directors and Officers of Insolvent Companies AO Hall Advocates July 2009 © AO|HALL 2009

Civil and Criminal Liabilities for Directors and Officers of Insolvent Companies

by jonbarclay on Jul 20, 2009

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Civil and Criminal Liabilities for Directors and Officers of Insolvent Companies — Presentation Transcript