© AO|HALL 2009

Criminal & Civil Liabilities for Directors and Officers of

Insolvent Companies

Jon Barclay, Partner

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 Directors and Officers of

Insolvent Companies

Jon Barclay, Partner

AO Hall Advocates

July 2009