Published: East Anglian Daily Times and Suffolk Business Magazine

Author: Lisa Keane

Date: November 2010

It is well known that a Director, who allows his company to wrongfully trade, can be made personally liable. However, the number of wrongful trading cases which actually get to court are perhaps surprisingly few.  In part, this is because the action has to be brought by a liquidator who will, almost inevitably, be bringing the proceedings from a position of weakness.  The more insolvent the company, the less money he has to commence proceedings against delinquent Directors.  Moreover, there is little or no incentive for a creditor who feels himself to have been wronged to offer to fund the proceedings, as any recovery made by the liquidator goes into his pot, which is for all creditors. The court has no power to target the award in the direction of a specific creditor, i.e. the one who funded the action.

In very specific circumstances the Court of Appeal has recognised the possibility of a creditor suing a Director and recovering for his own benefit.  This right appears under a little used statutory law from the early 19th century.  Section six of the Statute of Frauds (amendment) Act 1828 states that: “no action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade or dealings of any other person to the intend or purpose that such other person may obtain credit, money or goods upon, unless such representations or assurance be made in writing, signed by the party to be charged herewith.”

The language used is archaic and certainly not the easiest to understand, nor is it helped by being expressed in the negative.  However if it is changed into the positive, its significance becomes more apparent:  “an action may be brought where a person has made a representation in writing and did so fraudulently; as to the ability of another person to be in a position to pay for goods or credit supplied to that other person.”

In Contex Drouzhba Limited v Wiseman [2007] the court was faced with the following facts.  W, a Director, signed on behalf of his company a document which contained a promise that the company would pay for goods to be ordered in the future.  The trial judge found as a matter of fact that the company did not have the ability to pay, nor had it any chance of doing so in the future.

The submission on behalf of the Director was that he had signed the document on behalf of the company, rather than in his personal capacity.  However, it was clearly established in the House of Lords Standard Chartered Bank v Pakistan National Shipping Corporation [2003] that a Director cannot avoid liability for his own fraud by claiming he was acting on behalf of his company.  

The Court of Appeal accordingly found the Director personally liable on his fraudulent deceit.  Clearly this is a useful case as it is now open to sellers to consider asking   Directors of companies buying goods or services for them, to write a letter confirming the ability of the company to pay. .  Then, in the event that the company   was ultimately unable to pay its indebtedness then the Directors could personally be liable.

This article is for general information purposes only and does not constitute legal or other professional advice. You should not act or rely upon this information.

For further information please contact Lisa Keane