On 20 December 2024, in the matter of Restore Builders Limited [2024] JRC 290, the Royal Court (the "Court") made its first ever wrongful trading order against a Jersey director in over 30 years since it was put on the statute book, ordering the director to be personally liable for the debts of the company. In addition, the Court ordered his disqualification from acting as a director of a Jersey company for ten years.
Background
The application was brought by the Viscount, whose functions include dealing with individual and corporate bankruptcies (known as "désastre") in Jersey. For more information on Jersey corporate insolvency regimes, see here but, in summary, when a company is insolvent and declared en désastre, the property of the company and the powers of the directors vest in the Viscount.
The Respondent to the application, Thomas McLaughlin, was the sole director and shareholder of Restore Builders Limited (the "Company"), which was incorporated in July 2022.
On 25 November 2022, both the Company and the Respondent in his individual capacity were declared en désastre. This was only four months after the Company's incorporation.
Wrongful Trading
The law on wrongful trading is set out in Article 44 of the Bankruptcy (Désastre) (Jersey) Law 1990 (the "Désastre Law") and similar provisions are contained in the Companies (Jersey) Law 1991 (the "Companies Law") in respect of a creditors' winding up.
These provisions permit the Viscount or a liquidator to apply for an order that a director of a company be held personally liable for the debts of the company if that director:
- knew that there was no reasonable prospect that the company would avoid a declaration or a creditors' winding up; or
- was reckless as to whether the company would do so.
In Restore, the Respondent had accumulated personal debts of nearly £1 million before he incorporated the Company. The Court found that the incorporation of the Company was simply used as a tool by the Respondent to try avoid his impending personal bankruptcy. The Court, therefore, held that the Respondent knew (or ought to have known) that there was no reasonable prospect that the Company would avoid bankruptcy, even at the time of its incorporation.
There is a defence available to a director where the Court is satisfied that they took reasonable steps with a view to minimising the potential loss to the company's creditors. In this case, the Court found that at no time did he take any such reasonable steps. Accordingly, the Court held him to be personally responsible for the debts of the Company.
Disqualification
The Désastre Law also permits the Viscount to make an application under Article 78 of the Companies Law to disqualify a director. The Court must be satisfied that the director's conduct makes them unfit to be concerned in the management of a company. The maximum period of disqualification is 15 years.
In Restore, there was a discussion about the various brackets of disqualification periods, with the top bracket of ten to fifteen years being reserved for particularly serious cases, for example where a director has previously been disqualified and falls to be disqualified again.
The Court found the Respondent in "flagrant breach" of his obligations and disqualified him from being a director of a Jersey company for ten years.
This is a welcome reminder that the Court is aware of Jersey's status as a reputable finance centre and therefore is keen to ensure that Jersey directors are aware of and comply with their obligations and duties. Evidently, the Court will not shy away from using its powers of disqualification to protect the public from delinquent directors. That said, this was only the second reported disqualification case in over 20 years, the last being in the matter of SPARC Group Limited (in désastre) 2022 (2) JLR 65.
No tolerance for debtors playing "fast and loose with the rules and the Désastre Law"
Restore also serves as a reminder of the importance of a debtor's obligations to cooperate with and to aid the Viscount in the realisation of the debtor's property.
The Respondent failed to respond to correspondence from the Viscount, failed to attend appointments, failed to make promised payments, left Jersey permanently without providing the Viscount with his new address and misrepresented the value of the assets owned by the Company. In other words, the Respondent failed to provide any genuine assistance to the Viscount.
The Viscount pursued the Respondent by instructing a tracing agent to locate him. Following service of the proceedings, and somewhat ironically given the Respondent's concerted efforts to avoid responsibility, the Respondent sent an "extraordinary" letter to the Court containing what was "tantamount to an admission that he was acting dishonestly in using customers’ deposits not for the purpose for which he received them, but for other purposes entirely".
The Respondent's actions impacted the Viscount's ability to discharge his functions and this case illustrates that the Viscount and the Royal Court will not tolerate Jersey directors playing "fast and loose with the rules and the Désastre Law".
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Location: Jersey
Related Service: Litigation & Dispute Resolution