The English High Court recently considered whether a director who was in breach of his fiduciary duties to the company, resulting in a loss to the company’s creditors, could ultimately be liable for losses to the company itself (In the matter of ED Games Ltd [2009] EWHC 223). If this was the case the director could be caught under section 212 of the English Insolvency Act 1986 which allows certain parties other than an insolvent company itself (such as a liquidator) to litigate certain claims of the insolvent company against its former officers. However it only allows recovery of losses sustained by the insolvent company, as opposed to the company’s creditors.

 

Facts. A former director of a company in liquidation applied to strike out a claim brought against him by the company's liquidators under section 212. The liquidators alleged that the director caused the company not to file VAT returns for a number of months before it went into liquidation. The director argued that any loss that resulted from any breach of his duty was a loss to the company's creditors HM Revenue and Customs and not a loss to the company itself. Therefore as section 212 only allowed the recovery of loss sustained by the insolvent company it was not applicable.

Decision. The High Court held that, by not paying VAT, the company carried on trade that it could not have undertaken otherwise and this led to further deficits in the company's balance sheet. The court further held that, in principle, this could represent a loss to the company and be (wholly or partly) recoverable from the director under section 212 but this causal link must be proved by the liquidator. (There was no finding in this case on this as the court found that was a matter for the liquidators to prove at trial.)

Irish implications. The Irish equivalent to section 212 is section 298 of the Companies Act 1963 (as amended) which provides that if in the course of a winding-up or liquidation, it appears that, amongst other things, a director has misapplied or retained or become liable or accountable for any money or property of the company, or has been guilty of any misfeasance or other breach of duty in relation to the company, the court may order that director to repay that money or property to the company.  Like section 212 it also only allows recovery of loss sustained by the company.

  

This decision could be followed here in Ireland in context of section 298 therefore directors should take note of this decision while bearing in mind that a successful claim must show that a loss suffered by the insolvent company was directly caused by the director’s breach of duty.