A director of a company has a duty to promote the success of that company for the benefit of the shareholders. However, at the point where it becomes apparent that a company is trading insolvent, his duties changes and the director must from this point act in the best interests of the creditors of the company.
Should the director ignore this duty and continue to trade while the company is insolvent, then they will have breached this duty. In such a circumstance, any future liquidator of the company may attempt to hold the director personally liable for the losses of the creditors during the period of insolvency, by bringing a claim for Wrongful Trading.
One of the principle defences to a claim of Wrongful Trading is the ‘Every Steps’ defence. S.214(3) of the Insolvency Act 1986 states that the Court will not make a declaration of Wrongful Trading against a director if it is satisfied that the director took every step with a view to minimising the potential loss to the company’s creditors. The purpose of this defence is to protect innocent directors who made every possible attempt to minimise the loss of creditors, but may have been ignored or out voted by other delinquent directors.
Until recently there was some uncertainty over where the burden for this defence fell. Did the director need to prove the defence, or did the liquidator need to disprove the defence? This uncertainty has now been resolved by the High Court in Brooks and Willetts (Joint Liquidators of Robin Hood Centre plc) v Armstrong and Walker [2015] EWHC 2289. In Brooks and Willetts the court decided that the onus was on the defendant director to prove the defence of ‘Every Step’, rather than the liquidator to disprove the defence. This decision is helpful as it clears up any uncertainty as to on who the burden falls. Directors should bear this in mind and be aware that they cannot simply hide behind a defence of ‘Every Step’. It is a proactive defence and they will be expected to demonstrate exactly what steps were taken and why these satisfy the standard of the defence.
Are you a director and require legal advice on your duties? Or are you in involved in commercial litigation? If so the experienced commercial team at Levi Solicitors can help you.
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