No stigma should attach to businesspeople who get into financial difficulties through no fault of their own. However, as a High Court case showed, those who gamble at creditors’ expense when facing insolvency can expect to be banned from holding company directorships.
The case concerned the sole director of a media company that had a nil turnover throughout its existence and was entirely dependent on funding from associated overseas companies. Due to international currency restrictions imposed in response to a collapse in oil prices, that funding dried up.
However, the company continued to trade for over a year thereafter before being compulsorily wound up. By then, its debts stood at over £26 million. In seeking an order against the director under the Company Directors Disqualification Act 1986, the Official Receiver alleged that he had caused the company to continue to trade when there was no reasonable prospect of its creditors being paid or of it avoiding insolvent liquidation.
Ruling on the matter, the Court found that the director had not acted dishonestly and had genuinely believed that the company’s funding would be restored at some point in the future. However, given the complete uncertainty as to when the currency restrictions would be lifted, that belief was not a reasonable one.
Due to its complete absence of revenues, the company was unable to trade out of its difficulties. It was under intense pressure from its creditors and its debts had risen by about £7 million in its final 15 months or so of trading. Despite his best efforts, the director was well aware of the company’s parlous financial position, which was deteriorating month after month.
Describing it as a serious case, the Court noted that directors who gamble with the position of creditors, in the belief that all will be fine in the end, are not acting in the interests of those creditors but rather to their detriment. The director had engaged in risk taking at the expense of creditors in a manner that showed a disregard for proper standards. The public interest demanded that he be disqualified from acting as a company director for seven years.