Published on 21 January 2025, In the matter of Restore Builders Limited [2024] JRC290 (“Restore Builders”), is the first time the Royal Court of Jersey (“Court”) has made a wrongful trading order.
As discussed below, the Court held that Thomas McLaughlin (“Respondent”) be disqualified as a company director for 10 years, and be personally responsible for the debts of Restore Builders Limited (“Company”).
Failure to cooperate with the Viscount, and contempt to the Court and creditors
In Restore Builders, the Court heard an application by the Viscount in November 2024, that the Respondent be disqualified as a company director and that he be held personally responsible for the debts of the Company.
The Viscount is the executive officer of the Royal Court and the States Assembly. Within the Viscount’s functions are dealing with bankruptcies and the seizure and management of assets and enforcing court orders,
In Restore Builders, the Respondent failed to cooperate with the Viscount personally and in his capacity as a director of the Company contrary to the provisions of the Bankruptcy (Désastre) (Jersey) Law 1990 (“Désastre Law”). In particular the Respondent failed to provide adequate documentary evidence to enable the Viscount to pursue possible debts due to the bankruptcy of the Company. Further, the Respondent in his capacity as director of the Company misrepresented the value of the assets owned by the Company in his affidavit when making an application to declare the Company en désastre, where the exhibited value of assets was over £26,000, whereas the value realised was £700. Also, the Respondent said the Company’s debts amounted to over £282,000, whereas claims had been filed in the sum of £28,577. Accordingly, the Viscount said that the Respondent has demonstrated contempt to the Court and his creditors.
The Court noted that there was evidence that the Respondent knew or ought to have known that there was no prospect that the Company would avoid bankruptcy, and accumulated approximately £1 million in debt in his personal capacity prior to incorporating the Company. Further, it appeared that the Respondent incorporated the Company in order to improve his position with creditors, and limit his personal liability.
In relation to cooperation, it is important to note that Article 18 of the Désastre Law provides that “the debtor shall, to the utmost of the debtor’s power, aid the Viscount in the realization of the debtor’s property and the distribution of the proceeds amongst the debtor’s creditors”, and in parallel, Article 183 of the Companies (Jersey) Law 1991 (“Companies Law”) provides that, inter alia, those who are, or have at any time been, officers of or the secretary to the company, have specific duties to co-operate with the liquidator in a creditors’ winding up of a Jersey company.
Jersey Law: Responsibility for Wrongful Trading
A director of a Jersey company has a duty not to allow that company to trade if he knows (or is reckless as to whether) the company will not avoid insolvency. The provisions relating to wrongful trading in Jersey are contained both in Article 177 of the Companies Law and Article 44 of the Désastre Law.
Under the Désastre Law, a director also has a duty not to allow the company to trade if he knows (or is reckless as to whether) the company will not avoid insolvency. Article 44(1)-(3) of the Désastre Law is set out as follows:
“(1) Subject to paragraph (3), if in the course of a “désastre” in respect of a company or limited liability company it appears that paragraph (2) applies in relation to a person who is or has been a director of the company or manager of the limited liability company, the court on the application of the Viscount may, if it thinks it proper to do so, order that that person be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company or the limited liability company arising after the time referred to in paragraph (2).
(2) This paragraph applies in relation to a person if at a time before the date of the declaration that person as a director of the company or manager of the limited liability company-
(a) knew that there was no reasonable prospect that the company or limited liability company would avoid a declaration or a creditors’ winding up; or
(b) on the facts known to him or her was reckless as to whether the company or limited liability company would avoid a declaration or such a winding-up.
(3) The court shall not make an order under paragraph (1) with respect to a person if it is satisfied that after either condition specified in paragraph (2) was first satisfied in relation to him or her the person took reasonable steps with a view to minimising the potential loss to the company’s or limited liability company’s creditors.”
Article 177 of the Companies Law also contains analogous provisions in relation to Jersey companies in the course of a creditors’ winding up. These provisions create liability where there is no fraud, but where the conduct of the director is unreasonable and has caused loss. Again, these provisions mirror the emerging common law duty of the director towards creditors where the company is insolvent. A director will be excused if he took reasonable steps to minimise the potential loss to creditors. Accordingly, as soon as a director becomes aware that the company is insolvent or cannot avoid it, then he must take all reasonable steps to protect the creditors’ position. If the company does trade wrongfully, the director could be personally liable for contribution to the assets of the company as set out in Restore Builders.
In Restore Builders, the Court noted that, notwithstanding that the Respondent may well be a man of straw, the Viscount said that the Court should consider making an order under Article 44 of the Désastre Law to the effect that the Respondent should be personally responsible for the debts of the Company.
Director Disqualification: The relevant Jersey legal principles
Article 24(7) of the Désastre Law states that “Where the debtor is a company, the Court may, on the application of the Viscount, make any order in respect of a person who is or was a director of the company that it would be permitted to make under Article 78 of the Companies Law in respect of such a person.”
In turn, Article 78 of the Companies Law provides authority for the Court to make disqualification orders if it is satisfied that the person’s conduct in relation to a body corporate makes the person unfit to be concerned in the management of a body corporate.
Decision in Restore Builders
The Court held that the Respondent and, through him, the Company failed to comply with the Désastre Law, in particular the obligation “to the utmost of the debtor’s power, aid the Viscount in a realisation of the debtor’s property and the distribution of the proceeds among the debtor’s creditor.” The Court received no reason or excuse for this. In the circumstances, the Court disqualified the Respondent from acting as director of a Jersey company for ten years.
With reference to the case of SPARC Group Limited [2022] (2) JLR 65 (“SPARC Group”), where the Court made a disqualification order against the sole director of the SPARC Group Limited, the Court in Restore Builders also viewed this as a case of a flagrant breach of the obligations owed by a debtor under the Désastre Law, affecting the Viscount’s ability to discharge his functions pursuant to the terms of the Désastre Law. In SPARC Group, the Court observed that an order for disqualification is designed to protect the public as well as the position of Jersey as a finance centre.
As to the application for a wrongful trading order, the Court held that the Respondent knew or ought to have known, that there was no reasonable prospect that the Company which he incorporated would avoid bankruptcy when he, its sole shareholder, had accumulated debts of nearly £1 million in his personal capacity before incorporating the Company.
The Court agreed with the Viscount’s department that individuals “should not be able to play fast and loose with the rules and the [Désastre Law]”, and ordered that the Respondent should be personally responsible for the debts of the Company, being satisfied that the statutory test under Article 44(2) of the Désastre Law was met. The Court held that prior to the declaration of en désastre, the Respondent knew there was no reasonable prospect that the Company would avoid such a declaration and, in any event, on the facts known to him, was reckless as to whether the Company would avoid such a declaration; and that at no time did the Respondent take any reasonable steps in order to minimise the potential losses to the Company’s creditors.
Appleby
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