Business dissolved - but customer taking me personally to court.

[HyperD]

Hello again guys


I have a ex-customer from a business I used to be a director of taking me to county court over a payment she made to the business (now dissolved by companies house, I genuinely lost everything last year.... and have began to try and rebuild my life.).

Originally the court questionnaire came through and was sent to Mr Smith of Trading Company LTD (obviously I changed the details for this forum). I filled in the questionnaire saying that the business does owe her the money, but it no longer exists.

I now have the first hearing summons and the defendant has been changed just to me. (although it was still addressed to Mr Smith of Trading Company LTD on the front of the envelope)

Where do I stand with this? I don't want to get personally sued for this business debt, especially as she is the kind of person who would write it all over the internet that she had won her money from me, and it would open the flood gates to anyone else that feels like having a go.

I just need a little advice on how to approach the court and say this business is gone, I agree the business owed her some money... its not me personally I'm no longer a director.

Thanks in advance, Im worried sick about this.

D

 

[StevensOnln1]

Did you inform her when the company ceased trading? Also, do you have anything on paper to show that she clearly knew the contract was with the limited company and not you personally?

 

[David Griffiths]

This is a question for the legal section, but I think that you should defend the action by making it clear that her contract was with the limited company, not with you personally. Keep on making that point to the court

 

[Esk247]

This is a question for the legal section, but I think that you should defend the action by making it clear that her contract was with the limited company, not with you personally. Keep on making that point to the court

....and keep checking your credit history/file if you're successful with this! They can leave a mark on your record as they've tried to go after you personally. This can show up if you apply for business loans in the future. (true story, has happened to someone in one of my businesses).

 

[rps199]

I really echo what has been said. If transactions were done as LTD company then in theory she can't do anything as the company no longer exists and the company is classed in law as a separate entity to the directors, unless the directors were proven to be negligent which caused to business to fail? If thats the case then yes I'm sure you can be held to account?

 

[yourcreditmanager]

Hello again guys


I have a ex-customer from a business I used to be a director of taking me to county court over a payment she made to the business (now dissolved by companies house, I genuinely lost everything last year.... and have began to try and rebuild my life.).

Originally the court questionnaire came through and was sent to Mr Smith of Trading Company LTD (obviously I changed the details for this forum). I filled in the questionnaire saying that the business does owe her the money, but it no longer exists.

I now have the first hearing summons and the defendant has been changed just to me. (although it was still addressed to Mr Smith of Trading Company LTD on the front of the envelope)

Where do I stand with this? I don't want to get personally sued for this business debt, especially as she is the kind of person who would write it all over the internet that she had won her money from me, and it would open the flood gates to anyone else that feels like having a go.

I just need a little advice on how to approach the court and say this business is gone, I agree the business owed her some money... its not me personally I'm no longer a director.

Thanks in advance, Im worried sick about this.

D

When you say you've had the first hearing summons, do you mean that the claimant has simply amended her initial claim so you're listed as the defendant? If that's the case and if you're still within the time frame to reply, just state that the facts that you're not personally liable as the contract was with a limited company that was dissolved by Companies House. You can file an acknowledgement of service in any event (you may have done this) which gives you an extra two weeks in which to further reply to the claim. If the claimant continues with the case, one advantage you have is that the case will be transfered to your home county court if the claimant is in a different area to you.

Michael

 

[David Griffiths]

If thats the case then yes I'm sure you can be held to account?

The directors can be held to account in very specific circumstances, and that would have to be initiated by the liquidator. They certainly can't be held to account simply by a disgruntled customer bringing a small claims action.

The legal costs required to attribute blame to the directors and I've heard it suggested that it's not worth the cost unless the debt being chased is over about £15,000

 

[HyperD]

Hi guys

Thanks for the replies.

I let all my customers know that I had ceased trading on the day we closed the doors.

I have been able to dig up the original payment that was made to my businesses paypal account which states the agreement was setup with the business name. It's thankfully really clear..

Someone mentioned that I can apply for a summery judgement if I have evidence that the customer has no case. But I've never heard of this before.

I will get the court hearing moved to my local court, the first hearing is the 15th August so once I have contacted the court with the further evidence and found out whats what.. I'll get it moved..

I do feel a little better that I'm able to go to court with some evidence now... she actually suing me for less than its going to cost her. So its a real grudge match.

such a mess...

 

[Alan R Price]

HyperD

This sounds like a fairly standard try-on. What does the original documentation say? Is there an order form or contract? Did the company issue invoices to the customer? Is there any evidence at all to suggest that you were the contracting party, rather than the company? If the answer to that is no, I suggest you write back to the claimant (or her solicitors, as appropriate), saying that she is fully aware it is a company debt, not a personal one; that this is an abuse of process; and that you will apply to the court for a wasted costs order against them/her. Copy the court in on the correspondence.

You are not liable for the company's debts, full stop.

 

[HyperD]

Thanks.

No it clearly says she is paying the company. It does not mention my name at all.

Just need to build up the courage to go all through this now.

Thanks for your help with this guys

 

[SteveBurrows]

If she can show that the company was mal-administered, such as trading when insolvent, then she can get her debt transferred to the directors. If the company was run properly she cannot, the debt is the company's, not the directors or shareholders, that is the point of limited liability.

 

[Spongebob]

If she can show that the company was mal-administered, such as trading when insolvent, then she can get her debt transferred to the directors. If the company was run properly she cannot, the debt is the company's, not the directors or shareholders, that is the point of limited liability.

But in reality she can't do that. Only a liquidator can really be in possession of the evidence necessary to prove mal-administration of a company by its directors, and if the company went through a liquidation process clearly no such evidence existed, otherwise action would have been taken.

If the company was simply struck off by Companies House then it no longer exists and no evidence of possible mal-administration is available to the plaintiff. Her only real option is to apply to have the company re-instated and then wind it up through the High Court, leading to the Official Receiver being appointed liquidator.

This strategy would be horribly expensive and would have a negligible chance of success anyway. Only in very extreme cases does the OR find directors negligable.

My response would be to write to the plaintiff explaining that the debt is a company one and that you have no liability whatsoever. Add that you look forward to defending your position personally in court and that this will involve her in considerable further expense.

She will unquestionably back off - if she doesn't she's a complete nutter and I would keep a careful eye on my childrens' pet rabbits.

 

[quikshop]

How many times do we see a badly run business or someone with purposefully criminal intent take money from customers and then hide behind a limited liability company?

 

[Alan R Price]

If she can show that the company was mal-administered, such as trading when insolvent, then she can get her debt transferred to the directors. If the company was run properly she cannot, the debt is the company's, not the directors or shareholders, that is the point of limited liability.

Sorry, Steve, this is incorrect. Nobody can get a debt "transferred to the directors". If the directors have been guilty of wrongful trading, the court may order (on application by the liquidator) that they make a contribution towards the company's assets. Any such contribution forms part of the liquidation pot and is distributed in the normal order of priority: costs, preferential creditors; then ordinary unsecured creditors.

If the directors have been guilty of misconduct, the liquidator may be able to sue them for misfeasance, fraud or breach of trust etc. but again, the money recovered forms part of the general liquidation fund.

It is certainly the case however that in the absence of misconduct it is unlikely that any claims lie against the directors personally.

 

[SteveBurrows]

Alan, I agree the debt can not be formally transferred to the director, I meant it as shorthand. What I would say you've missed is the various rights to pursue the director personally to recover the loss if the director has acted outside their powers, authority or the law. The protection extended to a director as an officer of the company only exists while they act within their powers - step outside those and whole range of people may sue - including the company. The moment a director is ulta vires the game changes, because by definition they were not acting as a director. Shareholders, suppliers, customers, CPS, H&S etc. can all pursue individual directors as soon as they step over the boundary - including a tort for damage to financial interests. The effect is the same, if the director has behaved properly the company is the defendant, but if the claimant can show that the director did not then the law permits direct recovery by a wide range of parties. Obviously some of this comes thought the 2006 Companies Act and some is based on case law.

Clearly liquidators have some specific powers to assist them in recovery from directors who get things wrong, but not in respect of companies that are not in or have not gone through liquidation. As to evidence, that may exist before or after any liquidation or administration - whether the claimant can get their hands on it is a separate matter and we don't know the details here. I merely point out that directors are not protected, and can be claimed against, in a wide range of circumstances by a wide range of parties - one of the reasons that directors & Officers Insurance is becoming so popular.

 

[Spongebob]

All that waffle above is completely irrelevent to this case. Theorectically, I am sure that there are all sorts of ways in which directors' limited liability can be undermined; the simple fact is however, that it hardly ever happens, and for it to happen would require an awful lot more evidence to place before a court than this disgruntled creditor is ever going to be able to lay her hands on.

The OP can rest easy - there is nothing she can realistically do to touch you.

I've finally got a handle on this Steve Burrows clown - he obviously sells Directors' & Officers' insurance! He knows nowt about insolvency though.

 

[SteveBurrows]

Thanks Spongebob, but no I don't sell D&O or any other insurance. I also don't claim to be an insolvency practitioner. I do know a bit about the law affecting directors because that's what I'm trained and qualified in.

I agree that most erring directors are not pursued - even when they can be. Going to law is expensive and painful, but the limits of directors protection are well established by both parliament and the courts. For what it's worth directors do not enjoy _any_ limited liability - it is the company and its shareholders who have limited liability, which is why, when they act out of turn, directors are unprotected, the shield of limited liability provided by the company is removed as soon as a director behaves improperly, whether by accident or intent.

I also agree that the OP should have little to fear, unless she's done something wrong the claimant is all bluster, but if she's done something wrong a decent lawyer will find a way to hang it on a director.

Fortunately for directors most lawyers, like most insolvency practitioners, are not very effective in exposing the gaps in directorial armour, otherwise we would never risk going into business in the first place!

 

[David Griffiths]

Thanks Spongebob, but no I don't sell D&O or any other insurance. I also don't claim to be an insolvency practitioner. I do know a bit about the law affecting directors because that's what I'm trained and qualified in.

I agree that most erring directors are not pursued - even when they can be. Going to law is expensive and painful, but the limits of directors protection are well established by both parliament and the courts. For what it's worth directors do not enjoy _any_ limited liability - it is the company and its shareholders who have limited liability, which is why, when they act out of turn, directors are unprotected, the shield of limited liability provided by the company is removed as soon as a director behaves improperly, whether by accident or intent.

I also agree that the OP should have little to fear, unless she's done something wrong the claimant is all bluster, but if she's done something wrong a decent lawyer will find a way to hang it on a director.

Fortunately for directors most lawyers, like most insolvency practitioners, are not very effective in exposing the gaps in directorial armour, otherwise we would never risk going into business in the first place!

So

For what it's worth directors do not enjoy _any_ limited liability

but

the shield of limited liability provided by the company is removed as soon as a director behaves improperly

Somewhat inconsistent.

 

[Spongebob]

For what it's worth directors do not enjoy any limited liability

This is a small business forum, and in 99.99% of cases discussed here the directors are the shareholders. More often than not there is one shareholder and one director.

Of course directors enjoy limited liability. In fact in most cases they enjoy it on two counts. Firstly as shareholders their personal libility is limited to the money they have invested in the company, and secondly as employees they have no personal liability for contracts entered into while acting on behalf of and in the name of the company. The owner/director and his company are two entirely seperate legal entities and one cannot be made liable for the debts of the other.

it is the company and its shareholders who have limited liability, which is why, when they act out of turn, directors are unprotected, the shield of limited liability provided by the company is removed as soon as a director behaves improperly, whether by accident or intent.

This is complete and utter tosh, and evidence that you haven't the first idea of what you are talking about! Under what legal mechanism is " the shield of limited liability provided by the company removed as soon as a director behaves improperly, whether by accident or intent." ?

Yes, there are ways in which a rogue director can be pursued and brought to account for criminal actions - and so there should be. To suggest however, that a minor slip or even rank incompetence can automatically and immediately result in a removal of limited liability is a clear misunderstanding of even the basic tenets of the law and the system.

Or are you talking about Isle of Man law?

 

[SteveBurrows]

Spongebob, boring. Companies members (shareholders) have limited liability. The company can be sued but the members can't lose any more than their shareholding - they are not liable for the actions of the company - that is "limited liability".

Directors and other employees can't be sued in most cases, because they were acting for the company, but if their actions are either a) outside the law, b) outside the rules set by the M&A, or c) outside the authority given to them by the company, then they were demonstrably not acting for the company, and so they can be sued. If they get themselves into a position where they can be sued they don't have limited liability - it is unlimited. As it is the directors who make decisions on behalf of the company as the guiding mind of the company it is normally the directors who are exposed to being sued - it can happen to other employees but that really is rare.

Is it so difficult to understand? Whether is is a small transgression or a big one, if they step outside the rules they can be sued for it themselves - including by the company. UK law.

Yes it's very uncommon, not least because most people don't understand it as is evidenced by your indignation, but it's still UK law. In the case of the OP we apparently have a claimant who is determined to do just that - sue personally - and I have simply explained that it is possible.

Dave, I hope on re-reading you see that there is no inconsistency - if a director breaks the law or the company's rules they are not acting in the interest of the company - one of the seven directors duties laid out in Companies Act A2006 - ergo they were not acting for the company and are not protected by the company. A bit of paper registered with Companies House can't break the law!

I've explained enough. Spongebob wants to shout at me but I can't help the law. CA2006 was the single biggest chunk of law ever passed in the UK, it changed the game for directors, have a read. One of the reasons it was changed to be like this is because of those "rogue" directors who intentionally used a company to escape personal responsibility, so maybe we should all thank Ester Rantzen,

 

[SteveBurrows]

An example http://businessdatabase.indicator.c...sk_of_being_sued/UKTACDAR_EU111201/44/related

 

[SteveBurrows]

Rubbish link as it turns out, you need to register. Try this and look under Civil Liability http://www.dba.org.uk/pdfs/519-2 Duties of a Company Direc.pdf

 

[Tom McClelland]

... if she's done something wrong a decent lawyer will find a way to hang it on a director.

Good luck with that.

In reality this succeeds vanishingly rarely.

In fact I'd be interested in a cite of a single Civil case where an ordinary creditor has succeeded in pinning personal liability on a director (ie no criminal prosecution and no personal guarantee involved)

 

[SteveBurrows]

Good luck with that.

In reality this succeeds vanishingly rarely.

In fact I'd be interested in a cite of a single Civil case where an ordinary creditor has succeeded in pinning personal liability on a director (ie no criminal prosecution and no personal guarantee involved)

Didn't take much googling. Tent maker sues personally the directors of marquee hire company which failed to pay for the product it ordered

http://www.bailii.org/ew/cases/EWCA/Civ/2011/1126.html

No guarantee, no criminal action, just a plain old civil suit against directors who had fobbed off the creditor with a load of guff. Directors closed the company, creditors came back at the (ex) directors and won.

I agree it _used_ to be vanishingly rare. It's becoming increasingly common. Every case is different, but the principle has been established. We don't know the facts in the OP's case.

I still agree Tom that it's uncommon. My point is that while uncommon it is possible, if the directors in this case had not made silly untrue excuses to the creditor they would not have been liable. My credit control department used to hear dozens of such excuses each day from struggling directors trying to make ends meet; "It's in the post, waiting for insurance, the (end) client will pay to day then I'll pay you.... " - as this case from late last year shows it is very easy for the court to transfer liability to the directors if they are given even a whiff of an excuse

 

[talkinpeace]

In the OP's case though it was a customer who paid money and did not get their goods
like the customers of furniture stores that go bust leaving customers in the lurch
and those who paid cash generally have to suck it up
only those who paid by credit card get refunded

 

[SteveBurrows]

Yep, and the claimant will probably be claiming a tort - financial disadvantage because they paid their money but didn't get the goods. In the case of the tent makes it was a tort based on financial disadvantage because they supplied the goods and didn't get their money. Same thing in law - I gave X and I didn't get Y so I'm out of pocket to the value of X.

As has been said, the vast majority of these never get to court because it's expensive and the claimants have the common sense to cut their losses or fall back on insurance. Only if it is worth a lot, or if the claimant is cussed for some reason, does it get to court. In this case it does sound like the OP has a cussed customer as a claimant.

 

[Alan R Price]

Didn't take much googling. Tent maker sues personally the directors of marquee hire company which failed to pay for the product it ordered

http://www.bailii.org/ew/cases/EWCA/Civ/2011/1126.html

No disrespect, Steve but that case was not about stripping away the veil of incorporation because the company was insolvent, or about transferring the debt to the directors because of "mal-administration" prior to insolvency (in fact the claimant issued proceedings nearly a year before the defendants' company went into liquidation). It is about a specific set of circumstances where the directors appear to have acted dishonestly, deceitfully and recklessly so the court made an order against them personally, in favour of one creditor. Such orders a exceedingly rare and the principles are equally applicable to solvent companies as insolvent ones.

 

[SteveBurrows]

Hi Alan, insolvency doesn't come into the question. The OP's company is already dissolved. The OP's customer is now coming after the OP - on what grounds we don't know. In the example the creditor went after the directors after the company was dissolved - and succeeded. The case succeeded because the directors had given false statements / assurances to the creditor that their payment would be forthcoming because...., in short they lied to defer action by the creditor. Whether they were reckless in the eyes of the law I can't say, but deceitful and dishonest? In breach of their statutory duties? Yep, like most other directors who've told me "the cheque's in the post / I'm just waiting for the insurance money... " or whatever - these false assurances are unfortunately common practice in business, many directors would consider them a trivial means of buying time, but the court chose to hang the liability personally on the directors as a result. The same principle can apply to a customer bringing action, "the director told me they would fix this fault when..." - and because they, whether customer or creditor, are assured that it will be fixed in due course they agree to be patient while the directors quietly close the company and run off.

Yes this type of order is rare, the law stems out of the way CA2006 (which was not fully implemented until 2009) specifies certain director's duties making them part of law for the first time - before CA2006 there was no sound basis in law for a private action like this, and the lawyers and courts are still feeling their way. What you may be confident about is that cases like this, where a customer or creditor pursues the directors personally because they were operating outside the bounds laid down in CA2006, will become increasingly common.

That's also the view of the IoD which has been ringing loud warning bells to is members for the past few years about how CA2006 changes the game in respect of director's liability. If a director breaches any of their duties as specified by CA2006 they are fair game personally because they were demonstrably not acting for the company, a boundary that was previously very difficult to establish. All that is in question now is how liberal the courts will be in attributing directors actions as breaches of their duties. I think it will be 2020 before we understand the full impact of CA2006 on directors.

 

[David Freeman]

HyperD

This sounds like a fairly standard try-on. What does the original documentation say? Is there an order form or contract? Did the company issue invoices to the customer? Is there any evidence at all to suggest that you were the contracting party, rather than the company? If the answer to that is no, I suggest you write back to the claimant (or her solicitors, as appropriate), saying that she is fully aware it is a company debt, not a personal one; that this is an abuse of process; and that you will apply to the court for a wasted costs order against them/her. Copy the court in on the correspondence.

You are not liable for the company's debts, full stop.

Precisely this. I wouldn't worry at all about debts or faults arising after a company liquidation. The only legal way you can be held liable is if you personally took money and banked it in an account in your own name. If your company banked the money, and used it as operational expense then you personally owe her nothing. Obviously you are a conscientious, decent person to be worried, but you have no need to worry from a legal point of view unless you have done as I mentioned.

 

[Alan R Price]

Hi Alan, insolvency doesn't come into the question.

Sorry, I thought you had previously said:"If she can show that the company was mal-administered, such as trading when insolvent, then she can get her debt transferred to the directors."

It will be interesting to see if there is a rash of similar cases: my own view is that the courts will be very reluctant to make orders which can be seen as whittling away the protection of limited liability. The CA 2006 really only codified the law as it stood at the time and in fact the action in the Roder case was actually brought under the Statute of Frauds (Amendment) Act 1828. Similar actions have never been popular and I suspect are unlikely to become so.