I have been reading with interest the flavour of this thread. I would like to add a few general comments.
Pursuing a director personally is not particularly easy. The courts will rarely lift the veil of incorporation. I am talking from experience as I have been involved in a few cases in this respect. Sections 213 and 214 of the Insolvency Act 1986 relate to wrongful trading and fraudulent trading. It is a collective remedy (ie any monies recovered goes into the pot to be shared among all creditors of a company) that can only be pursued by the liquidator. The liquidator will rarely get involved without funding from the creditors. I have recently argued in a letter to the Ministry of Justice that the Insolvency Act 1986 should be amended to permit creditors to be able to apply under section 213 and 214, subject to obtaining leave of the court. This they have discounted but were more interested in my suggestion to increase the scope of sections 213 and 214 to cover Administrations. Sections 213 and 214 do not cover Administrations. Administrations in my view are the biggest source of abuse, especially pre-packs. There is urgent need for reform in this area.
There are a few other avenues where sometimes you may be able to hold a director personally liable. This would be the "tort of deceit" as well as the principle in Contax v. Wiseman (2007). Basically, this case held a director personally liable where he had signed a writtenorder and made representations at the time that the company was good for the money but he knew that the company would not be able to meet the liability. It was also key that the director was the sole director and effectively the controlling mind of the company. These situations are unlikley to occur very often.
Other situation to bear in mind is section 216 of the Insolvency Act 1986. This is basically where a director of the liquidated company was also a director or shadow director of the new company in the 12 months before the liquidation of the old company and new company's name is similar to that of the liquidated company. In some situations, the director of the new company can be personally liable for debts of the new company. There are three main exemptions that can be used to avoid liability, one of them being making an application to the court within 7 days of liquidation for permission to use a prohibited name (ie similar name). I have successfully pursued cases on the basis of section 216, but these are rare because the rogue directors are perfectly aware of the exemptions they can make use of to avoid personal liability.
I would agree with the other contributions that personal guarantees and proper credit control are important. If companies have proper credit control sections then there would be little need for debt collection companies. Many debt collection companies promise things which are not really deliverable. For example, many talk about usuing statutory demands or winding up petitions as an effective way of pressuring debtors into paying. Firstly, the regular use/threat of a statutory demand by a debt collection company where there is no real intention of pursuing bankruptcy can be a breach of their Consumer Credit Licence and the Office of Fair Trading can and will take action. Also, bankruptcy proceedings and winding up are unlikely to follow in many cases because of the costs of such proceedings.
What many debt collection companies seem to do is play the "harassment card" and try and scare the debtor into paying. This is music to my ears, where the defendant has a legitimate argument, as I love doing battle against the debt collection company employing the broken record technique as I have often succeeded in using the Protection from Harassment Act 1997 to claim damages.
In summary, a company with a good credit control section should follow good procedure (eg, proper terms of business, credit checking) and then decide whether to issue court action if the debtor is good for the money. If a claim is bit more complicated then consider passing it to lawyers. I will be honest in saying that it is going to get more difficult to enforce judgments through the courts especially if some new proposals become law. There is a proposal to prevent an Order for Sale if the debt is less than £25,000. I would like to see the level at a lower figure, eg £5,000. Also, there are proposal to take action against agressive bailiffs. I am happy to see bailiffs properly regulated but I would also like to see them have greater powers of entry. If we make it more difficult to enforce a court judgment, then we are likely to see an increase in the bullying tactics of debt collectors/companies who are even less accountable.
Anthony Reeves
Pinniger Finch & Co, Solicitors
