Court Considers Personal Liability of Director for Debt

In Toomey Leasing Group Ltd v Sedgwick & Ors [2016] IECA 280, Court of Appeal, Hogan J, 13 October 2016, the first named respondent (Mr Sedgwick) appealed from a decision of the High Court that he, and the second respondent were personally liable to the applicant in the sum of €48,250 pursuant to Section 297A of the Companies Act 1963.

Toomey Leasing (Toomey), a UK car leasing company, was a creditor of Appleyard Motors Ltd (Appleyard), a car dealership, and Mr Sedgwick was a director of Appleyard until it went into liquidation in June 2012. The essential question in the appeal was whether Mr Sedgwick should be deemed to have been knowingly a party to the carrying on of the business of the company in a reckless manner so that he should be made liable for the debt of Appleyard to Toomey.

Facts
By 2012 Appleyard was in arrears with the Revenue Commissioners and was, in effect, depending for survival on the support of its principal banker, Ulster Bank.

On 17 May 2012, Toomey sent an email to Appleyard expressing an interest in purchasing three cars.  Toomey had carried out a credit search on Appleyard which did not indicate anything of concern. Appleyard confirmed on 22 May 2012 that it was in a position to supply the vehicles for the sum of €48,250 and Toomey transferred this amount on 13 June 2012. Appleyard sourced the vehicles through another dealership but Ulster Bank withdrew its support and Appleyard could not pay for the vehicles.  Appleyard ceased trading, and on 26 June 2012, entered into liquidation.

Toomey claimed that by 12 June 2012 (when the last request for payment was sent by Appleyard) and, failing that, by 13 June 2012 (when the monies were transferred), Mr Sedgwick knew or ought reasonably to have known that he, while an officer of the company, was knowingly a party to the carrying on of the business of the company in a reckless manner.

The High Court
The High Court held that Mr Sedgwick and the second respondent were personally liable for the debt to Toomey for the following reasons:

• The applicant was not an ordinary creditor of the company, in the sense of being a trade creditor. The applicant was a customer of the company, which became a creditor because it paid in advance for vehicles which it did not receive, rather than making payment against delivery. Against the troubled background in which the company was trading, it had a duty to take special protective measures for customers such as the applicant.
   
• While the High Court believed that the directors acted honestly and responsibly up to 26 April 2012, it considered that their failure to take further professional advice regarding the future of the company no later than 31 May 2012, and/or to take appropriate measures to protect creditors or alternatively to take steps to wind up the company as of that date, was not responsible conduct in light of all of the information that they had in relation to the company.
   
• While the High Court did not believe that the evidence demonstrated that the directors were knowingly parties to the carrying on of any business of the company in a reckless manner, it was of the view that they could be deemed to have done so under Section 297A(2), in that having regard to all of the information available to them, and, the general knowledge, skill and experience that may reasonably be expected of persons in their position, they ought to have known that their actions or those of the company would cause loss to creditors.

Mr Sedgwick appealed.

The Court of Appeal
The Court of Appeal noted that Section 297A(2)(a) is a provision which deems certain conduct to amount reckless trading for the purposes of ascribing personal liability, even if such conduct would not in fact otherwise amount to reckless trading.

The question, therefore, to consider was whether a director of a company such as Appleyard “ought to have known that his actions or those of the company would cause loss to” a creditor such as Toomey. The Court noted that the statutory test is an objective one and the court is expressly required by the terms of Section 297A(2) “to have regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position.”

Accordingly, it is not enough that, viewed objectively, an experienced director ought to have known that his actions or those of the company might cause loss to a creditor. Rather, viewed objectively, ought an experienced director to have known that the actions in question would cause loss. This suggests that the loss to the creditor must have been foreseeable to a high degree of certainty.

The court noted that while it was true that by June 2012, Appleyard's survival depended on the good will of Ulster Bank and any director would have known that the risk of the withdrawal of support by the Bank must have been a real one, there was little to indicate that Mr Sedgwick ought to have known that the collapse would come on 13 and 14 June 2012 or that the receipt of the monies from Toomey would lead to loss on the part of that creditor. The Court noted that the evidence in the High Court suggested that while Mr. Sedgwick was aware in general terms of the Toomey purchase, he was not personally involved in that transaction.

Furthermore, Appleyard had never received any warning from either its auditors, financial controller or from the Bank itself that there was any imminent risk of losing support from Ulster Bank.

In the light of these facts, the Court of Appeal differed from the conclusions of the High Court. The Court was of the view that even if Mr Sedgwick had been personally involved in the Toomey payment, it was hard to see how on either 12 June 2012 (when a request for payment was made) or 13 June 2012 (when payment was received), he ought to have known that these actions would cause Toomey loss. He could not have known that this would occur for so long as Ulster Bank continued to support the company. As he had no reason to believe that the decision of Ulster Bank to cease to support the company was imminent or had been even threatened, the standard imposed by s. 297A(2)(a) (“…would cause loss to the creditors of the company or any of them….”) was not met.

There Court noted that Appleyard took an enhanced risk with the funds of Toomey by accepting advance payment before the delivery of the vehicles could actually be effected and it would have been wiser if the funds had been paid into an escrow account. However, none of this was in itself sufficient to ensure that the test in Section 297A(2)(a) had been satisfied.

The Court allowed the appeal of Mr. Sedgwick and refused the declarations sought under Section  297A(2)(a) of the 1963 Act.

For further information please contact Paula Mullooly.

Date published: 6 December 2016