A Guide to Misfeasance, Wrongful & Fraudulent Trading in Guernsey
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Introduction
Guernsey law provides a range of procedures that may be used by officeholders in a corporate insolvency process to return assets to the company to maximise the value available for distribution to creditors. These include claims for misfeasance, wrongful trading and fraudulent trading.
If the tests for misfeasance, wrongful trading or fraudulent trading are met, the Companies (Guernsey) Law, 2008 (the Companies Law) imposes personal liability on directors of the company.
Misfeasance*
Under section 422 of the Companies Law where it appears in the course of the winding up a company that a past or present officer of the company (i.e. a director) or any other person directly or indirectly involved in the promotion, formation or management of the company has:
- Appropriated or otherwise misapplied any of the company’s assets;
- Become personally liable for any of the company’s debts or liabilities; or
- Otherwise been guilty of any misfeasance or breach of fiduciary duty in relation to the company
The liquidator or any creditor or member of the company may apply to the Royal Court of Guernsey for an order against those individuals to repay, restore or account for such money or property or contribute such sum to the company’s assets (including interest). Any claim must be brought within six years of the date of breach of duty.
Conduct which may constitute a breach of the director’s fiduciary duty is wide ranging. The fiduciary duties of a director include to act bona fide in the interests of the company, to act for proper purposes or to not act for improper purposes, to exercise independent judgment and to avoid conflict of interests. However, in Carlyle Capital Corporation Limited v Conway, the Royal Court held the reference in section 422 to “misfeasance or breach of fiduciary duty” does not include simple negligence on the part of a director.
* misfeasance – a transgression, especially the wrongful exercise of lawful authority
Wrongful Trading
As above, in accordance with their fiduciary duties, directors of a company in financial difficulty must not only act bona fide in the best interests of the company but must also have proper regard to the interests of the creditors. There are circumstances in which directors could be liable personally to contribute to any loss suffered by the creditors.
A director may incur personal liability for wrongful trading under section 434 of the Companies Law in circumstances where they “knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation”, unless they took reasonable steps with a view to minimising the potential loss to creditors.
What the director ought to have known is based on both their actual skill, general knowledge and experience and the skill, general knowledge and experience that may be reasonably expected of a person carrying out the same functions as that director in relation to the company. An application for wrongful trading may be brought by the company’s liquidator, a creditor or a member.
If successful, the director may be ordered to make such contribution to the company’s assets as the court thinks fit.
Fraudulent Trading
If the liquidator discovers that any business of the company had been carried on with the intent to defraud creditors, the liquidator may pursue a claim against those directors for fraudulent trading under section 433 of the Companies Law.
A claim for fraudulent trading can also be brought by any creditor or member of the company.
If a claim is successful, the court may declare that any persons who were knowingly parties to the defrauding conduct shall be liable to make personal contributions to the company’s assets as the court thinks proper. They may also be criminally liable under section 432 of the Companies Law.
Next Steps
If you have any questions about such claims or insolvency issues more generally, please do not hesitate to contact Advocate Todd McGuffin (Head of Disputes & Risk), Advocate David Doutney (Partner) or Tillie Graham (Associate) at Babbé LLP.