Declaration of Wrongful Trading – A First for the Channel Islands
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In December 2024, the Royal Court of Jersey made the first wrongful trading declaration in the Channel Islands in the case of Viscount v McLaughlin. The decision arose out of the insolvency of Restore Builders Limited and the conduct of its sole director, Mr McLaughlin.
There were two applications against the directors, one for a disqualification order and one for a wrongful trading declaration.
The director had been operating as a sole trader under the name Restore Builders Limited and incorporated the company in July 2022. At the time of incorporation, the directors had accumulated circa £1 million in personal debt with respect to various creditors by virtue of his sole tradership. Shortly after incorporation, the company fell into insolvency, by which point a creditor had already commenced court proceedings against the company.
The Court held that Mr McLaughlin knew, or at was least reckless, as to whether there was no reasonable prospect as to whether the company would avoid insolvency and failed to take steps to minimise the losses to the company’s creditors.
The Court ordered that he be personally responsible for the company’s debts. Separately, the Court also made a ten-year director disqualification order under article 78 of the Companies (Jersey) Law 1991.
What does this mean for Guernsey?
Although there have been no such orders yet in Guernsey, this recent Jersey judgment still serves as a timely reminder to directors in the Bailiwick. Directors of Guernsey companies face analogous duties and risks where insolvency looms, particularly the duty to shift their focus to creditors and take reasonable steps to limit losses.
Under section 434 of the Companies (Guernsey) Law, 2008, the Royal Court can declare that a person (usually a director) shall be liable to make contribution to the company’s assets for the benefit of creditors in a liquidation process. Accordingly, director can be held personally liable for the company’s debts if the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation. If however, the court is satisfied that the director has taken all reasonable steps to reduce the potential loss to creditors of the company, no such order will be made.
Although the facts in the Restore Builders case were stark, the judgment is a clear signal of the willingness of the courts to impose personal liability where directors continue trading beyond the point of no return and fail to act to protect creditors.
Guernsey directors who recognise that insolvency may be forthcoming should take timely, documented steps to minimise loss, including seeking professional advice, preserving records and engaging constructively with creditors when the time comes to do so.
For more information on wrongful trading, please refer to this guide.
If you have any questions about wrongful trading claims or corporate insolvency issues generally, please do not hesitate to contact Advocate Todd McGuffin (Partner, Head of Disputes & Risk), Advocate David Doutney (Partner) or Tillie Graham (Associate) at Babbé LLP.