Liquidators of insolvent companies looking to get a payout from a bankrupt director’s insolvency for any breach of directors’ duties have been warned by the Court of Appeal: detailed proof is needed of any claimed breach and since courts have a discretion as to the level of damages a full court hearing is most likely needed.
Insolvency specialist have taken to suing directors of insolvent companies for alleged breaches of directors’ duties as a means of topping up the pool of cash to pay company creditors, which includes their own fees. This practice is now extending to actions against bankrupt directors of insolvent companies in the hope of extracting some cash from their bankruptcy.
Liquidators of H Investments Ltd sued bankrupt director Nyall Hitchcock alleging he had traded whilst insolvent, had acted without due care and skill and had failed to keep proper accounting records. H Investments Ltd was a rural contracting business based in Inglewood, Taranaki. In 2014, it was put into liquidation by Inland Revenue for unpaid GST. Liquidators claimed in Mr Hitchcock’s bankruptcy for damages of $50,000, being the full extent of H Investments’ unpaid debts after Hitchcock family creditors agreed not to claim for money owed them.
The Court of Appeal ruled it was not enough for the liquidators to say H Investments was insolvent, therefore Mr Hitchcock must have been in breach of his duties as director. Full details of any alleged breach were required. There was no evidence, the Court of Appeal said, that the liquidators interviewed Mr Hitchcock to get details about his business practices and how the indebtedness arose. Non-payment of GST, by itself, is not evidence of insolvency, the Court said. Directors may be choosing not to make payment even though cash could be rustled up.
Any claim in bankruptcy for a breach of a bankrupt director’s duties is not a ‘provable debt’, the Court ruled. It is a ‘contingent debt’ requiring detailed proof that directors’ duties have been breached and then an assessment of how much should be awarded as damages. Insolvency Service could reject outright any ‘proof of debt’ for a breach of director’s duties, forcing liquidators into court to prove the validity and value of their claim, the Court ruled.
H Investments Ltd v. Official Assignee – Court of Appeal (29.03.18)
18.069