Director acting in contravention of s.216 of the Insolvency Act 1986 on the hook for the company's debts
The recent case of PSV 1982 Ltd v Langdon  EWHC 2475 (Ch) (Re. Discovery Yachts Ltd) raised interesting preliminary issues for the Court to consider in connection with a director acting in contravention of ss. 216 and 217 of the Insolvency Act 1986 ("IA 1986").
Section 216 of IA 1986 prohibits a person who had been a director of a company in insolvent liquidation from being involved in the management of another company which has a similar name. Subject to limited statutory exceptions, the prohibition lasts for five years from the date of the liquidation of the insolvent company and applies to any person who was a director of the insolvent company within the 12 months before the company went into liquidation. Meanwhile, section 217 of IA 1986 makes any person who is in contravention of section 216 personally liable for the relevant debts of the company.
The facts of this case centre on a director ("Langdon") and a company which he was involved in, Discovery Yachts Group Limited ("DYGL"). DYGL was subject to a breach of contract claim brought by a third party. In those proceedings, the Court held that the contract, which was entered into in September 2017, was breached by DYGL in January 2018 and judgment was given against DYGL in favour of the claimant. The claimant then assigned the judgment debt to PSV 1982 Ltd ("PSV"), who sought to recover the sum from Langdon personally. PSV's basis for claim against Langdon was that, until April 2017, he had been a director of another company with a similar name, Discovery Yachts Limited, which had gone into insolvent liquidation on 12 October 2017. This meant that from 12 October 2017, as a director of DYGL, Langdon was (i) in breach of s.216 of IA 1986; and (ii) personally liable for the relevant debts of DYGL.
The Court considered two issues. Firstly, whether Langdon's liability for the judgment debt was automatically established by virtue of the proceedings against DYGL, or if PSV had to establish Langdon's liability in separate proceedings. In considering this issue, the Court stated that the potential of injustice to Langdon of being fixed with a liability which was established in proceedings to which he was not a party (and could not, therefore, present arguments in his defence) was an important factor to take into account. However, the Court ultimately concluded that it would be an injustice for a claimant to have to establish its case a second time and it reasoned that Parliament's intention with the wording of s.217 was clearly one of creditor protection and, resultantly, that any risk of injustice should be allocated to the director not the creditor.
The second issue the Court considered was one of timing. For the purposes of s.217(3) of IA 1986, 'relevant debts' are those debts and other liabilities which are incurred at a time when a person is involved in the management of the company in contravention of s.216. Langdon wanted the Court to agree that, because the judgment debt arose from a claim under a contract which had been entered into in September 2017 (and at which point he was not yet acting in contravention of s.216), the liability was not a relevant debt for which he could be personally liable. The Court dismissed this and held that the liability was not incurred when the contract was entered September 2017. Instead, liability arose only as a result of the breach of contract and so the liability was incurred in January 2018 at the moment that the breach had taken place. Therefore, the judgment debt was a relevant debt within the scope of s.217 of IA 1986.
The case provides helpful clarity on the scope of Section 217 and serves as a warning to directors who might find themselves in breach of Section 216.