Landmark judgment on disqualification and wrongful trading issued in Jersey

When it comes to corporate governance, understanding disqualification and wrongful trading is crucial for directors and stakeholders. Wrongful trading occurs when a director continues trading while insolvent, potentially leading to severe penalties. Company director disqualification serves as a safeguard against misconduct, protecting creditors and shareholders.

The Royal Court of Jersey (the Court) has issued a landmark judgment in respect of the disqualification of a director and wrongful trading in In the matter of Restore Builders Limited En Désastre [2024] JRC 290 (In the matter of Restore Builders).

In accordance with Article 24(7) of the Bankruptcy (Désastre) (Jersey) Law 1990 (the Désastre Law), the Viscount of Jersey applied to the Court for Thomas McLaughlin to be disqualified as a company director. In accordance with Article 44, the Viscount also applied that Mr McLaughlin be personally responsible for the debts of Restore Builders Limited (the Company) on the basis that he was engaged in wrongful trading.

Background

Mr McLaughlin sought to incorporate the Company in July 2022. However, he had been trading as sole trader of 'Restore Builders' since March 2021. Not long after its incorporation, the Company came into financial difficulties and was unable to pay its debts as they fell due. Under Article 1 of the Désastre Law, the Company was insolvent.

As early as 30 September 2022, Mr McLaughlin issued letters to creditors of the Company setting out that it would cease trading due to its insolvency. The Company ceased trading on 7 October 2022 and was declared en désastre on 25 November 2022. Mr McLaughlin was personally declared en désastre on the same date.

The Viscount of Jersey made a number of attempts to engage with Mr McLaughlin regarding the insolvency of both himself and the Company. However, Mr McLaughlin repeatedly failed to cooperate with the Viscount, personally and in his capacity as a director of the Company, contrary to Article 18(1) of the Désastre Law. He also left the island, becoming uncontactable for significant periods of time.

When Mr McLaughlin did engage with the Viscount, the information provided did not offer clarity in respect of either the Company's or his own personal affairs. For instance, there were discrepancies between the records of the Company and the affidavit he had filed when making an application to declare the Company en désastre. Mr McLaughlin had represented that the value of the Company's assets was over £26,000 when the value realised was only £700. He further disclosed that the Company's debts amounted to £282,632. However, the claims filed were approximately one tenth of that, in the sum of £28,577. There was also evidence that Mr McLaughlin may have mixed the Company's assets with his own. The result was that it was unclear where the assets and the liabilities "truly lay" between the Company and Mr McLaughlin personally.

The Viscount also submitted to the Court further evidence that Mr McLaughlin had accumulated circa £1 million in personal debt before incorporating the Company and that the incorporation of the Company was used as a means to improve his own position with creditors.

Judgment

Disqualification

Mr McLaughlin's repeated failures to cooperate with the Viscount led the Court to determine that he had failed to comply with Article 18 of the Désastre Law, in particular, the obligation upon a debtor "to the utmost of the debtor's power, aid the Viscount in a realisation of the debtor's property and the distribution of the proceeds among the debtor's creditor".

With this in mind, the Court considered its powers to disqualify a director under Article 24(7) of the Désastre Law and Article 78 of the Companies (Jersey) Law 1991 (the Companies Law). Article 24(7) empowers the Court to make equivalent orders to those under Article 78 of the Companies Law if an application is made to it by the Viscount. Article 78 of the Companies Law provides that:

1. If it appears to the Minister, the Commission, or the Attorney General, that it is expedient in the public interest that a person should not without the leave of the court: a) be a director of or in any way whether directly or indirectly be concerned or take part in the management of a company, b) [...]
2. The court may, on such an application, make the order applied for if it is satisfied that the person's conduct in relation to a body corporate makes the person unfit to be concerned in the management of a body corporate
3. An order under paragraph (2) shall be for such period, not exceeding 15 years, as the court directs
4. A person who acts in contravention of an order made under this Article is guilty of an offence
5. On the making of an order against a person under this Article, the registrar may record the person's disqualification in a form approved by the Commission

The Court considered the judgment of SPARC Group Limited [2022] (2) JLR 65 (SPARC), which concerns its earlier decision to disqualify a director whom it considered had flagrantly breached his obligations under the Désastre Law. In particular, the Court considered its observations in SPARC where it stated: "Bearing in mind that an order for disqualification is designed to protect the public and bearing in mind the position of Jersey as a finance centre and the need to ensure that directors in the place of Mr Mills comply with their obligations under statute a lengthy period of disqualification is warranted."

The Court held that there had also been a flagrant breach of the obligation owed by Mr McLaughlin as a debtor under Désastre Law and concluded that he should be disqualified for a period of 10 years.

Wrongful trading

Although the Viscount had submitted to the Court that Mr McLaughlin was a "man of straw" – lacking the financial substance to meet obligations or to be held accountable in a meaningful way – the Viscount considered that an order under Article 44 of the Désastre Law should be made compelling Mr McLaughlin to pay the debts of the Company personally.

Article 44 sets out the statutory test for wrongful trading. This article is satisfied where it is found that a person who is a director of a company or manager of a limited liability company who prior to the declaration of en désastre (Declaration) knew that there was no reasonable prospect that the Company would avoid a Declaration or a creditors winding up; or on the facts known to him or her was reckless as to whether the company would avoid a Declaration or such a winding-up.

As to Mr McLaughlin's state of mind regarding the potential insolvency of the Company, the Court considered that he would have been aware that his personal bankruptcy comprised claims against him in the sum of £964,057 and that, included in that sum, were claims for over £280,000 for employee social security contributions and tax, when his personal assets were only circa £2,000.

The Court considered that the incorporation of the Company was a tool for Mr McLaughlin to avoid his personal bankruptcy. It held that he "knew, or ought to have known, that there was no reasonable prospect that the Company which he incorporated would avoid bankruptcy when he, its sole shareholder, had accumulated debts of nearly £1 million in his personal capacity before incorporating the Company".

Accordingly, the Court determined that the test under Article 44(2) was satisfied.

Conclusion: key takeaways from a wrongful trading and disqualification judgment

Although this judgment turns on the unique facts of this case, it is a salutary reminder to directors to proceed with caution when a company starts to run into financial difficulties and to cooperate and assist the Viscount in discharging his duties under the Désastre Law. The consequence of failing to do so may lead to disqualification as a director and could result in personal liability for the debts of the company.

It is clear from the judgment that the Court will not tolerate a person "play[ing] fast and loose with the rules and the [Désastre Law]". The Court's authority to make significant disqualification orders, lasting 10 years or more, underscores the importance of considering the public interest and protecting both the public and the reputation of Jersey as a leading international finance centre.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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