1. If in the course of winding up of a company
(a) any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner;…
the court, on the application of the … liquidator … of the company, may, if it thinks it proper to do so, declare that such person shall be personally responsible, without any limitation of liability, for all or any part of the debts or other liabilities of the company as the court may direct.
3. Without prejudice to the generality of subsection (1) (a), an officer of a company shall be deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner if—
(a) he was a party to the carrying on of such business and, having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position, he ought to have known that his actions or those of the company would cause loss to the creditors of the company, or any of them, or
(b) he was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (taking into account the contingent and prospective liabilities).
Although the Section refers to the possibility of unlimited liability on the part of any officer against whom a declaration of reckless trading is made, the nature of the remedy is, in practice, restricted having regard to the principles laid down by the Supreme Court in O’Keefe v Ferris and supplemented in a number of cases under section 204 of the 1990 Act, most importantly in the judgment in Mehigan v Duignan.
In the O’Keefe case it was noted that any sanction imposed “should be proportionate to the wrongdoing that has been made out.”
This theme was taken up in the Mehigan case cited above, which involved potentially unlimited liability under section 204 of the Companies Act 1990. The court found that the discretion conferred by section 204 must be exercised in a responsible but also in a constitutional fashion. In assessing liability, the court should have regard to the extent to which the officer’s involvement in the contravention in question resulted in financial loss to the company, and if it did, whether such loss was reasonably foreseeable by the officer as being the result of such contravention.
It follows from these cases that the quantum in any reckless trading case is the recovery of loss inflicted on the company or its creditors by the reckless continuation of trade; it is not, therefore, the recovery of the entire deficit of the Company.
The leading judgment on reckless trading is the judgment in Re Hefferon Kearns Ltd. In this case, the Court found that the inclusion of the word “knowingly” meant that for an officer to be held liable he must have been party to the carrying on of the business in a manner which he knew well involved a serious and obvious risk of loss or damage to others and yet ignored that risk because he did not really care whether such others suffered loss or damage or because a selfish desire to keep his own company alive.
For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or jim.stafford@frielstafford.ie or tom.murray@frielstafford.ie