Fault and Justice: Section 212 of the Insolvency Act 1986

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The recent decision of the English High Court of Re Glam and Tan Ltd [2022] EWHC 855 (Ch) highlights the ways in which a director can be held liable, as well as the reasons why they can be released from liability for breaches of section 212 of the Insolvency Act 1986, which penalizes directors and faulty leaders.

The legislation

When a company is in liquidation (i.e. in liquidation), Article 212 allows the court to order the reimbursement of sums embezzled or withheld by an officer in the management of the company. This section is known as “mischief” and covers a wide range of administrator behavior.

The case

This case concerned a beauty salon that went into liquidation. It had only one director, Mrs. L. She did not provide the liquidator with complete files, nor satisfactory answers to the questions of the liquidator concerning the finances of the company.

The liquidator has filed a fault claim for almost £150,000, alleging that Ms L benefited from the payment of company funds to which she was not entitled. The payments made did not appear to be legitimate business expenses and included payments to Pets at Home, Ticketmaster and various parents. Ms. L also took (for herself) the money received by the company (rather than depositing it into the company’s account) and gave herself unjustified extra pay.

Ms. L argued that the vast majority of transactions were business expenses (and those that were personal expenses were reimbursed). However, she also alleged that her controlling, purple husband was a de facto director of the company who made financial decisions, including forcing the company to make loans to her, her cousin and her mother under threat, incidents and violence against Mrs. L On behalf of the liquidator, it was argued that no creditor had had contact with Mr. L., that his name did not appear on any financial document and that there was no evidence that personal expenses had been reimbursed.

decision

The court found that some of the payments were indeed business expenses, but found that the loans were not made for business purposes and therefore Ms L had breached her duties as a director under of Section 172 of the Companies Act 2006 (the duty to promote the success of the business), especially given the financial difficulties the business was experiencing at the time. The court held that taking extra pay, failing to provide cash receipts, and withholding an insurance payment were also breaches of duty by his administrator.

The court has the discretion under section 212(3) to determine exactly how much a director, who is found guilty of an offence, should contribute to the company. The court ruled that it would not be fair for Ms L to be made personally responsible for the full sums wrongfully paid when “her free will had been subjected to the will of her husband under the threat of violence”. The court therefore released her from the obligation to repay the loans she was forced to make to her husband and the money taken by her husband as these were “outside her control”.

Analysis

This is an unusual judgment, but it highlights the broad discretion available to a court in the application of Section 212. Even where a director has been found to have breached his or her duties, the courts will consider equity and justice when deciding what, if anything, should be reimbursed by them to society.

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