Company Law: Personal Liability for Corporate Debts, Lifting the Veil of Incorporation
Date: July 19th, 2010 | Filed under: Mediation & Company Law Articles | Tags: Company law, corporate debts, personal liabilityIt was firmly established as a fundamental principle of company law over one hundred years ago in the case of Salomon v Salomon & Co [1987] AC 22 that a company is the agent of its members, even if all the shares are beneficially owned by one person. Accordingly the acts of the company will not automatically be regarded as the acts of the members nor will the members be responsible as such for the debts and liabilities of the company. However, within the Companies Acts 1963 to 2006 and elsewhere, several instances may now be found of ‘veil lifting’, whereby personal liability is imposed on members or directors for the company debts and liabilities.
The Heffernans Kearns Case
Sections 297 and 297A of the 1990 Companies Act.
Section 297A provides that specified persons are to be personally responsible without limitation of liability for all or part of a company’s debts or liabilities in defined circumstances.
Section 297 can arise anytime in solvent or insolvent companies imposing criminal liability on persons found guilty of fraudulent trading.
Before the 1990 Act personal liability for the debts of a company could only be imposed on directors where fraud was proven.
If in the course of winding up or examinership, or if the court makes an order pursuant to section 251 of the Companies Act 1990, it appears that an officer was knowingly a party to the carrying on of the business of the company in a reckless manner or any person was knowingly a party to the carrying on of the business of the company with the intent to defraud the creditors of the company or the creditors of any other person or for any fraudulent purpose, then that officer or person may be held personally liable for the debts of the company.
An officer will be regarded as being knowingly party to such conduct, if; having regard to the general knowledge, skill and experience he might be expected to have, he ought to have known that his actions or the company’s actions would cause loss to the creditors or if he was party to the contracting of a debt and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due along with its other debts.
If a company fails to keep proper books of account and the failure is regarded by the court as having contributed to its inability to pay its debts or as having resulted in substantial uncertainty as to the assets and liabilities of the company or as having impeded the winding up then officers and former officers responsible for the default maybe made personally liable for the company’s debts. Need not be on a winding up. When an- application is made in respect of alleged reckless trading, the order can only be made where the company is deemed to be unable to pay its debts.
Mr Justice Kevin Lynch handed down the first written judgement on a reckless trading application under the 1990 Act in the case of Re: Hefferon Kearns Limited(No: 2); Dublin Heating Company Limited -v- Hefferon & Others. The Judgement of Lynch J. is important in that it gives considerable guidance as to what conduct by the officers of a company will constitute reckless trading.
The action taken by the plaintiff a heating and plumbing sub-contractor, was brought under section 33 of the Companies (Amendment) Act; 1990, which has since been repealed and replaced by section 297A of the Companies Act 1963, as amended. During this case which was at hearing for nine days in the High Court, the plaintiff alleged that the Defendant, a construction company, in which the four defendants were the only shareholders and directors, had traded in a reckless manner and sought to have the Directors made personally liable for the debts of the Company.
His Lordship was somewhat contained in this action as he was limited to looking at a very short period of time in order to determine whether the defendants had been reckless. It is an established fact, and acknowledged by Lynch J. that he could only look at the conduct of the defendants from the commencement into law of the Companies (Amendment) Act 1990 on 2nd August 1990 to 11th October 1990, the date the defendants applied to have the Company placed under the protection of the Court. He stated that liability could only be imposed for debts incurred after 29th August 1990.
The Judge confirmed that section 297A of the Companies Act 1990 does not impose a collective responsibility on a board of directors but operates individually and personally against the officers of a Company and that the onus rests on the plaintiff to prove his cause of action against each of the defendants.
His Lordship examined the meaning of recklessness having reviewed the authorities from both tort and criminal law and found that the inclusion of the word “knowingly” in section 297A must have been intended by the Oireachtas to have some affect on the nature of the reckless conduct required to come within the section. He said that its inclusion required that the director is party to carrying on the business in a manner which the director knows very well involves an obvious and serious risk of loss or damage to others and yet ignores that risk because he does not really care whether such others suffer loss or damage or because his selfish desire to keep his own company alive overrides any concern which he ought to have for others.
Lynch J. stated that ultimately each case must be decided on its own facts and his Lordship found that there was no evidence of recklessness within the meaning of section 297A (1)(a). He then went on to examine if the defendants conduct fell within the terms of section 297A(2), which states:
An Officer of the 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 and,
He was a party to the contracting of a debt by a 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”.
The Court noted, looking at the wording of section, 297A (2)(a) that there was a requirement of knowledge that the defendants actions or those of the Company would cause loss to the creditors. The use of the word “would” meant that it was not sufficient to show that there might be some worry or uncertainty as to the ability to pay all of the creditors. More certainty of loss was required before liability could be imposed. He held that this liability was not present in the facts before the Court.
His lordship in his examination of section 297A (2)(b) held that the defendants traded in a manner contrary to that sub- section for a period from 28th September until 11th October 1990, when the company was placed under that protection of the Courts.
Judge Lynch felt that their conduct even if unreasonable in objective terms, was nonetheless undertaken in the honest belief that the creditors of the company would benefit. His Lordship held that there was prima facie liability on the defendants under section 297A. He made the following points on this section of the legislation.
“Paragraph (b) of sub-section (2) appears to be a very wide ranging and indeed draconian measure and could apply in the case of virtually every company which becomes insolvent and has to cease trading for that reason. If; for example, a company became insolvent because of the domino effect of the insolvency of a large debtor, it would be reasonable for the Directors to continue trading for a time, thereafter to assess the situation and almost inevitably they would incur some debts which would fall within paragraph (b) before finally closing down. It would not be in the interests of the community that whenever there might appear to be any significant danger that a company was going to become insolvent, the directors should immediately cease trading and close down the business. Many businesses which might well have survived by continuing to trade coupled with remedial measures could be lost to the community”.
However, his lordship stated that section 297A (6) of the Act entitles the Court to relieve a defendant from personal liability where he has acted “honestly and responsibly” in relation to the affairs of the company. Mr Justice Lynch felt that the defendants in this action had acted honestly and responsibly to such an extent that having regard to all the circumstances he felt compelled to relieve them unconditionally from any liability under section 297A and accordingly the claim against the defendants was dismissed.
However, whilst this case gives some insight into judicial reasoning, it is somewhat unique in that the Court was limited to looking at the affairs of the company for a two week period from the point of view of unreasonable contracting of debts. Also the judge noted that two of the defendants had both given personal guarantees to the bank in respect of the company’s indebtedness and that the whole affair had ended up as a financial disaster for both of the principle defendants.
The action was taken against the four company directors. However, at the outset, the learned Judge ruled that the plaintiffs real claim was against the first and second defendants and that the third and fourth defendants had only been joined on the basis that they were directors of the company and that the plaintiff had no real wish to fix them for liability.
Whilst we see here that the Courts will apparently be slow to impose personal liability on the officers where there is only imputed knowledge of the risk, they may be more likely to impose liability where there is actual awareness of the risk of loss to creditors.
THE DOHERTY ADVERTISING CASE
In an application before the Commercial Court, a Receiver brought proceedings seeking to recover more than €6 million from two former directors of the collapsed advertising agency, Doherty Advertising. The reckless trading proceedings brought pursuant to section 297A of the Companies Act 1990 were originally taken in the High Court but the Receiver sought to have the case transferred from the Chancery List of the High Court to the Commercial Court on the grounds that it was an appropriate case to be transferred due to the legal complexities and in order to avail of the case management structures that are available in the Commercial Court.
The Receiver brought the proceedings in order to expedite matters as he sought orders against the directors for allegedly reckless and fraudulent trading. The Commercial Court generally deals with cases involving more than €1 million but has a discretion as to what cases may be admitted to the Court. The Receiver told the court that he was having difficulty obtaining replies and that neither of the two directors had supplied responding affidavits to him. The court ordered that the Receiver could seek sworn statements from the two directors on specific issues to be set out by the lawyers for the Receiver and the court set specific deadlines for this information to be furnished.
Doherty advertising was wound up in August 2004 with extensive debts
The admission of this case into the Commercial List of the High Court was highly significant. This was in sharp contrast with the length of time it may take an applicant/plaintiff considering bringing these proceedings in the other courts.
The relevant legislation as set out here is quite straightforward. However, the onus rests with the applicant/plaintiff to prove their case in court and any respondents/defendants must then defeat the claim or satisfy a court that they acted honestly and responsibly. The landmark case as set out here, Hefferon and Kearns has probably done more over the last 16 years to dissuade creditors from bringing this application to the courts on account of the expense, complexity and uncertainty at the end of the day. This might be about to change with PSK Construction and others to follow.
THE EASTLAND WAREHOUSING LTD CASE
The court was told by the joint liquidator as in this reckless trading and failure to keep proper books of account and records case against the former directors of Eastland Warehousing Ltd in 2003 that very large sums of money were misappropriated lodged to a building society account. Cheques made out to the company were cleared in the building society as the accounts there were in the companies name also. Once the funds were cleared on the account the directors has sole signatories on the accounts were in a position to distribute the funds so lodged in any way be pleased. The court was told that all this activity occurred outside the books of the company according to the liquidators. There was a shortfall of €1.5 million from which the directors were held personally liable.
4. Where proper books of account are not kept
The Mantruck Services Case
Section 204 of the Companies Act 1990 was considered by the High Court in the matter of Mantruck Services Limited (In Liquidation) and in the matter of an application pursuant to Section 150 and 204 of the Companies Act 1990 in a written judgement delivered by the late Mr Justice Shanley.
A Co. Roscommon company director and shareholder of Mantruck Services Limited (In Liquidation) was declared personally liable to the Company in the sum of €91,000 pursuant to section 204, as a consequence of the contravention’s of Section 202 of the Companies Act, 1990.
In this landmark judgement, the first of its kind under the provisions of the Companies Act, 1990, Mr Justice Shanley also imposed a five year restriction on the director, Mr John Duignan.
Mantruck Services Limited was incorporated in August 1988 and carried on business as distributors of tail lift and refrigeration units for commercial vehicles.
On July 2nd, 1993 the Company’s creditors resolved that the company be wound up and Michael Butler was appointed Liquidator. Subsequently on 29th July, 1993 on the petition of a creditor, the company was ordered to be wound up by the Court and David Mehigan was appointed Official Liquidator.
Following his appointment as Liquidator Mr Mehigan examined the books and records and found significant and extensive omissions in the Company’s records. He was of the view that these omissions resulted in substantial uncertainty as to the assets and liabilities of the Company and substantially impeded the orderly winding up of the Company.
The hearing of the section 150/202 motion commenced on 18th June 1996. It was indicated to the Court by counsel on behalf of the Respondent. John Duignan that there might be certain books, papers and records of the Company at the Company’s old premises or at a farm owned by the Respondent in Roscommon. The motion was adjourned and resumed on 16th July 1996 when the Official Liquidator gave evidence of having visited the Roscommon premises on 20th July 1996 and recovering 28 computer discs and five red Cathedral book. In relation to these books, the liquidator stated in evidence that the following basic information and records were missing.
Stock records for February 1992 and March 1993
Purchase Book prior to June 1991
Cash receipts and cheque payments prior to 15th October, 1991
Credit notes from January 1993 to July 1993
Record of factored invoices and receipts
Record of certain carrier refrigerated units
Debtors, Creditors and Nominal Ledgers for 1992-3
Details of finance agreements entered into.
Mr Mehigan said that, by reason of the absence of these records.
the books and records did not enable him to determine the financial position of the company with reasonable accuracy.
the books and records did not enable the Company to be readily and properly audited.
the books and records did not properly record the assets and liabilities of the Company.
the books and records did not properly record all goods purchased and sold by the company in sufficient detail to enable the goods sellers and buyers to be identified and did not properly record all the invoices relating to such purchases and sales.
the books and records did not properly records all sums of money received and expended by the company or the matters in respect of which the receipt and expenditure took place
Mr Mehigan stated that the failure of the Company to keep books of account (so as to properly record the above matters, and enable the financial position of the company be determined with reasonable accuracy and its accounts readily and properly audited) had resulted in substantial uncertainty as to the assets and liabilities of the Company and had substantially impeded its orderly winding up. The uncertainty as to assets arose because
there was no proper record of stocks for the years ending March 1992 and 1993.
there was no debtors ledger for the year ending 31st March, 1993.
there was no copy credit notes for the last quarter of the Company’s operation.
The uncertainty as to liabilities arose because
There was no creditors ledger for the year ending 31st March 1993.
The amount, if any, due to International Factors Limited, could not be ascertained from the records of the Company.
The liability to VAT could not be ascertained with any accuracy: there were three different records none of which appeared to tally with the returns to the Collector General.
The Respondent had made two statements of affairs which did not coincide one with the other.
These uncertainties as to assets and liabilities, according to Mr Mehigan, could be traced back to gaps or deficiencies in the records of the Company. In his evidence he detailed a litany of error or failure to record: among these were the facts that 149 invoices were not recorded in the Sales Book; there were also 304 cases where sales invoice copies could not be located. There were unrecorded credit notes and sales invoices for refrigerated units were missing; the Purchase Book was unreliable in showing entries where goods with VAT paid at point of entry were analysed as net purchases. A gross profit analysis done by Mr Mehigan disclosed a gross margin of 8.71% for the two years to 31st march 1993 compared with a gross margin for the year ending 31st March, 1991 of 34.65%.
Mr Mehigan estimated that some 80% of the time spent by him and his staff (and the outlay expended) related to his efforts to overcome deficiencies in the books and records of the Company. The professional fees and outlay for all the Liquidators work on the liquidation was £114,000. 80% of that sum was €91,000.
The Liquidator further stated that in this search for the books and records of the Company Mr Duignan had not been in any way co-operative with him.
The contravention of Section 202
His Lordship said that it is worth noting that before any liability can be imposed on any officer, or former officer, of a company, the court must be satisfied that a contravention of the provisions of Section 202 of the 1990 Act has been committed by the Company. The Court must be satisfied that a criminal offence has been committed by the company. The provisions of Section 202 (10) make it an offence for a company to contravene the section. Section 202 sets out the nature and extent of the accounting records which should be maintained. He went on to say that the obligation to keep proper books and records is not an obligation to act as a mere passive custodian of books and papers but rather it imposed an obligation to create books and records in a particular form and that they should be kept on a continuous and consistent basis and must be such that they will at any time enable the financial position of the company to be determined with reasonable accuracy.
Section 204
Judge Shanley said that before any liability can be declared under Section 204 of the 1990 Act, the following matters must be proved in evidence.
the company in question is being wound up.
the company is unable to pay all its debts
the company has contravened Section 202
such contravention has contributed to the company’s inability to pay all of its debts or has resulted in substantial uncertainty as to the assets and liabilities of the Company or has substantially impeded the orderly winding up of the company.
the officer (or former officer) of the company knowingly and willfully authorised or permitted the contravention by the company of Section 204.
Section 204, the section which provides for personal liability of officers, requires as one of the conditions precedent to liability, a contravention of Section 202 which either
contributes to the company’s inability to pay all its debts or
results in substantial uncertainty as to its assets and liabilities or
has substantially impeded the orderly winding up of the company
The court may, if it thinks fit, in circumstances where any of the foregoing is established, declare an officer in default liable for all debts of the company.
His Lordship went on to say that the section does not require that there be any casual relationship between the section 202 contravention and the liability declared under Section 204, nor does the section make any allowance for different degrees of blameworthiness which might attend contravention’s of Section 202 with regard to the absence of a causal connection between a contravention of Section 202 and the liability imposed under Section 204, Judge Shanley said there may be a significant number of situations where the contravention bears little or no relationship to the amount of the debts of the insolvent company.
He gave an example of an insolvent situation which was brought about as a direct result of unwise foreign exchange transactions and it is discovered that the auditors and directors have knowingly and consistently undervalued the assets of the company, thereby resulting in a contravention of Section 202, such that, while insolvent, the company’s indebtedness is less than it would have been had the assets been properly valued.
Accordingly, where such an under valuation results in substantial uncertainty as to the assets of the company or impedes the orderly winding up of the company liability under section 204 is established, yet it would be unjustifiable in principle to impose liability for all debts brought about by the unwise foreign exchange dealings on the auditors or directors. But, Judge Shanley went on to state, that where a particular contravention of section 202 can be seen to have a particular financial consequence resulting in a particular debt of the insolvent company, it would be difficult to see how it could be argued that imposing liability for such a debt works any injustice.
The Issues
Judge Shanley set out the following issues which he had to decide;
Whether the Company contravened any of the provisions of Section 202 of the Companies Act, 1990 (the 1990 Act’) in relation to the keeping of proper books of account.
If it did contravene Section 202 was the company at the time of its winding up unable to pay all its debts.
If it did contravene Section 202 did such contravention result in substantial uncertainty as to the assets and liabilities of the Company or, alternatively did such contravention substantially impede the orderly winding up the Company.
Whether if there was a contravention by the Company of Section 202 of the 1990 Act resulting in either of the matters at above whether Mr. Duignan is an officer of the company who knowingly and willfully authorised or permitted the contravention.
Whether Mr Duignan can avail of any defence under Section 204 of the 1990 Act.
If not and the matters at paragraphs (i) to (iv) are established what Order, if any, should the Court in its discretion make against Mr Duignan.
Whether an Order should be made under Section 150 of the Companies Act 1990 against Mr Duignan.
Conclusions
His Lordship was satisfied that the books of account of the Company made available to the Official Liquidator both before and on 20th June, 1996 did not contain:-
1) a record of stock for the years ending March 1992 and 1993.
2) copies of credit notes for the last quarter of the Company’s trading activity.
3) a debtors ledger for the year ending 31st March, 1993
4) a creditors ledger for the year ending 31st March 1993
5) such records as would enable the Company’s liability to the Revenue in respect of Value Added Tax to be correctly ascertained for the year ending 31st March 1993.
6) such records as would enable the Company’s liabilities to International Factors Limited to be ascertained for the same period namely the year ending 31st March, 1993.
6)
The Court indicated that it was satisfied that the books of account given to the Liquidator both before and on 20th June, 1996 were deficient in six material respects. These deficiencies were such that the financial position of the Company could not at any time be determined with reasonable accuracy or enable the Company to be readily and properly audited. Accordingly, it was satisfied that the deficiencies were such that the assets and liabilities of the Company could not be recorded and that there was not a sufficient recording or proper record of goods purchased and sold or of the purchasers and sellers of those goods or of invoices relating to all purchases and sales. Equally, the records of the Company did not contain statements of stock held by the Company for the years ending March 1992 and 1993.
In conclusion, his Lordship was satisfied that the books of account were not kept in a continuous and consistent basis and were deficient in failing to enter daily all sums of money received and expended by the Company and the matters in respect of which such took place and concluded that there were contraventions by the Company of Section 202 1(a), (b), (d), 202 (2), 202 (3) (a), (b) and (c) of the Companies Act, 1990.
Further the Company, having contravened Section 202, was unable to pay its debts at the date of its winding up; equally, the contraventions of Section 202 were such as to result in substantial uncertainty as to the assets and liabilities of the Company and also substantially impeded the orderly winding up of the Company. The court found that Mr Duignan was an officer of the Company who knowingly and willfully authorised and permitted that Section 202 contravention’s and accordingly, cannot avail of any defence under Section 204.
Mr Justice Shanley was satisfied that, while the Company was unable to pay all its debts, it is not possible to separate out liabilities of the Company prior to its winding up which result from any contravention of Section 202. However, there was evidence from the Liquidator that some 80% of his time was occupied in seeking to overcome deficiencies in the books and records of the Company. The losses which flowed from this expenditure of time (€91,239.80) were reasonably foreseeable by Mr. Duignan as a consequence of the contravention’s of Section 202. Accordingly, pursuant to Section 204 the Court declared John Duignan to be personally liable to the Company in the sum of £91,239.80.
Finally, having regard to the mandatory words of Section 150 of the 1990 Act (in relation to which see In Re Business Communications Limited Murphy J. 21st July 1995) the Court was satisfied that it had no discretion but to impose a 5 year restriction, contained in the section, on Mr. Duignan: he does not bring himself within any of the three exceptions of subsection 2 (of Section 150).
Other examples of piercing the veil of incorporation
1. Reduction of Number of Members below Legal Minimum
Under section 5 of the Companies Act 1963 a private company may be formed with a minimum of two members. The consequences of a reduction in the number of members below the basic minimum is set out in section 36 of the Act which provides that if the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and knows that it is carrying on business with fewer than two members, or seven members, as the case may be, shall be severally liable for the payment of the whole of the debts of the company contracted during the time, and may be severally sued therefor.
2. Failure to Correctly State Company’s Name
Under section 114(4) of the Companies Act if an officer of the company or any person on its behalf ‘signs or authorises to be signed on behalf of the company any bill of exchange, promissory note, endorsement, cheque or order for goods’ wherein its name is not mentioned in legible characters, he is liable to a fine not exceeding £250, but more importantly he is also ‘personally liable to the holder of the bill of exchange, promissory note, cheque or order for money or goods for the amount thereof unless it is duly paid by the company.
3. Directors with Unlimited Liability
Section 197(1) provides that in a limited company the liability of the directors or of the managing director, may, if so provided by the memorandum of association, be limited.
4. Liability of Disqualified or Restricted Person for a Company’s Debts
Under section 150 of the Companies Act 1990, subject to certain exceptions the court must impose various restrictions on any person who is a director or shadow director of a company which goes into insolvent liquidation, or who was a director or shadow director of such a company in the 12 months prior to the commencement of the winding up.
In addition, under section 163 , if while he is acting in such a prohibited manner or capacity the company goes into insolvent liquidation, or if it goes into insolvent liquidation within 12 months of him so acting, the court may, on the application of the liquidator or any creditor of the company, declare him personally liable, without any limitation of liability, for all or any of the debts or other liabilities of the company incurred in the period during which he was acting in breach of the section 160 restrictions or in breach of the disqualification order.
5. Acting on the Directions of a Disqualified or Restricted Person
Rather than flagrantly breach a disqualification order or section 160 restrictions, the person may instead manage the company from ‘behind the scenes’ with a nominee director.
In order to discourage such violations, section 164 of the Companies Act 1990 makes it an offence for any person while a director or other officer or a member of a committee of management or trustee of any company to act in accordance with the directions or instructions of another person knowing that the other person is subject to a disqualification order or that the other person in giving the directions or instructions is acting in contravention of section 150 restrictions.
Section 165 of the Companies Act 1990 provides that if a person is convicted of an offence under section 164 he shall be personally liable for the debts of the company concerned incurred during the period to which his conviction relates.
6. Failing to Meet Section 150 Capital Requirements
Section 155(5) of the Companies Act 1990 provides that from the date upon which a person had been placed under s150 restrictions by the court he may not accept appointment to a position without fulfilling the capital requirements of s150 within a reasonable period.
In such circumstances, if the company is subsequently wound up, and is at the time of the commencement of the winding-up unable to pay its debts, the court may, on the application of the liquidator or any creditor or contributor of the company declare that any person who was an officer of the company while the company so carried on business the company had been so notified, shall be personally responsible without any limitation of liability for all or part of the debts or other liabilities of the company as the court may direct.
7. Failure to Keep Records
Section 202 of the Companies Act 1990. This requires that every company must cause to be kept at its registered office or at such other place as the directors think fit ‘proper books of account … that—
(a) correctly record and explain the transactions of the company,
(b) will at any time enable the financial position of the company be determined with reasonable accuracy.
(c) will enable the directors to ensure that any balance sheet, profit and loss account or income and expenditure account of the company complies with the requirements of the Companies Acts, and
(d) will enable the accounts of the company to be readily and properly audited. [ s.202(1) ]
They must be kept on a continuous and consistent basis in that the entries must be made in a timely manner and must be consistent from year to year. In order to constitute ‘proper’ books of account they must give a ‘true and fair view’ of the state of affairs of the company and must explain its transactions. In particular they must contain
(a) entries from day to day of all sums of money received and expanded by the company and the matters in respect of which the receipt and expenditure take place;
(b) a record of the assets and liabilities of the company;
(c) if the company’s business involves dealing in goods—
(i) a record of all goods purchased, and of all goods sold (except those sold for cash by way of ordinary retail trade) showing the goods and the sellers and buyers in sufficient detail to enable the goods and the sellers and buyers to be identified and a record of all the invoices relating to such purchases and sales,
(ii) statements of stock held by the company at the end of each financial year and all records of stocktaking’s from which any such statement of stock has been, or is to be prepared, and
(d) if the company’s business involves the provision of services, a record of the services provided and of all the invoices relating thereto.
Under section 204 of the 1990 Act if a company that is being wound up and that is unable to pay all of its debts has contravened section 202 and the court considers that the contravention has contributed to the company’s inability to pay all of its debts or has resulted in substantially uncertainty as to the assets and liabilities of the company or has substantial impeded an orderly winding up, the court, on the application of the liquidator or any creditor or contributory of the company may, if it thinks it proper to do so, impose personal liability for all or part of the company’s debts, on any one or more of the officers and former officers of the company who is or are in default under section 202.
8. Other Default Regarding Books of Account
The term ‘officer’ is widely defined by section 204 for the purpose of the imposition of personal liability and includes any person who has been convicted of an offence under section 194, 197 or 242 of the Companies Act 1990.
Section 197 makes it an offence for any officer or employee of the company to knowingly or recklessly make an oral or written statement to which the section applies that is misleading, false or deceptive in a material particular.
9. Inaccurate Declaration of Insolvency
Sections 256(8) provides that where a statutory declaration has been made and it is subsequently proved to the satisfaction of the court that the company is unable to pay its debts, the court on the application of the liquidator or any creditor or contributory of the company may, if it thinks proper to do so, declare that any director who was a party to the declaration without having reasonable grounds for the opinion that the company would be able to pay its debts in full within the period specified in the declaration shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
The court may also make such further directions as it thinks proper to give effect to the declaration of personal liability. This might include charging all or part of the company’s debts and liabilities on the assets of the defaulting directors.
10. Fraudulent and Reckless Trading
Section 297A provides that if, in the course of winding up a company or in the course of proceeding under the Companies (Amendment) Act 1990 it appears that:—
(a) any person was, while an officer of the company, knowingly a party to the accruing on of a business of the company in a reckless manner; or
(b) any person was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company, or creditors of any other person or for any fraudulent purpose;
the court, on the application of the receiver, examiner liquidator or any creditor or contributory of the company, may, if it thinks if 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.
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