Court of Appeal: Liquidated company’s directors not personally liable for debt when loss to creditor was unforeseeable

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In 2015, the High Court held that the directors of a liquidated company, Graham Sedgwick and Colin Farrell, were personally liable to Toomey Leasing Ltd for €48,250. Toomey Leasing Ltd was a creditor of Appleyard Motors Ltd; and Mr Sedgwick and Mr Farrell were directors of Appleyard until it went into liquidation in June 2012.

Mr Farrell was not a party to the Court of Appeal proceedings as he had entered into a personal insolvency arrangement, the appeal was therefore reduced to the issue of whether Mr Sedgwick should be held liable for the debt of Appleyard to Toomey Leasing pursuant to s. 297A(2)(a) of the Companies Act 1963.

Delivering the judgement of the three-judge Court of Appeal, Justice Hogan indicated that the essential question arising on appeal was whether the directors should be deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner for the purposes of s. 297A(2)(a) of the Companies Act 1963.

Background

Prior to its liquidation, Appleyard operated a Ford car dealership from its premises in Blackrock, Co. Dublin. Appleyard had traded successfully for almost 30 years prior to its liquidation in 2012, however the post-2008 economic crash hit the company hard and by 2012 it was experiencing severe financial difficulties, depending for survival on the support of Ulsterbank.

In early June 2012, Toomey Leasing (a UK car leasing company based in Derby) expressed an interest in purchasing three cars from Appleyard, and subsequently transferred €48,250 for the vehicles.

Appleyard had sourced the vehicles through another Ford dealership (Ashley Motors), and in compliance with an arrangement that Appleyard had with Ulsterbank since 2010, it sought permission from Ulsterbank to make payment of the amount due to Ashley Motors in respect of the vehicles.

Ulsterbank’s permission was not immediately forthcoming and it transpired on the following day that Ulsterbank had withdrawn its support. Appleyard could not take delivery of the vehicles, and was forced to cease trading.

Appleyard’s financial controller recognised the consequences which this would have for Toomey Leasing (i.e., it would not receive the vehicles for which it paid) and requested the bank to allow these payments to be reversed – however Ulsterbank declined to do so.

On 26th June 2012, Appleyard entered into creditors’ voluntary liquidation.

Court of Appeal

At the heart of the appeal was Toomey Leasing’s assertion that Mr Sedgwick knew or ought reasonably to have known of the risk to it, and were therefore a party to the carrying on of the business of the company in a reckless manner that “…would cause loss to the creditors of the company or any of them….” (as per s. 297A(2)(a) of the Companies Act 1963).

Justice Hogan was of the view that “the fact that a payment was received from Toomey Leasing immediately before Ulsterbank withdrew support and the company ceased trading did not in itself mean that the exacting requirements of s. 297A(2)(a) were satisfied”.

Justice Hogan stated that it was hard to see how Mr Sedgwick ought to have known that the actions outlined above would cause this creditor loss – as is the standard imposed by s. 297A(2)(a). He could not have known that this would occur for so long as Ulsterbank continued to support the company, and had no reason to believe that the decision of Ulsterbank to cease to support the company was imminent or had been even threatened.

Had the request for advance payment been made after that date, then there would be little doubt that a director ought to have known that such conduct would cause loss to this creditor.

This, however, is not what happened, for the company ceased trading immediately once Ulsterbank withdrew its support.

In retrospect Appleyard took an enhanced risk with the funds of Toomey Leasing by accepting advance payment before the delivery of the vehicles could actually be effected, and it “would have been wiser if the funds had been paid into some form of escrow account prior to the delivery of the vehicles”; but none of this was sufficient to satisfy the statutory test in s. 297A(2)(a).

Conclusion

Justice Hogan stated that it was “not enough to show that Mr Sedgwick was aware that the loss to the creditor might have occurred”, and that it must have been foreseeable to a high degree of certainty.

While it was clear that the financial situation of the company was perilous – it had no prior warning that its financial support was about to be cut off. This only became clear the day after the advance payment had been received from Toomey Leasing, and in these circumstances, Mr Sedgwick could not have known that the receipt of this advance payment would cause loss.

On the facts of the case, the exacting requirements of s. 297A(2)(a) to establish a personal liability on the part of Mr Sedgwick as director of Appleyard, were not satisfied.

Allowing Mr Sedgwick’s appeal, and refusing to make the declarations sought under s. 297A(2)(a), Justice Hogan asserted that he could not close the judgment without “expressing considerable sympathy for the plight of Toomey Leasing” as an innocent victim of the collapse of Appleyard.