UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

UK: England and Wales: auditors' liability and the ex turpi causa principle [a belated posting]

Several months ago the Court of Appeal gave judgment in Moore Stephens (a firm) v Stone & Rolls Ltd [2008] EWCA Civ 644 and it would appear from recent reports in the legal press that an appeal to the House of Lords will be made. The case required the Court of Appeal to consider the operation of the ex turpi causa non oritur actio principle (no cause of action may be founded on an illegal act) in the context of a negligence claim brought by the liquidators of a company (Stone & Rolls) against a company's auditors (Moore Stephens). 

The liquidators argued that the auditors had failed, during the course of several audits, to identify the fraud of Mr. Stojevic (the directing mind and will of the company). Mr. Stojevic fraudulently obtained, through the company, money from various banks. One of these banks sued the company and Mr. Stojevic and was awarded damages against Mr. Stojevic and the company. The company was unable to pay and entered liquidation. The auditors denied negligence and applied for the action to be struck out on the basis that the claim was barred by the ex turpi causa principle. The first instance judge declined to strike out the claim (see [2007] EWHC 1826 (Comm)). 

The Court of Appeal held that the liquidators' claim was barred by the ex turpi causa principle and struck out the claim. The court rejected the argument that the company was the victim of fraud and attributed Mr. Stojevic's actions to the company. There was not, the court unanimously agreed, any room for discretion in the application of the ex turpi causa principle because, as Lord Goff observed in Tinsley v Milligan [1994] AC 340 at 355B: "...the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other".  The court also rejected the argument that the ex turpi causa principle did not apply where the claim was based on the commission of a fraud where the prevention of that fraud was "the very thing" that the defendants had undertaken to do. In this regard, Rimer LJ observed (at para. [109]):

There is ... no support in the authorities that we were shown for the proposition that if "the very thing" from which the defendant owed a duty to save the claimant harmless is, or includes, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle will be overridden so as to enable the bringing of the claim that relies on the claimant's illegality".

Note: The case has been reported here in the Law Society Gazette.

Postscript (2 Sep 2008): The House of Lords Judicial Office informs me: "[the] petition for leave was presented on 18 July 2008 ... and we would hope to get a decision on leave before the end of November this year". 

UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])

Notes: 

[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here. 

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

UK: England and Wales: winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for the Department of Business, Enterprise and Regulatory Reform with the power to petition the court for the winding-up of a company where this is “expedient in the public interest”. In considering the Secretary of State’s application, the court must satisfy itself that it is “just and equitable” for the company to be wound-up.

In a recent case - Re Tag World Services Ltd. and Club Labourse Travel Ltd. (Ch.D., Robert Englehart QC, 30 July 2008) - the Secretary of State petitioned for the winding-up of two companies both of which were subsidiaries of the same parent company.  The petition for one of these (Tag World) was granted (there was clear evidence of deceptive marketing practices).  It was argued for the Secretary of State that the second company (Club Labourse) should also be wound-up because it was inextricably linked with the first company and tarnished by its behaviour (although there was no evidence that it had acted wrongfully or disreputably).  The trial judge rejected this argument and observed (at para. [51]) that it would be wrong to wind-up the second company in the absence of any complaints against it. 

Notes: 

[1] The judgment is not yet available on BAILII but it has appeared on the Lawtel subscription service.  Update (24 September 2008): the judgment is now available on BAILII - click here. 

[2] For an earlier earlier post concerning Section 124A, click here.

UK: proposed reforms to Part 7 of the Companies Act (1989)

HM Treasury has published a consultation paper titled "Modernising the insolvency protections for the operation of financial markets – proposals to reform Part 7 of the 1989 Companies Act". In the executive summary it is stated:

Part 7 of the Companies Act 1989 modifies general insolvency law to provide systemic protection for certain financial markets in the event that one of their participants defaults. Due to the rapidly evolving nature of financial markets, the Act allows for these provisions to be updated by regulations and this consultation concerns proposals for such an update. Central counterparty clearing, which is the main focus of Part 7, is increasingly recognised as a vital element of market infrastructure, helping to guarantee transactions and produce efficiencies of risk management. In November 2004 the IOSCO (International Organization of Securities Commissions) and the Group of Ten central banks produced recommendations for the operation of central counterparties. The amendments proposed here are in accord with those recommendations, and with the recent proposal by the EU Commission to update the Settlement Finality Directive in line with latest market and regulatory developments, including the increased interoperability of systems".

UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".

Australia: ASIC's power to continue civil proceedings

The Federal Court of Australia has given judgment in Carey v Australian Securities and Investments Commission (ASIC) [2008] FCA 963, an interesting decision concerning ASIC's powers under Section 50 of the Australian Securities and Investments Commission Act (2001). The case concerned ASIC's decision to take over proceedings for breach of directors' duites commenced by a liquidator. One of the directors against whom proceedings had been brought, Mr Carey, argued that ASIC did not have the power to continue the action under Section 50. The Federal Court agreed, however, as Finkelstein J. observed (para. 6):

...in the circumstances of this case, the answer is somewhat academic. The parties accept that if Mr Carey’s view prevails ASIC can and will simply begin new proceedings in the name of each plaintiff. Moreover, I have pointed out to the parties that in such event, I would, most likely, make an order deeming each step taken in the existing proceedings to have been taken in the new proceedings"

This said, as Prof. Ian Ramsay has noted, there is a clear case for considering whether ASIC should be permitted to take over some proceedings, not least because of the likely cost savings. 

For further information see:

Background | The judgment | ASIC | Federal Court of Australia | 

Europe: companies and the European Convention on Human Rights

A good illustration of the way in which the European Convention for the Protection of Human Rights and Fundamental Freedoms can be relied upon by companies is provided by a recent decision of the European Court of Human Rights. In Meltex Ltd v Armenia [2008] ECHR 531, a company complained that its freedom of expression under Article 10 of the Convention had been violated by the refusal of the Armenian authorities to grant it broadcasting licences. Article 10 provides:

Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises"

The Court held that the refusals constituted interferences with the company's freedom to impart information and ideas. In the course of the opinion some interesting points were made with regard to the separate legal personality of the company. The Court observed:

... a person cannot complain about a violation of his or her rights in proceedings to which he or she was not a party, even if he or she was a shareholder and/or executive director of the company which was party to the proceedings ... Furthermore, while in certain circumstances the sole owner of a company can claim to be a “victim” within the meaning of Article 34 of the Convention in so far as the impugned measures taken with regard to his or her company are concerned ..., when that is not the case the disregarding of an applicant company's legal personality can be justified only in exceptional circumstances, in particular where it is clearly established that it is impossible for the company to apply to the Convention institutions through the organs set up under its articles of incorporation or – in the event of liquidation – through its liquidators".

India: Supreme Court upholds constitutional validity of National Company Law Tribunal

Significant changes to the way in which company law disputes and the winding-up of companies are dealt with have moved closer. Earlier this week the Supreme Court of India held - in Madras Bar Association v Union of India (11 May, appeal number 3067 of 2004, heard with appeal number 3717 of 2005) - that it was not unconstitutional to create the National Company Law Tribunal and National Company Law Appellate Tribunal and vest in them the powers and jurisdiction exercised by the High Court with regard to company law matters. A copy of decision is available by searching the Supreme Court judgments website here.

The Company (Second Amendment) Act (2002) provided for establishment of the NCLT and NCLAT to take over certain functions performed by the High Court, Company Law Board, the Board for Industrial and Financial Reconstruction and the Appellate Authority for Industrial & Financial Reconstruction. This followed the recommendations of the Eradi Committee, which found that the time taken to wind-up a company (often between 10 and 15 years) was largely due to the multiplicity of court proceedings required.

UK: England and Wales: Guernsey limited partnership not a company or 'hybrid' company

Last month, in Pillar Securitisation SARL & Ors v Spicer & Anor (Court Administrators) [2010] EWHC 836 (Ch), Mrs Justice Proudman held that administrators had not been validly appointed in respect of a limited partnership formed under the Limited Partnership (Guernsey) Law 1995 (available here, pdf) and which was a body corporate.

The administrators’ appointment had been made on Form 2.10B, which applied where the appointment was made in respect of a company. Mrs Justice Proudman held that a limited partnership was not a company under Guernsey law or within the definition of a company provided in Schedule B1 of the Insolvency Act 1986. Her Ladyship held that legislation was needed for the partnership to fall within the Schedule B1 definition. She also rejected the argument, based on a beneficent construction of the rules about prescribed forms, that the limited partnership should be regarded as a “hybrid” company because it was a body corporate with legal personality: "I do not think there is such a thing as a hybrid" she observed (para. [38]).

England and Wales: Winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for Business, Enterprise and Regulatory Reform with the power to petition the court for the winding-up of a company where this is “expedient in the public interest”. In considering the Secretary of State’s application, the court must satisfy itself that it is “just and equitable” for the company to be wound-up.

In Secretary of State for Business, Enterprise and Regulatory Reform v Amway (UK) Ltd [2008] EWHC 1054 (Ch), a Section 124A petition was presented in April 2007 by the Secretary of State with regard to a company running a direct selling business. Following the petition's presentment the company made changes to its business model which were implemented in October 2007 (and reported in the press at the time: see here). The case was heard in late 2007 and judgment was given today by Norris J. His Lordship declined to grant the petition (subject to the company providing certain undertakings) and observed:

The Court has a discretion whether or not to make a winding up order. The Court may simply dismiss the petition if satisfied that past wrongs have been remedied and the management can be trusted not to permit their recurrence (even if unconstrained by any undertakings). But the Court has power to accept undertakings as to future conduct, and a discretion as to whether to make the giving of undertakings a condition of dismissing the petition. The power will not be exercised (and undertakings will be refused) if those offering them cannot be trusted. The power to accept undertakings is likely to be exercised if that course is acceptable to the Secretary of State. If the Court considers that undertakings may be acceptable, it should nonetheless be slow to accept them if the Secretary of State is not willing to dispose of the petition in that way: but whilst the course may be unusual, the Court undoubtedly has power to do so if there are countervailing factors which outweigh the Secretary of State's opposition. In the instant case I could simply dismiss the petition: but undertakings are offered and I see no need to spurn them even if the Secretary of State shows no enthusiasm for their acceptance" (para. [62]).

With regard to Section 124A, his Lordship observed:

Parliament has charged the Department with wide ranging responsibilities in relation to the affairs of companies including (under section 124A of the Insolvency Act 1986) their investigation and the formation of the view that it would be expedient in the public interest that companies should be wound up ... The Secretary of State is not a licensor of approved business models or a business design consultant and is under no obligation to approve or to police a scheme of undertakings relating to the conduct of an individual company's business" (para. [10])

NB: Under Section 27 of the Serious Crime Act (2007), a petition to wind-up a company can be presented by the Director of Public Prosecutions, the Director of HMRC and the Director of the Serious Fraud Office, where (a) the company has been convicted of an offence under section 25 in relation to a serious crime prevention order; and (b) the relevant Director considers it would be in the public interest for the company to be wound-up.

England and Wales: "dog leg" claims and company directors

In Gregson v HAE Trustees Ltd & Ors [2008] EWHC 1006 (Ch) a so-called "dog-leg" claim was brought against the directors of a corporate trustee (HAE) by a trust beneficiary. It was argued that the claims of HAE against its directors for breach of duty were held on trust for the beneficiaries and were trust property. The possibility of such a claim was rejected by the trial judge (Robert Miles QC, sitting as a deputy judge of the High Court). The judge observed:

"The dog leg claim, if valid, would, for all practical purposes, circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. The refusal of the law to accept that directors of a trustee company owe a direct duty to safeguard the assets of a trust of which it is trustee is, I consider, a powerful reason to doubt that directors may be liable to the beneficiaries of the trust by the indirect, dog leg, route now proposed" (para. [46]).

"A further problem with the dog leg claim (as Commissioner Page pointed out in Alhamrani v Alhamrani [2007] JRC 026) is that it appears to cut across established principles of company and employment law. For instance, the members of a company may by ordinary resolution ratify or sanction what would otherwise be a breach of the duty of care of the directors. It appears to me that, were the dog leg claim to be recognised, it would no longer be possible for the members of a trustee company to do this. Again, if the dog leg claim were to succeed it would follow that the cause of action and its fruits would not form part of the estate of an insolvent trustee company. On this point, I agree with Phillips J in Young v. Murphy [1996] 1 VR 279 that the claims of an insolvent trustee company against its directors for breach of their duty of care form part of the insolvent estate" (para. [59]).

NB: The case also raised issues concerning the duties of trustees, which are noted here.

UK: pre-pack administrations - SIP16 report

The Insolvency Service has published a report on the operation of Statement of Insolvency Practice 16 for the period July to December 2009: see here (pdf). Amongst the report's finding is the following:

... there is no evidence that the level of reported director misconduct in pre-packs (at least those reported under SIP 16) is any greater than the overall level of misconduct reported by insolvency practitioners generally. Nor is there any evidence in conduct reported by insolvency practitioners to support the view that pre-pack administrations have been cynically manipulated by directors in the vast majority of cases".

UK: England and Wales: contributions for fraudulent trading under Section 213(2) of the Insolvency Act (1986)

In Goldfarb v Higgins & Ors [2010] EWHC 613 (Ch), handed down yesterday, the trial judge held that a company secretary (Mr Higgins) and director (Mr Charalambous) of a company in liquidation were liable to contribute to the assets of the company under Section 213, the fraudulent trading provision in the Insolvency Act (1986).

In assessing their contribution the trial judge was required to consider whether, as counsel for the liquidator contended, the company secretary and director should be jointly and severally liable for the totality of the loss. The liquidator's counsel was unable to cite any authority considering whether Section 213(2) required joint and several liability. The trial judge stated (paras. [29] - [32]):

I find some assistance ... from the judgment of Park J in In Re Continental Assurance Co [2001] BPIR 733. That case concerned not section 213 but section 214 of the 1986 Act. Section 214 is concerned with wrongful trading and provides that the court may declare that 'a person who is or has been a director of the company' is liable 'to make such contribution (if any) to the Company's assets as the court thinks proper'. Where several respondents were subject to an application by the liquidator under section 214, Park J rejected the argument that the starting point is one of joint and several liability. He held that the wording of the section clearly 'concentrates individually on each director who is a respondent to an application by a liquidator' [386]. And he continued at [387]: '…The initial duty of the court where it finds that liability exists on the part of two or more respondents is to determine in the case of each respondent how much he individually ought to contribute'.

The wording of section 213 is different from section 214 in that the statutory jurisdiction under the former is addressing "persons" in the plural rather than a single "person". But the reference in section 213 to "contributions" is in my view a clear indication that the contribution need not be the same for each respondent. I think it would be surprising if the 1986 Act sought to prescribe a different approach in a fraudulent trading case within section 213 from that in a wrongful trading case within section 214. The fact that immediately adjacent provisions in the statute adopt almost identical wording is in my view a strong indication that, as a matter of interpretation, no such distinction is intended.

It is clearly possible for the court to determine that several respondents should all be jointly and severally liable for the full loss caused to the creditor(s). However, in my judgment, it is appropriate to make a separate assessment of the contribution of Mr Higgins and of Mr Charalambous on the facts here".

Australia: directors' duty to prevent insolvent trading - draft ASIC guidance

The Australian Securities and Investments Commission has published for a comment draft guidance concerning directors' duty to prevent insolvent trading under Section 588G of the Corporations Act (2001): see here (pdf). The guidance identifies the key matters which ASIC considers directors should take into account in meeting the duty as well as explaining those factors which ASIC will consider when determining if there has been a breach of the duty.  

Australia: Liquidation and the Statutory Derivative Action

In Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52 (8 April 2008) the New South Wales Court of Appeal considered whether the Australian statutory derivative action (Part 2F.1A of the Corporations Act (2001)) should be available where a company is in liquidation. The court unanimously held that it should not be available, thereby taking a different position from several first instance decisions in New South Wales and Victoria (see, e.g., Brightwell v Rfb Holdings [2003] NSWSC 7 and Freshstart Australia Pty Ltd v Lofthouse [2006] VSC 317). Tobias JA (with whom Beazley JA and Bell JA agreed) observed (para. [124]):

"...the context as well as the extrinsic materials identifying the mischief which Pt 2F.1A was intended to remedy, namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle, are indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator. This is because the rule in Foss v Harbottle and its exceptions did not apply and were irrelevant to a company in liquidation".

A few days later, in Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90 (PDF version), the Supreme Court of South Australia (Full Court) touched upon this question but did not (in its opinion) need to provide an answer because an alternative route was found to permit a creditor to bring a legal action on behalf of a company in liquidation. Debelle J. observed (at para. [44]):

"When a company is in liquidation, the liquidator is, as a general rule, the person in whom is vested the authority to bring legal proceedings on behalf of the company ... However, the court has an inherent power to authorise a creditor or contributor to sue in the name of the company. As McLelland J noted in Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250 at 252 the procedure is of respectful antiquity and is sanctioned by high authority ... Section 236(3) [which states "The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished"] abolishes only the right to bring derivative proceedings. Nothing in the Explanatory Memorandum to the Bill suggests an intention to remove or qualify the court’s inherent jurisdiction".

[For discussion of Foss v Harbottle, click here (the case can be read here). The UK Companies Act (2006) introduced a statutory derivative action: see Part 11].

England and Wales: The phoenix syndrome, director's liability and S 727 of the Companies Act (1985)

Judgment in First Independent Factors & Finance Ltd v Mountford [2008] EWHC 835 (Ch) was given today. The trial judge, Lewison J., was required to consider a number of issues concerning Sections 216 and 217 of the Insolvency Act (1986). The main purpose of these sections is to deal with what has become known as the "phoenix syndrome": the continuation of a company's business, through a new company, where the original company has gone into insolvent liquidation. Section 216 prohibits the directors of the insolvent company from re-using the insolvent company's name (or a similar name) as part of the new venture. Contravention of Section 216 can result in the director's personal liability for the debts of the new company.

With regard to Sections 216 and 217, Lewison J. made the following points:

(a) Whilst the "phoenix syndrome" is the main target, the words of Sections 216 and 217 include situations that cannot be described as falling within this description. The operation of Sections 216 and 217 should not be confined to cases of "phoenix syndrome". [Ad Valorem Factors Ltd v Ricketts [2004] 1 All ER 894 was cited in support].

(b) When deciding whether a name suggests an association with another company, the person through whose eyes this should be considered is someone who might deal with the company or business. This person is closer to Laddie J's formulation of a "reasonable person in the relevant commercial field" (in HM Revenue & Customs v Walsh [2006] BCC 431) than Simon Brown LJ's reference to "members of the public" (in Ad Valorem Factors).

(c) "Association" can be based on ownership (e.g., between members of the same group of companies) or assets (e.g., where a successor company has the goodwill of the liquidated company).

(d) The defence available under rule 4.230 of the Insolvency Rules (1986) applies where a company was previously trading. Rule 4.230 referred to "company" and this could not be interpreted as "business".

(e) The court does not have the power under Section 727 of the Companies Act (1985) to relieve a director against liability imposed by Sections 216 and 217.

[Section 727 of the 1985 Act has been replaced by Section 1157 of the Companies Act (2006), the latter coming into force on 1 October 2008].

UK: Scotland: winding-up unregistered companies

Lord Hodge, sitting in the Court of Session (Outer House) has ordered the winding-up, under Section 221 of the Insolvency Act (1986), of eleven companies registered overseas but with their principal place of business in Scotland: see HSBC Bank Plc, Re An Order To Wind Up Kirkbride Investments Ltd [2009] CSOH 147. With regard to the exercise of the court's discretion, Lord Hodge observed that the approach adopted by the English courts was appropriate in Scotland. He stated (para. [11]):

There is no recent Scots case law on this issue but I am satisfied that the approach of the English courts is appropriate and I recall that our courts have adopted that approach in applications which have not resulted in written opinions. In similar circumstances Lord Grieve in Inland Revenue Commissioners v Highland Engineering Limited 1975 SLT 203 relied on English case law in his interpretation of the provisions of the Companies Act 1948 in relation to the winding up of unregistered companies and observed that it was desirable that the courts in each jurisdiction should interpret a United Kingdom statute, such as the Companies Act, in the same way. In Marshall, Petitioner (1895) 22 R 697 the First Division used English authority to inform their interpretation of section 199 of the Companies Act 1862".

England and Wales: The meaning of 'de facto' director

In Gemma Ltd (in liquidation) v Davies and another [2008] EWHC 546 (Ch), [2008] WLR (D) 89, the High Court explored the circumstances in which an individual would be regarded as a de facto director for the purposes of Section 212 of the Insolvency Act (1986). The judgment, which has not yet been published on BAILII, contains a useful overview of the authorities. The trial judge outlined several principles:

(1) It must be proved that the alleged de facto director performed functions that could only be discharged by a director.

(2) There is no need to prove that a de facto director was held out as a director.

(3) The director must have participated on an equal footing with the other directors and not in a subordinate role.

NB: The Companies Act (2006) does not contain a specific definition for de facto director. Section 250 does, however, define the term "director" (in such a way as to include de facto directors) and Section 251 defines the term "shadow director".

Ireland: Directors' duties: executive and non-executive directors

In Kavanagh v Delaney & ors [2008] IESC1, the Irish Supreme Court considered the duties of executive and non-executive directors. Hardiman J. (with whom the other judges concurred) referred to the English decision Re Barings (No 5) [1999] 1 BCLC 433 and observed:

“In my view, apart from any general amplification of the words of Shanley J. [in Re La Moselle Clothing [1998] 2 ILRM 345], there is a yet unmet need to make authoritative findings after full debate, as to the respective duties of an Executive and a non-executive director and, perhaps, a non-executive director appointed (as the appellant was) for a particular and specific purpose. But this has yet to occur. I would not be prepared simply to apply the Baring’s criteria, without such argument, to all these classes of director, or to assume that their common law duties are identical. I am slightly uneasy that, in this case, there may have been an assimilation in particular of the position of a non-executive director to that of an executive one. Such an approach might derive some support from the judgment of Roderick Murphy J. in Vechicle Imports Ltd (in liquidation) (Unreported, High Court, 23rd November 2000), but it is not explicit and in any event there does not appear to have been argument on the topic of the duties of the different classes of director, mentioned above. I do not consider that this case, or that of Vehicle Imports, mandates the assimilation of the position of a non-executive director to that of an executive in terms of their common law duties. The position of a highly paid executive director of a vast Bank may be of limited use in considering the common law duties of a non-executive director … a small company”.