Firms should take heed of High Court records ruling

A NEW benchmark was recently established in the High Court on the conduct and scope of the winding up of insolvent companies when Mr Justice Shanley found a company director to be personally liable for knowingly and wilfully failing toe keep proper books and records for his company. The precedent has important implications, not only for directors, but also for auditors and creditors of insolvent companies.

The case is believed to be the first High Court judgment arising under Section 204 of the Companies Acts 1990 dealing with the issue of books and records. Mr Justice Shanley found Mr John Duignan, the former managing director of Mantruck Services Ltd (in Liquidation), to be personally liable for knowingly and wilfully failing to keep proper books and records for his company.

The Co Roscommon company, which installed refrigeration units and tail-lifts in commercial vehicles, went into liquidation in July 1993 with significant liabilities estimated as high as £800,000. From the outset of the liquidation, the inadequacy of the books and records was a serious issue.

It is of fundamental importance in the orderly winding up of an insolvent company that the assets of the company may be secured by the liquidator and subsequently realised to their fullest potential. Creditors, whether they be secured or ordinary trade creditors, frequently despair of recovering their debt from liquidations where records have been destroyed or prove inadequate. In such cases creditors are unlikely to recover any proceeds because of a liquidator's lack of sufficient evidence from within the company's own records to prove debts and collect assets in the liquidation.

Inadequate records have frequently allowed company directors to walk away from the accumulated debts and losses of one company - and begin trading in a new one - a process known as the Phoenix Syndrom. In July 1991, Section 202 and 204 of the Companies Act 1990 became law thus signalling a further attempt to end this particular abuse. These sections are identical to provisions introduced in the Companies Act in New Zealand in 1983 where there have been a number of successful cases whose precedents were recognised in Justice Shanley's judgment in the Mantruck case.

An important feature of Justice Shanley's judgment was that he accepted the standard of proof applicable for Section 204 as being of the standard for civil rather than criminal proceedings. The liquidators of insolvent companies, when faced with inadequate books and records, cannot easily ignore the implications of this precedent. In certain liquidations creditors may become more demanding and may convince the liquidator that there is a case for pursuing directors for personal liability.

The Mantruck judgment found that the company had contravened Section 202 of the 1990 Act which resulted in to the assets and liabilities and also impeded its orderly winding-up.

However, Mr Justice Shanley found that it was not possible to separate out those Mantruck liabilities incurred prior to the date of liquidation which were the result of such contravention.

The Judge found that the deficiencies in the company's books and records were reasonably foreseeable by Mr Duignan and consequently declared the director liable for liquidation costs of £91,239.80 incurred in trying to overcome such deficiencies. Legal costs were also awarded against Mr Duignan.

The case may yet be appealed.