Risks for Directors in Insolvent Trading

The Kenyan Insolvency Act has only recently come into force.  Although we currently have very little Kenyan jurisprudence on its terms, given that it is largely based on the UK Insolvency Act, UK precedent will be persuasive. Therefore, recent decisions like Nicholson & Anor v Ghuman & Ors Re Octavian Security Ltd [2016] EWHC 3509 (Ch) (Octavian) from the High Court of Justice in London are potentially very relevant to the Kenyan context.

In Octavian, Mr and Mrs Ghuman were found to have breached their fiduciary duty by transacting with their company at undervalue and fraudulently trading during the period when their company was in financial difficulty, prior to its formal insolvency. One of the claims made by Mr and Mrs Ghuman was that they were not directors of Octavian at the time it went into administration as both had resigned previously and had not been reappointed prior to the company’s entry into administration. The judge held that there was telling and compelling evidence that, whatever the formal position may have been, Mr and Mrs Ghuman each conducted themselves as, and were regarded and treated as, directors and the controlling mind of Octavian. The Court ruled firmly against them, finding them personally liable to repay the funds which they had received from the company in these transactions.  These funds would then become available to the creditors of the company.  A claim under the Insolvency Act on similar facts would most likely reach the same outcome for Kenyan directors.

The Octavian case is one of clear misappropriation of funds that should be available to the company’s creditors by people in control of a company.  However, most situations are much less clear cut and so directors can, even if acting with good intent, end up making incorrect decisions which can result in personal liability for company debts.

What should a director of a company which is in danger of insolvent trading do?

As soon as a director is aware that there is a risk of the company being or becoming insolvent, they should be extremely cautious regarding the company’s further trading.  A director’s reputation and personal assets are potentially at risk as soon as his company starts to get into financial difficulties.

A director should seek information from the company’s management and diligently interrogate management on the information provided to them, or if they are part of management, diligently investigate the financial health of the company before continuing to operate.

The next step is to seek independent professional advice.  Simply continuing to trade in this situation is a very risky proposition, as this is where a director’s personal assets are under threat.

Seeking formal professional assistance is often a very difficult decision to make, especially if the advice is that the company must be put into administration or wound up.

A correctly advised director is much less likely to be personally liable for an insolvent company’s debts.

Should you have any queries or need any clarifications with respect to the above, please do not hesitate to contact Sonal Sejpal.

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