In the recent case of In the Matter of Restore Builders Limited, En Désastre [2024] JRC 290 an application was made to the Royal Court by the Viscount, who is the executive officer of the Jersey Court and is appointed to administer bankruptcies in Jersey under the Bankruptcy (Désastre) (Jersey) Law 1990 (the "Désastre Law”), seeking orders in relation to the director of a Jersey company.
The company, Restore Builders Limited (the "Company"), had been declared en désastre and the Viscount's application requested that the Royal Court make a wrongful trading order, pursuant to Article 44 of the Désastre Law, against the director of the Company. The effect of the order would make the director of the Company, Mr Thomas McLaughlin ("Mr McLaughlin"), personally responsible for the debts of the Company. The Viscount's application also sought an order disqualifying Mr McLaughlin from being a director of a Jersey company under Article 24(7) of the Désastre Law, which provides for the same jurisdiction to disqualify directors as is provided for by Article 78 of the Companies (Jersey) Law 1991 (the "Companies Law").
Background
Mr McLaughlin was a builder who had previously operated as a sole trader prior to incorporating the Company. Shortly after the incorporation of the Company, it indicated it was in financial difficulty and unable to pay its debts as they fell due, meaning that it was insolvent as a matter of Jersey law. The Company ceased trading and applied for a declaration by the Royal Court that it be declared en désastre, the Royal Court granted the application. Mr McLaughlin was also personally declared en désastre.
A director of a company declared en désastre is required to cooperate with the Viscount but Mr McLaughlin did not do so, despite numerous attempts being made on behalf of the Viscount to engage with him. Even when Mr McLaughlin provided some information it was inadequate or did not make sense. Mr McLaughlin subsequently left the Island.
Mr McLaughlin misrepresented the value of the Company's assets and liabilities in his supporting affidavit for the application for a declaration en désastre. There was also evidence that Mr McLaughlin was aware, or ought to have been that the there was no prospect that the Company would be able to avoid bankruptcy. It appeared that he had incorporated the Company so as to improve his personal position in respect of his liabilities to creditors. Mr McLaughlin failed to acknowledge the proceedings until just before the hearing.
The applicable test
Article 44 of the Désastre Law provides that during the course of a Désastre in relation to a company, the Viscount may make an application to the Royal Court for an order where it appears that a person who is or has been a director, prior to the declaration being made:
- Knew there was no reasonable prospect that the company or limited liability company would avoid a declaration or a creditors' winding up; or
- On the facts know to him or her were reckless as to whether the company or limited liability company would avoid a declaration or a creditors' winding up
Seeking an order that the person be personally responsible for "all of any of the debts or other liabilities of the company or the limited liability company arising after this time.
Disqualification
Under Article 24(7) of the Désastre Law, the Viscount has the same power to make an application to the Royal Court for an order seeking the disqualification of a person from being a director as is provided for the relevant Minister for External Relations, the Jersey Financial Services Commission of the Attorney General by Article 78 of the Companies Law.
Article 78 also provides that the Royal Court may make the order applied for if it is satisfied that the person's conduct in relation to a company makes the person unfit to be concerned in the management of a body company. The maximum period this type of order can be made for is 15 years and it is an offence to act in contravention of that order.
Analysis
Wrongful Trading Order
It was noted in the judgment that there was no record of the Royal Court having ever previously made a wrongful trading order. The Royal Court determined that the evidence, which is summarised above, showed that Mr McLaughlin knew or ought to have known there was no reasonable prospect of the Company avoiding bankruptcy and that it had been used as a tool to try to avoid Mr McLaughlin's own personal bankruptcy.
The Court stated that individuals should not be able to "play fast and loose" with the rules and provisions of the Désastre Law and that Mr McLaughlin should be personally liable for the debts of the Company as the statutory test had been met. This finding of the Royal Court illustrates the approach the Royal Court will adopt when considering whether to make a wrongful trading order, the protection of creditors will be key part of its decision-making process.
The test for wrongful trading in a Creditors' Winding Up, as set out in Article 177 of the Companies Law is in materially identical terms to the test in the context of a désastre. The Royal Court's decision therefore provides helpful guidance for applications under the Companies Law as well. This is useful for directors, liquidators and lawyers as Creditors' Winding Up applications are more common than applications to place a company en désastre.
Disqualification
Mr McLaughlin's conduct as summarised above was criticised by the representative of the Viscount's Department who provided evidence in support of the application and the Court accepted that the criticisms were justified. The Royal Court held that this was a case where there had been a "flagrant breach of the obligations owed under the Désastre Law which affected the Viscount's ability to carry out his functions under the terms of the Désastre Law and citing the recent case of SPARC Group Limited [2022] (2) JLR 65 which stated that:
"an order for or disqualification is designed to protect the public and bearing in mind the position of Jersey as a finance centre and the need to ensure that directors in the place of Mr. Mills comply with their obligations under statute a lengthy period of disqualification is warranted."
Mr Mills had flagrantly breached his obligations under the Désastre Law and there was therefore a parallel with Mr McLaughlin's behaviour which assisted the Royal Court in concluding that the period for disqualification as director of a Jersey company should be the same as for Mr Mills - ten years.
Conclusion
Although the conduct of Mr McLaughlin was such as to clearly meet the tests for a wrongful trading order and disqualification as a director, it is helpful to now have a decision of the Royal Court showing that it will make a wrongful trading order in appropriate circumstances and providing insight into the way that it approaches the process of applying the facts of the case to the relevant tests.
