The s214 Insolvency Act

Paper Summary:

This paper examines how the s214 Insolvency Act of 1986 enables the court to declare a director liable to contribute to the company?s assets if it is satisfied that the director could have avoided insolvency. It looks at how the introduction of the wrongful trading provisions was primarily a means of protecting creditors against the abuse of the limited liability privilege by directors. It attempts to show how despite providing the utility of penalising the activities of reckless directors without having to prove dishonesty, the surprisingly few s214 actions that have been brought have indicated the provision?s inadequacy. It also discusses how there is clearly an urgent need to reform the method by which s214 proceedings are financed.

From the Paper:

"In the light of the Cork Report, the "wrongful trading" provision was incorporated into s214 Insolvency Act 1986. This applies to any director or "shadow director" of a company which has entered insolvent liquidation and, at some time prior to the commencement of its winding-up, such a person knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvency . The standard of skill and care by which a director will be judged is outlined in s214(4). This provides that the court should take into account the knowledge, skill and experience of the particular director and whether his actions are those that would be taken by "a reasonably diligent person", possessing the knowledge, skill and experience that could be reasonably expected of a person in that position."

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