Wrongdoing in insolvency: part 7

This week we look at section 217 of the Insolvency Act 1986. This involves various personal consequences arising from breach of section 216. These are distinct from the criminal sanctions under section 216 and the civil sanctions do not depend upon a criminal prosecution under section 216 having taken place.

Section 217 applies to 2 categories of people. The first and most obvious one is any person who in contravention of section 216 is involved in the management of a company (namely one with a prohibited name under the principles explained in previous articles). Being involved in management is defined as someone who "is a director of the company or..... is concerned, whether directly or indirectly, or takes part, in the management of the company.". However section 217 does not just apply to those people, but also applies to anyone (even people to whom section 216 does not apply) if such person acts or is willing to act on instructions given (without the leave of the court) by a person who he or she knows at that time to be in contravention of section 216 in relation to such company. Thus it is not just the person in contravention of section 216 who is caught by 217, but any person involved in the management of the company who knows that such person is in breach of section 216 and nonetheless continues to be so involved.

That is the more serious when one considers that any person to whom section 217 applies is personally liable (jointly and severally with the company and any other person liable) for any relevant debts and liabilities of the company. Relevant debts etc are, if you are a person who is in contravention of section 216, debts and liabilities of the company incurred when you were involved in the management of the company. (Note that this is any debt or liability: it does not have to be one that you were personally involved in, the only relevant question being whether the debt or liability occurred at a time when you were caught by section 217). If you are a person caught by acting or being willing to act on instructions given by someone in contravention of section 216, then the relevant debts are those debts and liabilities incurred at the time that you were acting or willing to act on instructions. This means that, particularly if the company becomes insolvent, your personal liabilities can be very extensive indeed. Because it extends beyond debts to liabilities, that can also extend to damages claims so that if the company becomes liable to pay damages then if it is at a relevant time if you are in breach of section 217 you could be made personally responsible for those damages also.

Creditors can bring the action directly against the person in breach of the section, provided that they can demonstrate that the person alleged to be in breach is a person to whom section 217 applies. It is irrelevant whether the creditor knew that the person at the company was in breach of section 216. (So a person who knows that someone is acting in breach of section 216 and who becomes a creditor of the relevant company could soon be another person from within the company involved in management who knew that they were working with someone acting in breach of section 216 and were nonetheless willing to do so). There is also no relief from liability under section 1157 of the Companies Act 2006 which can in some circumstances release persons from liabilities where they have acted honestly and reasonably. If you are in breach of the section then you are responsible for the relevant liabilities.

There is also a problem arising for those people acting in conjunction with a person in breach of section 216 as a result of a deeming provision in section 217 (5). If at any time they have acted on instructions given (without leave of the court) by a person who they knew at that time to be acting in contravention of section 216 then it is presumed unless they prove the contrary (on a balance of probabilities) that they were willing at any time thereafter to act on instructions from such a person.