Wrongful Trading Orders: Jersey’s first and what Guernsey can learn

On 20 December 2024 Jersey made its first wrongful trading order against a Jersey director in the case of Viscount v Thomas McLaughlin (In re Restore Builders Limited, En Desastre) [2024]JRC290 (the Restore Builders Judgment). Not only is this a first for Jersey, but a first for the Channel Islands.

What is a wrongful trading order?

Wrongful trading occurs where a company is approaching insolvency and this is known or ought to be known to the directors, yet the directors continue to trade. Once a director of a company concludes, or should have concluded, that there is no reasonable prospect of a company avoiding insolvency, they have a duty to take every step that a reasonably diligent person would take to minimise loss to their creditors.

Where a director does not fulfil this duty, they are said to be conducting wrongful trading and are exposed to civil liability. Where wrongful trading is established by the court, the director in question can be ordered to make a contribution to the company’s assets. The form that the contribution takes is at the discretion of the court. This is known as a wrongful trading order.

In addition to ordering the director to make a contribution to the company’s assets, the court can also make an order disqualifying the director for a period of up to 15 years.

Until the Restore Builders judgment, no wrongful trading order had been made in relation to an individual director in either Jersey or Guernsey.

The Restore Builders Judgment

The Restore Builders Judgment relates to two applications, one for disqualification, and one for a wrongful trading order, against Mr Thomas McLaughlin, the director of Restore Builders Limited (the Company).

Mr McLaughlin had been trading as a sole trader under the name “RestoreBuilders” and incorporated the Company in July 2022. At the time of incorporation, Mr McLaughlin had accumulated circa £1million in personal debt with respect to various creditors by virtue of his sole tradership.

Shortly after incorporation, the Company fell into insolvency, by which point a creditor had already commenced proceedings in the Petty Debts Court against the Company. The Company was declared en désastre on 25 November 2022, with Mr McLaughlin himself being declared en désastre on the same date.

Mr McLaughlin thereafter had multiple obligations to the Viscount to attend meetings and present documentation, which he did not do. He eventually left the island without notice to the Viscount.

In evidence preceding the Restore Builders Judgment, Mr McLaughlin misrepresented the assets of the Company, and it was established by the Court that he knew or ought to have known that the Company could not avoid bankruptcy.

In correspondence with the Viscount, Mr McLaughlin insisted that he should not be struck off as a director as it was in fact the Viscount’s actions that had prevented Mr McLaughlin from continuing to trade and to “trade his way” out of insolvency.

Mr McLaughlin also declared in correspondence that he had been using customer’s pre-payments to settle his debts, instead of using them for their intended purpose, thereby purposefully misleading customers.

The Court held that Mr McLaughlin’s failures were sufficient to disqualify him from acting as a director of a Jersey company for 10 years. The Court further granted the application for a wrongful trading order on the basis that Mr McLaughlin knew, or ought to have known, that there was no reasonable prospect that the Company would avoid bankruptcy, particularly in circumstances where Mr McLaughlin’s personal debts amounted to almost £1million.

The Court found that the Company was simply a vessel through which Mr McLaughlin was attempting to avoid personal liability, and at no time had he taken any reasonable steps in order to minimise the potential loss to the creditors of the Company.

The Guernsey position

The legal test in Guernsey largely follows both Jersey and the UK. Pursuant to section 434 of the Companies (Guernsey) Law, 2008, the court can make an order that a director be personally liable for the company’s debts if the company has gone into insolvent liquidation and at some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation and that person was a director at the time.

If, however, the director has taken all reasonable steps with a view to minimising potential loss to the creditors of the company, and the court is satisfied of this fact, such an order will not be made.

Whilst the Restore Builders Judgment shows rare occasion where a director has acted with extreme recklessness, it does demonstrate the operation of the relevant legal provisions in the Channel Islands. It also shows that the rules are in fact not made to be broken.

Conclusion

As stated above, we are yet to see the operation of section 434 in Guernsey. However, the Restore Builders Judgment serves as an excellent reminder that once your company is approaching insolvency, it is best to seek legal advice to ensure you are taking all the right steps.

If anything, Mr McLaughlin’s actions demonstrate that white lies are definitely not the best way to get yourself out of trouble.