Greensill: should directors of failing companies be worried?

The recent announcement that the Australian parent company of Greensill Capital is under investigation for insolvent trading highlights the potential liabilities faced by directors of failed companies. 

Greensill Capital Pty Ltd (Pty Ltd) went into administration owing almost $4.9bn. As well as a possible insolvent trading claim, the administrators identified various transactions that require investigation. 

Potential liabilities

The potential proceedings against Pty Ltd directors are likely to be based on insolvent trading, under section 588G of Australia's Corporations Act (the Act). Liquidators have enjoyed good success rates under this long-established, Australian basis for liability.

Section 588G requires directors to prevent an insolvent company incurring debt and also applies if the company would become insolvent because of the debt. This duty applies where the director knew of, or had reasonable grounds for suspecting, the insolvency. 

A director will have possible defences under the Act – for example, if they can show their course of action had been reasonably likely to lead to a better outcome for the company. However, if liable, directors can face an unlimited amount of compensation, as well as a civil penalty. 

Concerns companies might temporarily become insolvent due to the covid-19 pandemic led to a suspension of insolvent trading liabilities for six months from 24 March 2020, though it was made clear by regulators that this safe harbour did not provide a licence for reckless trading. 

It is unclear if this protection will apply in the Pty Ltd case; in addition to an insolvent trading claim, liquidators identified some “unreasonable director-related transactions” that may be voidable under federal insolvency or state property laws.

UK regime

In the UK, section 214 of the Insolvency Act 1986 enables a director to be held liable for wrongful trading – a similar objective to insolvent trading. However, Australian liquidators’ success rates have not been matched by their UK counterparts.   

Between 1986 and 2013, there were only 29 reported wrongful trading cases, with orders against directors in only 11 cases, though further cases may have been successfully settled.  

Various reforms were made to improve these outcomes, most notably enabling office holders to assign claims to third parties who are willing to fund the cases (section 246ZD of the Insolvency Act 1986).

The problem of evidence

While it can be expected more cases will be brought, the evidential task for claimants in establishing wrongful trading remains significant. 

Liability for wrongful trading applies once a director knows, or ought to know, there is no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration and requires the director to take every step to minimise losses to creditors.

It can be difficult for directors to know when companies will inevitably fail (and for liquidators to prove this). Recent circumstances have presented particular difficulties, when even healthy companies suffered impacts of uncertain duration under coronavirus measures.

Accordingly, wrongful trading liabilities were temporarily suspended from 1 March to September 2020 and then from 26 November to 30 April 2021. Directors are, of course, also subject to a range of other duties and possible liabilities and the covid-19 safe harbours do not apply to these. 

Instances of wrongdoing

If there have been breaches of duty, such as misapplications of money, the misfeasance action enables the liquidator to bring proceedings on a summary basis under section 212 of the Insolvency Act 1986. 

Liquidators may also bring proceedings for fraudulent trading, which apply to a wider range of possible defendants, but require evidence of business being carried out with intent to defraud under section 213 of the Insolvency Act 1986. 

In a case where a director is disqualified under the Company Directors Disqualification Act 1986 and losses are found to have been caused to creditors, a contribution order can be made.

Group insolvency

In circumstances where a group of companies becomes insolvent, separate legal personality means individual group members are generally protected from the liabilities of others, although liability can potentially be imposed on another basis. 

In Australia, under section 588V of the Act there is express provision for holding companies liable for their subsidiaries’ insolvent trading, but the group structure will not enable the Pty Ltd liquidators to pursue Greensill Capital’s UK subsidiaries. 

Shadow directors

Another possibility is liability for a group member as a shadow director. Insolvent trading liability can, as can wrongful trading liability, be imposed not only on formally appointed directors but also de facto directors and shadow directors. 

Shadow directors are persons who are not formally appointed to the board but in accordance with whose directions or instructions the directors are accustomed to act. In Australian case law, it has been held that there is nothing inherently incongruous in a company being found to be a shadow director of another company (Buzzle Operations Pty Ltd (In Liquidation) v Apple Computer Australia Pty Ltd [2010] NSWSC 233, [231]).

Although this possibility is typically discussed in terms of liability of a parent company as a shadow director of a subsidiary, the same principles could apply in respect of other group members, depending on the circumstances. 

Liability as a shadow director will require evidence of a pattern of conduct rather than an occasion of the board following the direction of the individual (Secretary of State for Trade and Industry v Deverell and Another [2001] Ch 340).

Even if company A is a corporate director of company B, this will not automatically result in the directors of company A being regarded as shadow directors of company B; and the pattern of conduct will still be required.

The future for Greensill

Pty Ltd’s main role was to fund the UK operating company and the German bank subsidiary and the affairs of the group are interconnected. The UK companies in the group are reportedly likely to be liquidated with an expected large deficit of an estimated $275m realisable to pay unsecured claims worth $1.5bn.

The liquidation and investigation of the group is likely to be protracted and costly, given the complexity of the affairs of the group. The UK’s Financial Conduct Authority will also be investigating. 

Rebecca Parry is a professor at Nottingham Law School ntu.ac.uk