27.05.20

Personal Liability: Company Directors Governing in Times of Financial Distress

Jezeel A.W. Martin
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Personal Liability: Company Directors Governing in Times of Financial Distress

Since the first positive case of COVID-19 was confirmed in Jamaica in March 2020, it is incontrovertible that the local business community has been significantly impacted by the epidemic. An examination of the varying sectors of the business community may reveal that, for some, business has never been better, but for many, the result has been one of significant financial distress.

Many companies are considering whether they can rely on remedies in law to shield themselves from liability for not being able to meet their contractual obligations.

Understandably, some directors may also be concerned about the possibility of being found personally liable for decisions taken by the board of directors to continue trading or to bring trading to a halt, as companies battle to survive these uncertain times.

General Duty

The Companies Act mandates that directors act honestly and in good faith having regard to the best interest of a company, and, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances taking account of the general knowledge, skill and experience of the particular director or officer, when making decisions for the company that they govern. Consequently, directors must ensure that that they always act reasonably when determining what actions must be taken, considering the best interest of the companies (while having regard to their members/shareholders, employees and members of the communities in which the companies operate).

Consequently, in order for a director to be able to demonstrate that he or she exercised reasonable diligence, it may be prudent for the director to maintain a record of expert reports (such as financial statements) and other information presented to the directors or taken into consideration in the decision making process and to ensure that proper minutes are kept of those board meetings or that written resolutions note the matters considered in the decision making process.

Personal Liability

Generally, directors are not personally liable, unless they have acted in breach of the fiduciary duties owed by them to the Company.

As a result, generally, the director will not be held liable for the debts of the company unless there is reason for the corporate veil to be pierced. A court in Jamaica is generally unwilling to pierce the corporate veil unless a company's separate legal personality is being abused for the purpose of some relevant wrongdoing.

In some jurisdictions, a director may be held personally liable for “wrongful trading” in circumstances where the company has gone into insolvent liquidation and at some time before the commencement of the winding up of the company, that director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation and allowed the company to continue trading. However, Jamaica does not have a similar provision that would make a director personally liable simply where the company carries on trade while it was insolvent. Instead, Jamaica has the concept of “fraudulent trading”.

Under the Companies Act, directors and other officers of the company may be held personally liable for the debts of a company which is in the course of being wound up where the directors have acted fraudulently, dishonestly or with the intent to deceive or defraud in some way.

If, for example, a creditor can prove that a director or directors carried on the business of the company during the COVID-19 epidemic and incurred debts at a time where to their knowledge there was no reasonable prospects of creditors ever receiving payment or no reason for thinking that funds would become available to pay the debt when it became due or shortly thereafter, a court in Jamaica may infer that the director or directors were carrying on the business of that company with intent to defraud its creditors and its director or directors could be held personally liable for such debt.

A creditor would be faced with a high standard of proof where such allegations of fraud are being made, and that creditor must present clear evidence to support the allegations. Further, the creditor would be required to prove that the director or directors in question had or must have had knowledge of the transaction or transactions in question to render that director or those directors personally liable. It is not enough simply that they were directors of the company at the material time.

It is important to note, however, that such a claim cannot be brought until the company is actually in the course of being wound up. Once the company is being wound up, the liquidator or a creditor can bring the action based on the actions of the directors prior to winding up.

The role of a director should never be taken lightly. Now more than ever, as directors grapple with weighty decisions to ensure the survival of the companies which they govern, it is critical for them to pause and to consider whether they should, in these uncertain times, continue trading and or take on more financial obligations and to what extent doing so increases their own risk for personal liability. Directors should ensure that they know and understand the financial status of the company and ensure that they create a defensible record of the decision-making process. If challenged, these steps, with the help of good counsel, should help to put directors in a good position to stave off personal liability.

Jezeel Martin is an Associate at Myers, Fletcher and Gordon, and is a member of the firm’s Commercial Department. He may be contacted at jezeel.martin@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.