Directors Liability for Insolvent Trading
Companies leave behind several obligations that are unmet in the event where they fold up or cease to operate. Typically, many who engage with companies on life support do so without any knowledge of the state of the company at the time of engagement. Employees are left jobless; debts remain unpaid. Supply obligations are unmet. In a sum, a lot of things hang in the balance.
The Corporate Insolvency and Restructuring Act, 2020 (Act 1015) tries to resolve some of these problems by introducing provisions on insolvent trading. The provisions on insolvent trading are generally aimed at ensuring that the company does not engage in trading when it is not in a position to pay its debt as and when they fall due.
Section 119 of Act 1015 makes it clear that directors of companies cannot simply look on and conduct business as usual especially when these directors have reasonable grounds to believe that the company is insolvent. The law has its way of finding out if indeed a director is aware that a company is in a bad place financially and as a result cannot meet its obligations. The law, for instance, considers the privileged positions held by directors in the company and the fact that from where they sit, they are required to know the state of the company. After all, remember that the directors of the company are primarily responsible for running the affairs of the company. A part of their obligation in ensuring the running of the company is, therefore, to ensure that the company does not carry on trading when its financial position does not permit it to pay its debt as and when they fall due. It is not surprising that the law makes them liable personally for insolvent trading. Act 1015 makes insolvent trading an offence and the directors are liable on summary conviction to a fine of not less than five hundred penalty unity (that is GHS 6000) or to a term of imprisonment of between 2 to 5 years.
Let’s also not forget the Companies Act, 2019 (Act 992) would additionally impose disqualifications prohibiting a director found culpable in these circumstances to additional disqualifications from acting in any senior management position.
Additionally, should it come to the attention of a liquidator that business of the company was carried out with an intent to defraud creditors of the company or any other creditors, the liquidator may apply to the courts to make that person (and not the company) personally responsible for any debts that may have been incurred by the company as a result of that trade. Any person found to have been knowingly carrying on the business of a company with the intent to defraud is likewise liable on summary conviction to a fine of five hundred penalty units (GHS 6000).
The reasoning, in this case, is simple. Third parties dealing with companies generally have little means of knowing the internal workings of the company. They would not know that they are engaging with a company that is insolvent or is likely to become insolvent unless that information has been made available to them and would, therefore, engage in good faith with the company only to wake up shortly afterwards to find out that the company has been forced into liquidation.
Major insolvencies in Ghana prove that directors and management of insolvency companies tend to continue to trade and operate despite the solvency status of the company and the knowledge that at any point in time things could head south. The new Act attempts to protect the public from such acts by ensuring that the directors, management and all persons involved in such activities are personally liable for their actions and can no longer hide in the guise of it being ‘the company’ and not they who engaged in the trade.