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No second chances - Director automatically personally liable for company’s debts

PSV 1982 Limited v Langdon [2022] EWCA Civ 1319

Mr Langdon was a director of Discovery Yachts Group Limited (‘DYGL’).  He had also concurrently been a director of Discovery Yachts Limited (‘DYL’)). When DYL went into insolvent liquidation in 2017, Mr Langdon was put in breach of s216 of the Insolvency Act 1986 which prohibits directors of a company in insolvent liquidation from being involved in the management of a company with a similar name.

In 2019, a judgment was entered against DYGL. As Mr Langdon was in breach of s216 by virtue of his directorship of DYGL and the insolvency of DYL, the High Court held that pursuant to s217 of the Act, he was automatically personally responsible for the debt as it had been incurred at a time when Mr Langdon was in breach of s216.  The Appellant argued before the Court of Appeal that—

  1. The debt had to be proved against the director before personal liability arose; and
  2. The liability was incurred when the contract was entered into and not upon breach.

The Court of Appeal reminded itself of the principles of statutory interpretation and held that the natural and ordinary meaning of section 217 was that a director would be automatically personally responsible for the relevant debts of the company.  The provisions were in a part of the Act aimed at ‘penalisation of directors and officers’ and their effect weighed up the positions of the director who has committed a criminal offence (under s216) and a creditor who has innocently suffered as a result.  This interpretation therefore accorded with Parliament’s intentions.

The court also found that the liability of DYGL arose from the judgment, and it was not relevant whether the original liability had arisen on entry or on breach.  However, in the alternative, it held that a liability to pay damages for breach was not a secondary or contingent obligation arising upon entry into the contract.  According to Insolvency Rule 14(6) a ‘liability’ is to pay money or money’s worth.  At the date of the contract, the obligation was simply to carry out repairs to the other party’s yacht and there was no ‘liability’ for the purposes of s217(3).

The decision is a warning that the phoenix provisions are not limited to new phoenix companies and a director in breach will not have a second chance to challenge the company’s liabilities.  It is also a useful reminder of the meaning of ‘liability’ in the context of the Insolvency Rules.

Read the full judgment:

Written by James Culverwell


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