Director’s liability for company contracts

Section 216 of the Insolvency Act 1986 (the “Act”) prevents a director of a company that has gone into liquidation from being a director of similarly named company (“Newco”) for the period of 5 years. Pursuant to section 217 of the Act, breaching section 216 results in the director becoming liable for Newco’s debts from the date that the director started acting in breach of section 216.

The claimant customer had been awarded damages, interest and legal costs against the Newco for a contractual breach by the Newco in respect of a defective yacht. The director was not a party to those legal proceedings. Further, whilst the director was acting in breach of section 216 when the Newco breached the contract, he was not acting in breach of section 216 when the contract was entered. The court held that despite these issues, pursuant to section 217 of the Act the director was still liable for the contractual damages, interest and legal costs awarded to the claimant customer. Once liability was established against the Newco, the director was automatically liable due to section 217.

The court focused on when the Newco’s liability arose for the purposes of section 217. This was held to be when the contract was breached (giving rise to the cause of action) and not when the contract was entered. Therefore, it was irrelevant that the director was not acting in breach of section 216 at the time the contract was entered.

Re Discovery Yachts [2021] EWHC 2475 (Ch)

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