Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Restructuring & Insolvency
The recent legislative compression of avoidance actions appears to have contributed to producing a collateral effect — namely, the considerable proliferation of suits aimed at seeking liability for breach of duties in insolvency proceedings. The categories of defendants in suits of this sort have become larger: in addition to directors and statutory auditors, mention must be made of parent companies in group contexts, external auditing firms, shadow (de facto) directors and, last but not least, lenders having substantially managed the debtor in difficulty or having imprudently extended credit to the debtor in difficulty.
Restructuring proceedings have not the effect of releasing directors and other stakeholders from liability for previous actions and decisions.
The declaration of insolvency could not be seen as a remedy to release liabilities; in any event, not all actions and decisions taken by directors or stakeholders may be enough to be considered as affected by the categorisation of the insolvency proceedings as guilty.
In fact, two elements are required to categorize insolvency as guilty: (i) willful misconduct or gross negligence on the part of the formal or de facto directors or managers with general power and any person who had that status within the two years before the declaration of insolvency, and (ii) the insolvency situation must have been created or aggravated, in addition to a causal relationship between the two elements.
In addition, directors’ liability is not automatic. Rather, an action or omission must be proved to have caused or worsened the insolvency of the debtor, by means of an intended or negligent conduct.
Generally, commencement or completion of insolvency proceedings does not have the effect of releasing directors and other stakeholders from liability for their previous actions and decisions. As such, if a director of a company causes damages to a third party (e.g. a creditor) in breach of their obligations owed to such a party, he/she may be held liable for such damages regardless of commencement or completion of any restructuring or insolvency proceedings.
No, neither restructuring nor insolvency proceedings release the management or the shareholders from liability for decisions made prior to the restructuring or insolvency proceedings if the decisions in question intentionally or (grossly) negligently caused a loss for the company, shareholders or a third party, see the reply to questions 11 and 12 above.
A director or officer of a company may be liable under the Corporations Act for civil and criminal penalties or to compensate the company if the company incurs a debt while insolvent (insolvent trading). Directors and officers may also attract liability for breaching their statutory duties of reasonable care and diligence in the exercise of their powers and to act in good faith and for a proper purpose. Statutory liability may also be imposed where directors or officers improperly use their position to gain an advantage for themselves or cause detriment to the company.
In some situations directors may become personally liable for unremitted amounts of income tax or GST. The Commissioner of Taxation must give 14 days’ notice to the directors setting out the details of the unpaid amount and the penalty. Directors may avoid a penalty if the company pays the unremitted amount, the company enters into an agreement relating to the unremitted amount, an administrator is appointed or the company goes into liquidation. The courts maintain a general discretion under the Corporations Act to excuse directors from liability in some circumstances if they can be shown to have acted honestly and reasonably.
The terms of a scheme of arrangement and a DOCA can incorporate releases from liability for directors and other stakeholders.
No, to the extent they exist, such liabilities will continue until the date of dissolution of the company.
No. Quite to the contrary, there is an increased likelihood that director's liability claims are scrutinized in an insolvency context. That said, such claims will typically not be pursued where a restructuring has been achieved although no formal release will occur.
Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.
However, claims of the creditors for damages suffered jointly by them due to a reduction of the insolvency estate before or after the opening of the insolvency proceedings (‘collective damage’) may, during the insolvency proceedings, be asserted only by the insolvency administrator (Sec. 92 Insolvency Code).
Even in an insolvency plan, the liability of directors towards their company for breaching their duties cannot be waived (Sec. 225a(3) Insolvency Act, Sec. 93 Stock Corporations Act, Sec. 43(3) with 9b(1) Limited Liability Companies Act).
Neither Restructuring nor Insolvency Proceedings release directors, managers or other stakeholders from liability. Please refer to our answer to Question 11 above.
British Virgin Islands
The effect of restructuring proceedings on directors’ liabilities, etc, will depend on the terms of the arrangement in question. If there is no express provision releasing directors, they remain liable.
Directors of a company that is dissolved following its liquidation will be given a reprieve in relation to potential claims; however, in certain circumstances a dissolved company may be restored into liquidation for the purpose, eg, of realising an asset or pursuing a claim that was not dealt with during the liquidation. A claim against a malfeasant director may be sufficient grounds on which to seek such a restoration.
It is not unusual for the terms of a restructuring proposal to contain provision for directors to be released from liability for previous actions and decisions. However, the inclusion of such a release is often a vexed and hotly debated issue for creditors. Absent express exclusion in the terms of the scheme, directors will remain liable for their prior acts.