Directors' liability during corporate insolvency; The legal framework, relevance and efficacy of the wrongful trading rule in Malawi

Abstract

Prior to the enactment of the Insolvency Act of 2016 in Malawi, Malawi did not have a mechanism which created personal liability against directors of a company for losses incurred by the company and its creditors during insolvent liquidation of the said company where the said insolvent liquidation clearly resulted from the directors’ indifference in the management of the affairs of the company from the point in time when the company became financially distressed. This mechanism came about under the wrongful trading rule in section 187 of the said Insolvency Act.

Materially, sections 187 of the Insolvency Act of 2016 in Malawi is to the effect that a director of a company in Malawi will be personally liable to contribute to the assets of the company during the company’s insolvent liquidation if it is shown that at some time before commencement of the said insolvent liquidation, the director knew or ought to have concluded that the company was destined for insolvent liquidation, and he failed to take every step with the view to minimizing the potential loss to the company’s creditors as he ought to have taken.

This mechanism is referred to in Malawi as the wrongful trading rule. The phrase “ wrongful trading” is simply a marginal note of section 187 of the Act, and the phrase does not appear anywhere in the provisions of the said section. Since the enactment of the wrongful trading rule in 2016 to the time when this study was conducted, Malawian courts have, to the knowledge of the researcher herein, not heard any case bordering on the rule. For this reason, the legal framework of the wrongful trading rule is not defined. This study is an attempt to define the said legal framework of the rule.

The definition of the legal framework of the wrongful trading rule is designed to address the following questions: What is the mischief which the wrongful trading rule was designed to remedy? What is the cause of action in a wrongful trading claim?; When does the said cause of action arise?; Who has standing to institute a wrongful trading action?; Who is a proper defendant in a wrongful trading claim? And who else does the law deem to be a proper defendant in a wrongful trading claim and why?; What are the defences available to a defendant in a wrongful trading claim?; What are the remedies available to a claimant in a wrongful trading claim? And finally, How are wrongful trading proceedings funded? A discussion on all this has been undertaken between chapters 2-7 of this study.

Considering that apart from the wrongful trading provision itself, no court decision nor literature was available in Malawi during the conduct of this study, reliance was placed on sources from jurisdictions that have similar rules. Firstly, primary reliance was placed on sources from the United Kingdom. This was done for the reason that the Malawian wrongful trading rule was copied verbatim from the wrongful trading rule in the UK Insolvency Act of 1986. The UK wrongful trading rule having been litigated upon and written upon for over the past three decades, sources from the United Kingdom were pertinent in this study.

Apart from the United Kingdom, the study also relied from sources from other jurisdictions, notably South Africa and Australia. Although these jurisdictions do not have the wrongful trading rule drafted in the similar way with Malawi and the United Kingdom, sources from South Africa and Australia were equally pertinent to this study as they centred on counterpart rules in the said jurisdictions ( the reckless trading rule for South Africa, and the insolvent trading rule for Australia ) both of whom are designed for similar purposes to the Malawian and the UK wrongful trading rule, namely, to combat director-indifference in the management of the affairs of financially distressed companies during a period leading to insolvency of the said companies. Where necessary, and to a very minimal extent, reliance was placed on sources from other jurisdictions, notably, the United States of America, New Zealand, Canada, and the Republic of Ireland.

Apart from defining the legal framework, the study has interrogated the relevance of the wrongful trading rule. This involved an interrogation as to whether the legal framework of the wrongful trading rule in Malawi, as defined in this study, embraces the key issues recommended by the United Nations Commission on International Trade Law ( UNCITRAL ) to be found in rules that purport to create personal liability against company directors for their failure to fulfil their obligations to their companies during a period leading to insolvent liquidation of the said companies when it became clear to the directors that the companies were financially distressed. This has been undertaken in Chapter 8 of this study.

From the foregoing, Chapter 9 of this study has interrogated the efficacy of the wrongful trading rule, where the dominant question has been whether or not the wrongful trading rule is capable of achieving the purpose for which it was enacted in Malawi. This has been done by isolating the problems that are likely to affect the efficacy of the wrongful trading rule in Malawi. Firstly, the interrogation of the efficacy of the rule has been done based on the statutory frame of the rule as it is in Malawi, considering that the frame of the rule in the United Kingdom, from where the Malawian rule was copied, has recently undergone reform to the extent that presently the Malawian and the UK wrongful trading rules are significantly different.

Secondly, and considering the absence of sources on the rule in Malawi, the efficacy of the Malawian wrongful trading rule has been interrogated through a comparative analysis of the sources touching on the efficacy of the UK wrongful trading rule, the South African reckless trading rule, the Australian insolvent trading rule and such other counterpart rules from other jurisdictions where necessary.

Finally, having isolated the problems that are likely to affect the efficacy of the wrongful trading rule in Malawi, Chapter 10 of this study, which is the final Chapter, has provided the recommendations for reform of the wrongful trading rule in order to enhance its efficacy in Malawi. The chapter has then provided an outline of the reformed wrongful trading rule, as well as the expected gains of the said reforms.