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no reasonable prospect that the company would avoid going into
insolvent liquidation; and
c) That person was a director of the company at the time.
10.3.2.1 Applicability of the section - who will be liable?
Section 214 imposes liability on directors who know, or ought to have concluded,
that the company would be in insolvent liquidation. The section does not require
that the directors be involved in trading, unlike section 213 which requires the
person to take some positive steps in carrying on the business before liability can
be imposed. 123 Directors who may be liable under the section include shadow
directors. 124
A shadow director is defined in section 251(1) of the UK Companies Act 2006 as
"a person in accordance with those instructions the directors of the company are
accustomed to act." However, section 251(2) excludes a person who gives advice
in his professional capacity to directors who then acted on the advice, as a
shadow director. 125 From this definition, it will exclude solicitors, accountants
and auditors, whose advice is often sought by directors, from liability under
section 214. These professionals are excluded in order to ensure advice is freely
given without fear of any liability. Otherwise, they may advise the company not
to proceed with trading though it is very likely to generate profit and it may cost
creditors the chance of being repaid.
The position, however, is not clear whether a parent company can be held to be a
shadow director of its subsidiary. The law does not impose any statutory liability
on the parent company for the debt of the company. Reliance continues to be on
the court‟s discretion to lift the veil as and when it becomes necessary, in contrast
123 See Re Maidstone Buildings Provisions Ltd [1971] 3 All ER 363.
124 See section 214(7) of the UK Insolvency Act 1986- “In this section 'directors‟ includes a
shadow director”.
125 Section 251(2) of the UK Companies Act 2006- “A person is not to be regarded as a shadow
director by reason only that the directors act on advice given by him in a professional capacity”.
The same definition also contained in section 251 of the Insolvency Act 1986.
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