The Predicaments of UK Wrongful Trading Liability in Insolvency: Implications for Nigeria and Proposal for a Resilient Approach

The pre-insolvency period more commonly called the ‘insolvency vicinity’ or the ‘twilight zone’ is a period of financial uncertainty in a company because it is the approaching period where the company begins to exhibit signs of financial distress but is not yet into insolvent Liquidation.⁵ It is a uniquely challenging position for a director to manage the company's affairs in the twilight zone due to the heightened risks of default to creditors and the company's potential failure.

The wrongful trading provision exemplifies the uncertainty that comes with compliance with the shift of directors' duties from shareholders to the company's creditors in the vicinity of insolvency.⁶ It is a provision that aims to mitigate and disincentive directors' incurring debts when there is no reasonable prospect of avoiding going into Liquidation.⁷ The prudent director should change the strategy and focus of the company from shareholders to creditors in the UK in the insolvency vicinity.⁸

The strategy change expected of a director in the twilight zone is a change from a shareholder-focused duty obligation in line with running the company for the owners' interests to a creditor-interest-based duty as the company approaches insolvency.⁹ The argument for this shift of duty direction from shareholders to creditors is because, at that time, the debt provided by creditors was more at risk of being residual claimants. In the UK, the duties owed to creditors in the insolvency vicinity have been codified in the Companies Act 2006 to reflect that those directors are to consider the interests of creditors in the course of their directorial decisions.¹⁰ The duty of directors to consider the claims of creditors owes its genesis to several decisions delivered in Australia, notably in Kinsela v. Russel Pty Ltd (In Liquidation).¹¹ The decision was adopted in the UK in the 1987 decision of the Court of Appeal in West Mercia Safetywear Ltd v. Dodd.¹²

The shift in focus from shareholders to creditors as insolvency approaches has not been without hitches and dilemmas from directors due to the entrenched position of company law that a company is for shareholder value maximization.¹³ Firstly, the extent of the shift and who should enjoy primacy amongst the stakeholders (shareholders or creditors) has not been unanimous across jurisdictions in a comparative study by Gurrea-Martinez.¹⁴ The appointment of the director is by the owners (shareholders), and most obligations are for their benefit under the UK Companies Act 2006.¹⁵ With the argued shift from owners to creditors as insolvency approaches, the director faces an adjustment challenge in the way and manner to re-position his duty.¹⁶ Secondly, there are no clear guidelines on how directors should re-position their minds towards fulfilling the shareholder-creditor duty shift.¹⁷ Should priority be given to only the interests of the creditors at the expense of other stakeholders?

Unlike the UK, which has codified the need to consider the interests of creditors in directors' duty formulation and the judicial recognition of the shifting nature of the duty from owner to creditors as insolvency approaches, Nigeria has not codified the consideration of creditors' interests in the CAMA 2020. There is no equivalent judicial decision similar to West Mercia Safetywear Ltd v. Dodd. Thus, the director in Nigeria faces the risk and uncertainty of re-adjusting focus from owners to creditors. The lack of a statutory provision or case law direction on the shifting of responsibility in the insolvency vicinity in Nigeria presents an atmosphere of risk of liability in the event of opportunistic behaviours as insolvency approaches.

The second anxiety facing a company director within the insolvency vicinity is the fear of liability which positively or negatively affects behaviour or performance.¹⁸ In a qualitative interview with directors in the UK, the study established that directors primarily fear the repercussions of liability in insolvency because of the signal of incompetence it sends out.¹⁹ However, the directors do not, on a large scale, frown at the role of the courts in reviewing their business decisions.²⁰ Anderson points out that the dilemma faced in the UK over time is the right balance between the pursuit of malpractice at insolvency and the need to protect responsible risk-taking.²¹ Risk-taking is a common dilemma generally faced by directors when directing their companies' affairs.²² Apart from the anxiety of risk-taking, the fear of failure can make directorship roles unattractive for people due to fear of liability.²³ More disturbing in the mind of the director is the fear of losing the business. Fear of personal liability amongst independent directors has reduced directorship roles in high-risk sectors, affecting boards' effectiveness.²⁴

The uncertainty directors face leads to the likelihood of failure and affects their psychological well-being.²⁵ As pointed out by Dias and Teixeira, ‘Motivation may also take a deep hit with failure, creating a sense of helplessness, thus diminishing individuals' beliefs in their ability to undertake specific tasks successfully in the future and leading to rumination that hinders task performance.’²⁶ Company directors and entrepreneurs in Nigeria undergo a degree of fear and depression when managing their businesses, especially when facing dwindling finances, according to Taye-Faniran and Olowo.²⁷ In a similar survey on the fear of directors in selected countries in Europe, Asia, North America and the UK, fear of insolvency liability was always at the top rank for company directors.²⁸ The importance of improving standards for judging directors' actions in insolvency cannot be over-emphasised because they suffer from the likelihood of hindsight bias from insolvency practitioners (mainly lawyers) and judges.²⁹