The Director Who Traded Through Insolvency
Kayesa Supplies Ltd, a hardware company in Lilongwe, has traded since 2015. By June 2023 its liabilities exceeded assets by MWK 45 million. The sole director, Mr. Kayesa, knew this from monthly accounts. Despite advice from the accountant, he continued ordering stock on 60-day credit and used MWK 8 million of company funds to pay 'consultancy fees' to his sister's company, which had no employees and did no work. In September 2023 he sold the company's only delivery van, worth about MWK 9 million, to his brother for MWK 3 million. In November 2023, a creditor petitioned to wind up the company. The liquidator now wants to recover the consultancy payment and the van, and to hold Mr. Kayesa personally liable for debts incurred after June 2023. Mr. Kayesa says he believed the company would recover after a promised government contract and that he acted in the company's best interests.
1. Identify the directors' duties Mr. Kayesa may have breached and explain the test for liability.
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Duties. Mr. Kayesa owed the company duties of good faith, proper purpose, care and skill, and avoidance of conflicts of interest. As the company approached insolvency, those duties also required him to consider the interests of creditors, because the creditors' money was at risk.
Breaches. Using MWK 8 million to pay his sister's shell company for no work is a misuse of company funds and a conflict of interest. Selling the van worth MWK 9 million to his brother for MWK 3 million is a related-party transaction at an undervalue. Continuing to order stock on credit after June 2023, when liabilities exceeded assets by MWK 45 million and the accountant had warned him, suggests reckless trading. A hope of a government contract does not by itself justify continuing to take credit; he needed a reasonable, evidenced prospect of recovery.
Test. The court will ask what a reasonably diligent director in his position knew or ought to have known. Honest belief is relevant but not decisive. The more insolvent the company, the less room for risky trading that transfers loss to creditors.
Conclusion. Mr. Kayesa likely breached his duties. The remedy is not automatic personal liability for every debt, but the liquidator can seek compensation, recovery of assets and, if the statutory threshold is met, an order that he contribute to the company's liabilities.
2. Can the liquidator recover the MWK 8 million consultancy payment and the van sale? Discuss preference and undervalue.
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Consultancy payment. A payment to a connected person for no consideration, made when the company is insolvent, may be a transaction at an undervalue or a preference. The liquidator must show that the company received no value, that the payment depleted assets available to creditors, and that it falls within the relevant look-back period. The absence of employees or work by the sister's company is strong evidence. The liquidator can seek an order that the sister's company repay the MWK 8 million or that Mr. Kayesa compensate the company.
Van sale. The sale at MWK 3 million for a van worth MWK 9 million is a transaction at an undervalue. The fact that the buyer is the director's brother makes it a connected-person transaction, which usually attracts closer scrutiny and may reverse the burden on good faith and value. The liquidator can seek to set aside the sale, recover the van, or recover the difference between the true value and the price paid.
Defences. The brother may argue he was a good-faith purchaser for value without notice, but the price itself is evidence of the opposite. Mr. Kayesa cannot rely on his belief that the company would recover to justify a sale to his own family at a third of value.
Conclusion. Both transactions are vulnerable. The court should order repayment and/or return of the van, with account for any improvement or adjustment, so that creditors are put back in the position they would have occupied.
3. What must be shown to make Mr. Kayesa personally liable for post-June 2023 debts?
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Statutory route. Personal liability for post-June 2023 debts requires proof of fraudulent or wrongful trading: that Mr. Kayesa knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation, yet continued to trade and incurred credit. The liquidator must identify the date of knowledge and the debts incurred after it.
Application. The June accounts showed a MWK 45 million deficiency. The accountant advised him. He nevertheless ordered stock on 60-day credit, paid MWK 8 million to a related company, and sold the van at an undervalue. Those facts support an inference that he was shifting risk to creditors. His hope of a government contract is not enough unless it was concrete, documented and reasonably capable of rescuing the company.
Standard. The test is objective with a subjective element: what he knew and what a reasonable director should have known. The court has discretion to order him to contribute to the company's assets, not necessarily to pay every debt in full.
Conclusion. The liquidator has a strong case for a contribution order covering debts incurred after June 2023, especially the stock credit. The court should fix the date of knowledge carefully and allow Mr. Kayesa to show, if he can, that a reasonable director would have continued trading. On the facts, that showing is unlikely.