Yet another nail in the coffin for wrongful trading cases?
In recent weeks, there has been much speculation about how the ending of the exemption for insolvency proceedings from LASPO will affect the ability of Insolvency Practitioners to bring proceedings. What has received less attention is the way in which the Courts are making it extremely difficult for Liquidators (and Administrators as from October 2015) to successfully pursue wrongful trading claims under section 214 of the Insolvency Act 1986.
For a long time Insolvency Practitioners have shied away from wrongful trading actions because they have been told that they require a huge investment of time and expense, both by the IPs and their lawyers, whilst the outcome can be unpredictable. In particular, you cannot prove wrongful trading simply by establishing that the directors continued trading when the company was insolvent. You have to prove that the directors knew or ought to have known there was no reasonable prospect of the company avoiding insolvent liquidation. Although concerned with directors' disqualification rather than wrongful trading, the Government’s spectacular failure to disqualify the directors of Farepak in 2012 demonstrated how difficult it can be to prove wrongful trading. The Government thought they had a very strong case and yet had to withdraw half way through the trial before the directors were even required to give evidence.
We have now had two reported cases in relatively quick succession, and in both the Liquidators have come unstuck for essentially the same reason.
In Brooks v Armstrong (Re: Robin Hood Centre Plc), the Liquidators pleaded five alternative dates on which they alleged the directors ought to have known the company was destined for insolvent liquidation. They sought compensation from the directors of up to £701,000. At trial, they were unsuccessful on four dates but successful on the fifth, in respect of which they were hoping to recover compensation in the region of £300,000. The Registrar decided that the compensation payable was only £35,000 because most of the Company’s additional losses were not caused by the decision to trade on. At a subsequent costs hearing, the Registrar decided it was not appropriate to make a costs order in favour of the Liquidators, and made no order as to costs. The Liquidators legal costs were over £1 million with an ATE insurance premium of £106,000. Therefore not only did the lawyers take a bath on their fees, but also the Liquidators will not have recovered any of their own time costs invested in the claim.
In Grant and Tickell v Ralls (Re: Ralls Builders Limited), judgment was handed down on 11 February 2016. The Liquidators succeeded in establishing wrongful trading on one of two dates pleaded. Originally they were seeking compensation of over £1 million but by the time of the 15 day trial that had reduced to a range between £600,000 to just under £1 million, still a significant sum. The Judge decided that no compensation was payable. The Judge was not satisfied that the company had suffered any material loss by virtue of the decision to trade on. The losses were the consequence of the decision to cease trading and to go into administration. The Judge rejected the Liquidators’ alternative argument that compensation should be payable by reference to the amount by which liabilities to creditors had increased.
The trial in Ralls Builders took place before the judgment in Robin Hood was handed down, so neither case refers to each other. What this means is that two Judges have independently come to the same view about how compensation should be calculated. Their decisions make it even harder for Liquidators to bring wrongful trading claims because of the difficulties in proving that losses were caused by the decision to continue trading.
If a liquidator is thinking about wrongful trading proceedings, then a forensic analysis of the Company’s losses will be required, linked to each date that is going to be alleged as the date of knowledge that the company was destined for insolvency. In our view, that analysis has to be undertaken with the involvement of the experienced insolvency lawyers who are going to conduct the case, to ensure that there is a clear understanding of the purpose of the analysis, that it shows and distinguishes the losses caused by the decision to trade on and the losses caused by the decision to cease trading, and that it is backed up by evidence that will persuade the Court that significant losses were caused by the decision to trade on.