The recent case of Re Ralls Builders Limited has confirmed that in circumstances where the company is heading for liquidation directors cannot escape a wrongful trading claim by ignoring individual creditors. It emphasises the importance of taking the correct legal advice at an early stage.
The Insolvency Act has an offence for “wrongfully trading” which occurs when a director allows a company to continue trading when it is clear that the company is going to end up in liquidation, if by continuing to trade it fails to minimise the loss to individual creditors.
Directors who allow a company to continue are personally liable to the company for the increased debt.
In this case the position was slightly different. During the 7 month period the company continued to trade but it made a profit. The issue arose however in that the bank had taken the benefit of the majority of the profit whilst other individual creditors had suffered from increased losses.
The court was asked by the liquidator to order that the directors be liable for the individual creditors’ increased losses notwithstanding the overall improvement.
The court found that the directors were in breach of the Insolvency Act by not taking “every step” to minimise the potential loss. The quantum of the loss however had to be referenced to the loss suffered by the Company (not the individual creditors) and therefore there was no sum due to be repaid on this occasion.
The directors were fortunate that they had taken professional advice at a very early stage, when initially considering all of their options and months before administration was entered, so were aware of their duties.
Whilst very fact specific this is a reminder though that as soon as there are any concerns, even potential concerns such as a major customer defaulting on payment or potentially significant litigation being considered, directors should seek advice on their duties.