- Directors should take (and follow) advice from insolvency practitioners as early as possible in distressed situations in order to protect themselves from liability.
- If a company does continue to trade “wrongfully”, the directors must be able to demonstrate that they have taken all steps to reduce losses to individual creditors, as well as creditors as a whole. However, no order should be made unless the deficiency for creditors as a whole is increased in the period of wrongful trading.
The liquidators of Ralls Builders Limited (the Company) brought a wrongful trading claim against the directors of the Company. The Company went into administration in October 2010 followed by liquidation in January 2011. It had continued to trade up until the administrators were appointed, but the liquidators argued that, by July or August 2010 at the latest, the directors ought to have known that insolvent liquidation could not be avoided and they should have ceased trading at that point. From that time to the point at which the Company was put into administration, new unsecured liabilities had been incurred by the Company, although some secured debt and existing unsecured creditors had been paid, and overall the creditor position of the Company slightly improved. However, several of the new unsecured creditors had not been paid and so the liquidators sought a contribution to the assets of the Company from the directors.
The Judge agreed with the liquidators that the date of “no return” was August 2010. The directors had been receiving advice from an insolvency practitioner up to that point to the effect that the Company was not trading wrongfully and that it was not unreasonable to believe that investment could be forthcoming. The directors had not availed themselves of the defence to wrongful trading, however, as they had not taken “every step” to minimise the loss to creditors. Whilst the overall position had improved, individual creditors had been disadvantaged. It was not enough to reduce the loss to creditors as a whole.
However, the Judge did not make an order for payment against the directors. The starting point to calculate any award is to assess the amount of any increase in the deficiency for creditors during the period of wrongful trading. In this case, the position had slightly improved so no order should be made. In addition, the costs of the administration and liquidation had not been caused by the wrongful trading and therefore were not recoverable from the directors.
This case is a useful reminder of ways in which directors can avoid personal liability for wrongful trading.