Court Clarifies What Must Be Proven To Establish Wrongful Trading

Handing down judgment in the case of Ralls Builders Limited (In the matter of Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch)) Mr Justice Snowden has clarified the law relating to claims brought under Section 214 Insolvency Act 1986 for Wrongful Trading against a Company’s former directors.

To be successful a liquidator/office holder must be mindful that:

1) Whilst there may have been wrongful trading, if such trading does not cause the Company’s debts to increase and it would be appropriate to not make an order against the directors;

2) the Court will consider what advice was received by the company/directors from Insolvency advisors prior to Liquidation;

3) If the continuation of trade was during a time expected to bring profit and growth through fulfilling existing contracts and therefore a better result for the Company, the Court will not hold such actions against the former directors.

In this case the liquidators could not say precisely what element of the Company’s losses were caused by the decision to cease trading and what elements were caused by a decision not to pay, Mr Justice Snowden held that such circumstances were not an appropriate basis for quantification of a claim under Section 214 Insolvency Act 1986.

This case is an important reminder to liquidators that when issuing claims for Wrongful Trading especially given the upcoming changes to the law surround CFAs will lead to pressure to issue claims to beat the changes (see our blog – LINK) to be successful, you must show that the director’s conduct has caused a loss to the Company and that loss must not have been caused for any other reasons other than the director’s conduct.