Wrongful trading

Here are two cases from last year. In Langreen the directors were found to have traded while insolvent but not wrongfully. In Onslow Ditching the directors were found not only to have traded while insolvent but to have done so wrongfully.

Liquidator of Langreen Ltd (in Administration) October 2011 - insolvent trading found to be not wrongful

The liquidator represented a company which had been established to utilise satellite technology to offer broadband internet access to rural areas in the UK, which at the time were largely ignored by other providers.

The court gave judgment for the directors of an insolvent company on a claim brought by the liquidator for wrongful trading pursuant to the Insolvency Act 1986 s.214. The company was always undercapitalised and always had cash-flow problems, but on each of the relevant dates it could be understood why the directors had acted as they did. Their decisions to carry on trading were objectively reasonable, and had been taken in the interests of the creditors and investors. The liquidator had failed to establish that the directors had known, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

Liquidator of Onslow Ditching February 2011- insolvent trading found to be wrongful

The company purchased a site for the construction of residential units. It obtained some funding from the bank and considerable expenditure from a building contractor before it went into liquidation.

The liquidator sought and was successful in obtaining a declaration against two directors (on three grounds),and damages/fines or a contribution of assets from each director for:

Misfeasance and breach of fiduciary duties by failing to act honestly in the best interests of the company and its creditors;
Wrongful trading, for failing to act in the best interests of creditors when it was clear that insolvency of the company was unavoidable; and
Failing to exercise their roles as directors with reasonable skill and care.

The court observed:

"What drove [the directors] at this stage was wilfully blind optimism; the reckless belief that, provided they did not enquire too deeply into the figures, provided ODL did not let on to [the contractor] that there was no funding and did not let on to [its bankers] that there was no fixed price contract, then something might turn up, if only because [the contractor and the bank] could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would "share the pain". But the hope that "something might turn up" was on any objective view groundless and forlorn. Insolvent liquidation was inevitable".

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