Background
Ralls Builders Limited (“Ralls”) was a construction company which went into liquidation in 2011 following a period in administration.
Its liquidators, Stephen Grant and James Tickell, brought proceedings under section 214(1) of the Insolvency Act 1986 (“s214”) seeking a declaration that the directors should pay a contribution to the company’s estate for losses incurred whilst trading after a point in time at which, in the liquidators’ view, the directors should have seen that Ralls could not avoid an insolvent liquidation. Mr Justice Snowden ruled on this application in February this year (re Ralls Builders Limited (in Liquidation) [2016] EWHC 243 (Ch))
In short, the judge declined to order that the directors make any contribution because although it was held that the directors ought to have concluded by a certain date that there was no prospect of avoiding an insolvent liquidation, the period of continued trading had caused no loss to the company overall nor worsened the interests of its creditors generally. Although Snowden J was satisfied that the directors ought by August 2010 to have realised an investor’s promises would not sufficiently come good and that the directors had not taken ‘every step’ they ought to have taken to minimise creditor losses, he nonetheless declined to make a contribution declaration. He held that when determining whether directors should contribute, the question of loss caused by the company’s continued trading was key.
On the facts as he found them Snowden J was not satisfied any material increase in the company’s net deficiency had come about. In fact, there had been a degree of improvement. An increase in the net deficiency caused by continued trading may well have produced a contrary ruling were the directors unable to demonstrate that they had taken every possible step to minimise loss to individual creditors.
Key Facts
Snowden J gave a second judgment in the liquidators’ claim at the end of July 2016 (re Ralls Builders Limited (in Liquidation) ([2016] EWHC 1812 (Ch)). There, he considered whether the company’s directors should be ordered to contribute to the costs and expenses of the company’s administration and subsequent liquidation in such sum as those costs and expenses had been increased because of the period of continued trading (i.e. beyond the point of no return, 31 August 2010). Determination of this part of the liquidators’ claim had been stood down from the original trial.
The liquidators’ original claim had been for all the expenses incurred in the administration and liquidation which were around £287,000. At the beginning of the trial counsel for the liquidators notified the court that the claim would be reduced so as to exclude costs and expenses which would have been payable in insolvency in any event. There had not been time to quantify this reduced amount but in submissions at the second hearing the liquidators made a claim for just over £256,000 which they said represented the additional costs and expenses of dealing with the s214 claim.
The liquidators claim, in summary, was that in finding the directors ought not to have traded beyond 31 August 2010 the judge could, irrespective of his decision not to impose a contribution order, still order a contribution in relation to the liquidators’ increased costs. The defence, in summary, was that the sums claimed could not as a matter of principle be made subject to a contribution order since sums expended in investigating and bringing a claim by a party were not recoverable by way of damages and that a s214 claim should be adjudged in the same way. It was the parties’ agreed position that there was no case law authority in which an order of the type sought by the liquidators had previously been made.
Counsel for the directors argued that the only means by which expenses incurred in litigation could be recovered would be by an order for costs, not by an award for damages. Although a s214 claim was not a claim in tort or breach of contract, the judge saw no obvious reason, including the fact that the liquidators’ claim was for the ultimate benefit of the creditors and not the liquidators personally, to distinguish those types of claim for the purposes of reaching his decision in this case. S214 claims were, he noted, often brought with or in the alternative to claims for a breach of a duty of care or fiduciary duty. As all such claims were investigated pursuant to officeholders’ statutory duties the judge thought it “illogical” that different principles might apply to the question of whether the officeholders’ costs and expenses of the claims were recoverable.
Judgment
On that basis Snowden J found it “self-evident” that the liquidators should not be in better position in making a claim for a contribution to costs and expenses than they were in their (failed) claim for a contribution to the company’s losses.
After considering SISU Capital Fund v Tucker [2006] BCC 463, and, briefly, ‘the Nossen principle’ from Re Nossen’s Letter Patent [1969] 1 WLR 638 whereby liquidators might recover costs connected with the use of their own staff as the most convenient way of giving expert evidence (but which, since both sides had experts here, could not apply to this case), Snowden J found, endorsing the reasoning of Warren J in SISU, that as a matter of law the liquidators’ expenses incurred in investigating and bringing a wrongful trading claim could not be recovered as part of a contribution to the company’s assets pursuant to s214. Nor would any special status be afforded an officeholder in making such an assessment, despite the fact that he may have duties to bring or defend claims.
A key finding in the judgment as to the recoverability of costs and expenses via a costs order related to causation. Applying Park J’s reasoning in Continental Assurance [2001] BPIR 733, Snowden J found that a director’s conduct is not ‘wrongful’ for the purposes of s 214 simply because a date existed (in the court’s view) at which he did conclude or should have concluded that insolvent liquidation was unavoidable. More was required, and losses needed to be directly consequent to the decision to trade on. Park J’s endorsement of a phrase in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 was resonant for Snowden J: “Normally the law limits liability to those consequences which are attributable to that which made the act wrongful”.
Still less could Snowden J see any reason why continued trade beyond such a date should justify an order to pay for costs and expenses subsequently incurred by the liquidators in investigating or litigating an unsuccessful s214 claim, whether or not there was an increase in the net deficiency of the company after that relevant date. However, the judge indicated that he might have made an order in relation to any demonstrably direct consequences of the decision to continue trading regardless of the lack of an increase in the net deficiency.
Conclusion
Insolvency practitioners considering a s214 claim will no doubt want a copy of this judgment within reach: it provides a fresh view on how compensation payable for “wrongful trading” should be calculated.
Section 10 of the Company Directors Disqualification Act (“CDDA”) was treated as a footnote in the judgment. Section 10 CDDA allows the court to make a disqualification order against any director declared to be liable to make a contribution to a company’s assets pursuant to s214. The discretion exists regardless of whether any person has applied for such a disqualification order to be made. As he made no s214 order, Snowden J did not need to apply his discretion to the case in hand. However, he commented that he would, had the question arisen, have adjourned his decision so as to allow then Secretary of State for Business, Innovation and Skills an opportunity to make submissions.
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