Directors not liable for costs of wrongful trading proceedings

In Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch), the subject of our earlier article, liquidators brought wrongful trading proceedings against the directors under s 214 of the Insolvency Act 1986 for a contribution to the company’s assets.

In the aforementioned case the court held that the directors should have realised earlier that the company had no reasonable prospect of avoiding insolvent liquidation or administration. Given that the company had paid back its bank creditor but allowed new trade debt to be incurred which was not repaid, the directors could not rely on the “every step” defence. However, even though the directors had wrongfully traded, the court did not make a contribution order because it was not clear that the wrongful trading had increased the company’s net deficiency.

The court, in making its decision, left open two issues which have now been addressed in a follow up judgement (Re Ralls Builders Ltd (in liquidation) [2016] EWHC 1812 (Ch)). The first was whether the directors should contribute to the company for the ancillary costs and expenses of the administration and liquidation, to the extent unnecessarily increased by the wrongful trading. The second issue was whether the court should disqualify the directors from acting as directors under s10 Company Directors Disqualification Act 1986 (“CDDA”).

In this follow up judgement, the court held that it would be illogical to order the directors to pay costs which the liquidators had incurred in trying to prove – unsuccessfully – that loss had been sustained. Although there was a period of wrongful trading, the directors’ conduct was not wrongful per se as the company had suffered no loss.

Another factor against a contribution order was the decision in SISU Capital Fund v Tucker [2006] BCC 463, which held that insolvency officeholders cannot recover the costs of their own time spent in assisting in litigation unless they come within the “Nossen Principle”. The Nossen Principle provides that a company may be able to recover the direct costs of its own specialist employees if they are the most suitable experts to use in a matter requiring expert evidence. In Ralls Builders the principle was not applicable because litigation is not an area of expertise intrinsic to the liquidator’s profession and no special rules applied to insolvency cases.

As the court did not make an order for the directors to contribute to the company, he concluded that the court had no jurisdiction to make a disqualification order under s10 CDDA. The legislation requires the court to have made a contribution order and not simply to have found that the directors continued to trade beyond the point at which they knew or ought to have known that the company had no reasonable prospect of avoiding insolvent liquidation/administration.

This case serves as further caution to office holders considering whether to bring a claim pursuant to Section 214 of the Act to be careful to test if there has been an increased net deficiency as a result of the alleged wrongful trading. Even if an office holder is successful in proving wrongful trading, he will fail to benefit the estate if there has been no such increase in the company’s net deficiency as a result. Indeed, in that situation, the estate will have suffered from incurring additional costs.

For further information about this case or for any insolvency queries please contact Associate Solicitor, Lauren Hartigan-Pritchard on or 01905 677045.

Get In touch