Quantifying a wrongful trading application (Nicholson v Fielding)

Quantifying a wrongful trading application (Nicholson v Fielding)

Simon Hunter, barrister at Three Stone, explores Nicholson v Fielding and suggests the decision highlights the importance of properly quantifying a wrongful trading application.

Original news

Re Main Realisations Ltd (in liquidation); Nicholson and another v Fielding and others [2017] Lexis Citation 313[2017] All ER (D) 156 (Oct)

The Companies Court refused the liquidators’ application under section 214 of the Insolvency Act 1986 (IA 1986) for a declaration that the respondent company directors were liable to make contributions to the company’s assets for having wrongfully allowed it to continue trading when they knew or should have known there was no reasonable prospect of it avoiding going into insolvent liquidation. The court held that, on the evidence, the respondents had no knowledge that the company had no reasonable prospect of avoiding insolvent liquidation and an objective director would not have concluded it was doomed.

What practical lessons can restructuring and insolvency professionals take away from this judgment?

Inevitably the outcome in this case turns on its particular facts. It is not, though, without considerable wider relevance. The importance of this judgment is in the comments of the deputy registrar in relation to the fourth issue (see below). It is a salutary lesson to practitioners (and their lawyers) to ensure that claims which they bring are quantified on a proper basis and that that quantification is backed up by evidence.

In a claim for wrongful trading this quantification must be undertaken particularly carefully. It is established that where there is no sufficiently detailed financial information allowing a calculation of the net deficiency between the relevant date and the date of the liquidation, the court can take the actual net deficiency between two other dates and pro rata it to the correct period. This, albeit in a rather tangential way, appears to be what happened in this case.

As the deputy registrar in this case accepted, though, that is only an approach to be used where there is no sufficiently detailed financial information. The court should be cautious of the approach where there is no good explanation why there is not a proper deficiency account. In this case, the third respondent had kept exemplary accounting records. There was no reason why a proper deficiency account could not have been created showing the actual increase in the deficiency caused by the alleged wrongful trading. The deputy registrar commented that comparing the October 2008 accounts (prepared on a going concern basis) with the statem

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