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 statement of affairs on November 2009 in the administration (which was not prepared on that basis) was not comparing like with like.

The practical impact of this judgment goes beyond wrongful trading. It is always worth considering at an early stage the quantification of any application, how that will be evidenced, and what other documents or information may be required to discharge the burden of proof.

What was the background to the case?

The company was incorporated under another name on 10 July 2006. It was, in effect, the successor to a company incorporated in 1964. The principal business carried on by both companies was transporting new and used cars for a variety of manufacturers and hirers. The older company went into administration on 18 September 2006, owing HMRC in excess of £1m. On 19 August 2009 HMRC presented a winding-up petition against the company, which itself went into administration on 12 October 2009. It moved into creditors’ voluntary liquidation on 25 June 2010.

It appeared that some of the company’s problems arose from the general conditions of the economy in 2007/08. There was evidence that fuel prices had risen by 24% between October 2007 and May 2008. Car manufacturing fell by 15.1% during 2008. The directors continued to seek new contracts, and engaged in extensive discussions with HMRC. Staff were laid off and transporters were laid up to cut costs.

The application made by the liquidators was that the respondent company directors were liable under IA 1986, s 214 for wrongful trading. The section applied if:

  • the company had gone into insolvent liquidation
  • at some point before that a person knew or ought to have known that there was no prospect of the company avoiding insolvent liquidation
  • that person was a director at that relevant time—see IA 1986, s 214(2). The relevant dates identified by the applicant liquidators were 1 June 2008 and 31 October 2008.

The respondents were the company’s directors at the relevant times—the first and second respondents were experts in the car-transport industry and the third respondent was an accountant. In his judgment the deputy registrar accepted that the first and second respondents made the major strategic decisions. The third respondent was there primarily to deal with the accounts.

What issues arose for the court’s consideration?

The issues that arose were set out concisely in para [43] of the judgment they were:

  • whether any of the respondents knew that the company had no prospect of avoiding insolvent liquidation
  • if not, whether they should have known
  • if they knew or should have known, whether there was a defence under IA 1986, s 214(3), ie the respondent took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken
  • if there was no such defence, what the quantum of the claim was against each of the respondents.

What did the court decide and why?

The application was dismissed. On the first two issues, the court decided that the respondent directors neither knew nor should have known that the company had no prospect of avoiding insolvent liquidation. The deputy registrar was satisfied that the respondents had engaged in ‘ongoing detailed consideration’ of the company’s position, backed up by ‘exemplary management accounts’ drawn up by the third respondent.

Although it was not necessary to do so, the court also considered the third and fourth issues. The deputy registrar would not have found for the respondents on the defence under IA 1986, s 214(3): he was not satisfied that the continued trading was ‘designed appropriately so as to minimise the risk of loss to individual creditors’—see para [109], quoting from Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch)[2016] All ER (D) 142 (Feb).

However, on the fourth issue the deputy registrar held that even if the application had succeeded on liability and the statutory defence had failed, he would have awarded the applicant liquidators nothing. He was critical of the way in which the claim had been quantified, noting that he had not been given a proper account of the deficiencies, and that there was no explanation as to why not. The only attempt at quantification was to compare the balance sheet deficit in the October 2008 accounts with the statement of affairs signed by the third respondent on 27 November 2009. The deputy registrar held at para [115]: ‘It would have been for the liquidators to satisfy me that there is recoverable loss. On the evidence, any figure I came to would be a stab in the dark. That does not discharge the burden of proof.’

Interview by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Wrongful trading claims under sections 214 and 246ZB of the Insolvency Act 1986 and the process for bringing the claim

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