Wrongful trading: be prepared
Insolvency Bitesize - November 2017
Liquidators in a recent case failed to establish company's directors should pay over £2m as liability for wrongful trading. On the facts, there was no wrongful trading. What’s more, even if there had been, the court would not have been prepared to make an award on the evidence presented to it. Any attempt to do so would have been "a stab in the dark".
The directors’ actions could not be judged in an "economic vacuum". They did not know that there was no reasonable prospect of avoiding insolvent liquidation at the two dates alleged by the liquidators. Quite the reverse: in the face of mounting difficulties, the directors repeatedly revised their strategy while continuing to assess the figures and were actively engaged in finding how best the company could trade. Evidence of the correspondence with HMRC was the hallmark of on going detailed consideration of the company's position.
The case is a good example of what liquidators shouldn't do:
- wait too long: it took 6 years for the liquidators to bring the claim and they only just made it with weeks to spare until the limitation period ran out;
- fail to collect and present crucial evidence: the liquidators presented inadequate evidence to court, crucially failing to obtain cash flow forecasts which had been submitted to HMRC by the company. They could have been collected by the liquidators earlier in the liquidation;
- dither about the relevant date: the liquidators only added a second date from which they alleged the wrongful trading took place on commencement of the trial. While the judge allowed this, it showed a lack of detailed preparation;
- fail to evidence the quantum claimed: even if the application had succeeded on liability, the court would have awarded nothing. The liquidators' evidence as to quantum "could hardly have said less". The claimed increase in deficiency to creditors was based on the directors' own statement of affairs prepared more than 7 years ago in the earlier administration – that was "utterly inappropriate". For example, the liquidators were unable to tell the court whether creditors had submitted proofs and, if so, for how much. That meant amounts owed to creditors were uncertain, they may have already been paid (following the company’s business sale) and the court could not rule out that that would have happened anyway had the company entered liquidation at an earlier date; and
- fail to show causal link between any loss and the directors' actions: there was no evidence that, even had there been any loss caused by delaying the liquidation, it was caused by the directors' failings – the state of the market in which the company operated would have suggested otherwise.
As we have previously highlighted, wrongful trading claims have a notoriously low success rate.