Successful defence of a claim for wrongful trading bought by a Liquidator against former Directors of a Company

Reported Case - David Emanuel Merton Mond (Liquidator of Langreen Ltd (in Administration)) v (1) Jonathan Bowles (2) Hazel Bowles (3) Philip Moffat (4) Errol Rhoden [2011] - Preston Redman instructed by successful defendants in a claim for wrongful trading brought by a Liquidator against former Directors of a Company.

IN THE MATTER OF LANGREEN LTD (In Liquidation) sub nom DAVID EMANUEL MERTON MOND (LIQUIDATOR OF LANGREEN LTD (In Administration)) v (1) JONATHAN BOWLES (2) HAZEL BOWLES (3) PHILIP JOHN MOFFAT (4) ERROL BENJAMIN TRUMAN RHODEN (2011)

Ch D (Companies Ct) (Registrar Derrett) 21/10/2011

COMPANY LAW - INSOLVENCY

CREDITORS' VOLUNTARY WINDING-UP: DIRECTORS: KNOWLEDGE: LIQUIDATORS' POWERS AND DUTIES : WRONGFUL TRADING : EXTENT TO WHICH DIRECTORS KNEW OR OUGHT TO HAVE KNOWN INSOLVENT LIQUIDATION INEVITABLE : s.214 INSOLVENCY ACT 1986

The court gave judgment for the directors of an insolvent company on a claim brought by the liquidator for wrongful trading pursuant to the Insolvency Act 1986 s.214. The liquidator had failed to establish that the directors had known, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

The claimant liquidator (L) made a claim of unlawful trading pursuant to the Insolvency Act 1986 s.214 against an insolvent company's four directors (D1, D2, D3 and D4).

The company, a start-up business, had begun to trade in March 2004. Its success had depended upon its achieving sales in large volumes. Those were not achieved and it went into creditors' voluntary liquidation in April 2006. D1 and D2 had initially become involved as investors while D3 and D4 were responsible for the company's day-to-day running. L settled the case against D3 and D4 for token sums, and identified four dates on which he asserted that D1 and D2 knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

His case was that by July 12, 2004 it was clear that the required volume of sales was not being achieved; by November 3, 2004 the company's financial position was clearly precarious; by May 5, 2005 it was faring no better despite a change of focus; and that by October 12, 2005 its cash-flow projections were demonstrably unrealistic.

The matter had a somewhat unsatisfactory procedural history and those dates were only identified some eight months after the proceedings had begun. Moreover, the court determined that L had no relevant or effective sanction and would have to accept the costs consequences of that.

The issues were whether (i) the proceedings had been commenced satisfactorily; (ii) D1 and D2 were executive or non-executive directors; (iii) on each of the relevant dates D1 and D2 knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

HELD: (1) The proceedings, as commenced, were defective. Moreover, L had made a serious error in not revealing that for some of the period originally asserted, D1 and D2 were not directors of the company. It could be inferred that after settling with D3 and D4 for token sums, L's only purpose in pursuing the wealthier D1 and D2, without sanction or creditor support, was to recover costs. While the defects did not invalidate the proceedings, they could be taken into account when dealing with costs (see paras 39-40, 45, 47 51 of judgment).

(2) The term "non-executive" director was not a term of art and had no set meaning in English law, and it was necessary to examine what a person actually did. Although, at the outset, D1 and D2 could have been described as "active investors" or non-executive directors, they very soon took on a role commensurate with that of an executive director: they took an active part in the financial management of the business, negotiating and personally guaranteeing a company overdraft, being on the bank mandate, actively monitoring the company's debts and negotiating with creditors. Although D3 and D4 had run the company on a day-to-day basis, D1 and D2's participation had gone beyond simply protecting their investment, and there was no distinction to be drawn between the four of them (paras 80, 83-84, 87, 91-92).

(3) That said, the evidence did not suggest that D1 and D2 had actively determined the development of the company's business model, which appeared to have been sound. At the outset, they had had no reason to believe that the company would not eventually be profitable. Nor was it wrong for them to have continued in that belief on the dates identified by L. L's case was based on a significant amount of hindsight, and it could not be said that on any of the dates identified the inevitable conclusion was that the company would not avoid going into insolvent liquidation.

On July 12, 2004 the company had only been trading for five months and the directors knew that it would need significant investment if it were to survive. At that stage, the fact that the volume of sales was not in line with the projections did not mean that the company would be unsuccessful (paras 93-94, 96, 101, 109-110). Although D1 and D2 knew by November 3 that money was tight, they had taken active steps to secure external investment and to manage debt. In any event, they could have discharged the company's debts from their personal assets had they so chosen (paras 111, 114-116, 123-124).

Up until May 6, 2005 the projections showed an increase in profitability, and D1 and D2 reasonably believed that a third party was going to make a significant investment. Although neither of those things happened, there was no reason for D1 and D2 to believe, on May 5, that the company should not continue to trade (paras 134-136).

By October 12, 2005 the company was exploring a foreign business opportunity and while, with hindsight, it was easy to conclude that D1 and D2 were refusing to accept reality, it could not be said that, at that date, there was no prospect of success (paras 141-142). L had not established his case.

The company was always undercapitalised and always had cash-flow problems, but on each of the relevant dates it could be understood why D1 and D2 had acted as they did. Their decisions to carry on trading were objectively reasonable, and had been taken in the interests of the creditors and investors (paras 143-144, 149).

Judgment for defendants

Counsel:

For the claimant: Lexa Hilliard QC, Richard Chapman

For the first and second defendants: Simon Davenport QC

Solicitors:

For the claimant: Foreman & Co

For the first and second defendants: Preston Redman

LTL 26/10/2011

Judgment: Approved - 36 pages

Document No.: AC0130205