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Wrongful Trading – Importance of Quantifying Loss in UK

The recent successful appeal in Brooks and another (Joint Liquidators of Robin Hood Centre plc in liquidation) v. Armstrong and another [2016] EWHC 2893 (Ch), [2016] All ER (D) 117 (Nov) has clarified and highlighted the complexities of bringing a wrongful trading claim and the importance of correctly quantifying losses for which directors can be made personally liable under section 214 and/or 246Z of the Insolvency Act 1986 (“the Act”).

Background

Side, SceneAs we have reported previously, the directors of a company in creditors’ voluntary liquidation were previously held jointly and severally liable to pay compensation of £35,000 for wrongful trading. The case was notable for being a useful summary of the Court’s approach to a wrongful trading claim, especially given the few successful decisions in this area and the detailed judgment that was provided. Further recent case law clarified the Court’s position with regards to quantifying such claims, more specifically how the ‘increase in net deficiency’ and any additional losses attributable to a wrongful decision to continue trading should be calculated.

Appeal

The directors successfully appealed the Registrar’s decision after arguing that the process by which the Registrar had calculated the compensation payable had been unfair. The court held on appeal that the liquidators had failed, in the earlier proceedings, to create a properly articulated case that there had been any increase in the net deficiency of the company during the period of wrongful trading and that, on the approach adopted and facts found by the Registrar, there had been no such increase. Accordingly, it was held on appeal that the Registrar should not have ordered any payment by the directors under section 214(a) of the Act.

The Deputy Judge dealing with the appeal was persuaded that, whilst inspired by the right reasons, the Registrar had applied an analysis which had not been put forward by either party and which had not been the subject of submissions at the hearing. Had the Registrar’s analysis been considered at the hearing, the directors would have been entitled to raise genuine objections to it, either on the basis that there was insufficient evidence on relevant issues, or because, if the analysis was followed through correctly, there would have been no compensation payable.

Conclusion

If a liquidator (or administrator) is considering wrongful trading proceedings, then they must produce a forensic analysis of the company’s losses, linked to each date that is going to be alleged as the date of knowledge that the company was destined for insolvency. That analysis has to be undertaken with competent insolvency lawyers who are going to conduct the case, to ensure that there is a clear understanding of the purpose of the analysis. Further, the analysis must show and distinguish the losses caused by the decision to trade on and the losses caused by the decision to cease trading supported by evidence that will persuade the Court that significant losses were caused by the decision to trade on.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Andrew Johnson, Bankruptcy Attorney, Squire Patton Boggs Law Firm
Associate

Andrew is a lawyer in the Restructuring & Insolvency practice based in the London office.  His practice focuses primarily on acting for financiers, officeholders and individuals in all aspects of insolvency, business sales and acquisitions, restructurings, asset recovery and advising secure lenders on their security. Andrew has undertaken secondments at LiveNation and Squire Patton Boggs' Hong Kong office, and is currently on secondment for a year in the Business Support Unit at Lloyds Banking Group.

+44 20 7655 1194
Paul Muscutt, legal specialist, insolvency lawyer, Squire Patton law firm
Partner

Paul Muscutt is a specialist in all aspects of contentious and non-contentious insolvency, with a focus in the banking and asset based lending sectors. Paul joined the Squire Patton Boggs Restructuring & Insolvency Practice Group in London in 2001 and has acted primarily for financial institutions, insolvency practitioners and corporate clients.

+44 20 7655 1476