The burden of proof in wrongful trading

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Philip Anthony Brooks and Julie Elizabeth Willetts (Joint Liquidators of Robin Hood Centre Plc) v Keiron Armstrong and Ian Walker [2015] EWHC 2289 (CH)

Facts

The case concerned an application by the Joint Liquidators for orders against the directors of a company under s.214 Insolvency Act 1986 (IA) in relation to wrongful trading. The case provides a useful summary of where the burden of proof lies in establishing a defence under s.214(3) IA.

Legislation

Under s.214 IA, the Court may require a contribution of assets from a director of a company which has gone into insolvent liquidation where, at some point prior to the winding up of the company, that director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation.

Under s.214(3) IA, the Court will not make an order for wrongful trading where, knowing that there was no reasonable prospect of the company avoiding insolvent liquidation, the director made every effort to minimise the potential loss to the company’s creditors. Such steps that ought to be taken are determined by reference to the reasonably diligent person having the general knowledge, skill and experience reasonably expected of a director in that position.

Decision

  1. Burden of proof: once it has been established that the director knew or ought to have known that there was no reasonable prospect of the company avoiding liquidation, the onus in establishing a defence under s.214(3) IA falls on the director. The director must show they made every effort to minimise the potential loss of the company’s creditors; it is not for the liquidator to show they did not take such steps.
  1. Knowledge: Liquidators do not need to show that the directors had knowledge at a certain time, only that they knew or ought to have known that the company had no reasonable prospect of avoiding liquidation at some time before the winding up.
  1. Predictions: There was no duty to cease trading while insolvent if the directors predicted the company would achieve profits in the foreseeable future. In this case, the potential benefits of trading initially outweighed the potential adverse effects of liquidation.
  1. Creditors as one class: Whether directors have minimised loss has to be judged by reference to the creditors as a whole. In this case, while continuing to trade was initially accepted, once the directors knew that the company’s trade creditors were paid, but that VAT and rent liabilities were not, they should at this point have known there was no reasonable prospect of avoiding insolvent liquidation because liabilities to creditors as a whole were increasing.

Comment

The case contains a useful and detailed example of how the courts approach the elements of a wrongful trading claim and is noteworthy for clarifying where the burden of proof lies in establishing a defence under section 214(3) IA.

For further information, help or advice please contact Kelly Jordan on 0191 211 7899 or email [email protected].