WRONGFUL TRADING: RE RALLS BUILDERS LTD

Wrongful trading is a claim which arises under section 214 of the Insolvency Act 1986 and applies where a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation and took the decision to carry on trading. In this instance the court, on the application of the liquidator, may declare that the director is liable to make such contribution to the company’s assets as the court thinks proper.

Simply allowing the company to continue to trade when insolvent would not put the director in contravention of these provisions.  It must be shown that he/she ought to have known, or concluded, that there was no reasonable prospect of avoiding insolvent liquidation.

The case of Ralls Builders Limited (In the matter of Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch)) helps to clarify what needs to be established to bring a successful wrongful trading claim.

The liquidators sought a contribution to the company from its former directors in respect of losses caused by its continued trading after the point at which they knew or ought to have known that the company could not avoid insolvent liquidation.

Although the judge was satisfied that the company’s directors had been guilty of wrongful trading, he declined to order the directors to make any contribution to the assets of the company because the liquidators had failed to establish the loss suffered by the company as a result of its continued trading.

This case highlights that the ability of the liquidator to establish that the loss suffered by the company has been caused by the director’s conduct is the key element for a successful wrongful trading claim.