Directors of doomed development project guilty of wrongful trading

The directors of a development company have been found guilty of wrongful trading after continuing with a project long after they should have known it was bound to fail. 

The case involved the directors of a company which was set up to acquire a plot of land worth £900,000 and build industrial trading units. They borrowed £437,000 on the basis that some of the units had been pre-sold. However, that overstated the position.

The directors then fell into dispute with one of the contractors brought in to work on the site.

The contractor suspended work on the project. The bank was not told about this and went ahead and honoured further payments made by the directors. 

The development company then went into liquidation. The liquidator sought declarations that the directors were guilty of misfeasance, breach of fiduciary duty and wrongful trading because they had allowed work to continue on the project when they had known, or ought to have known, that it was bound to fail.

The court held that at the outset of the project, the directors had honestly believed that it would succeed. However, the position changed once work got underway. The contractors quickly carried out work to a value that exceeded the amount available to pay them.

The only honest thing to do at that stage was to stop the development so a full appraisal could be carried out and so the bank could be informed. In spite of this, the directors tried to continue until insolvency was unavoidable.

The Court held that the directors should have known that there was no realistic chance of avoiding insolvent liquidation and so continuing with the development constituted wrongful trading. 

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Exploring how best to secure payment of the Court award

The Defendant was the sole owner of his property and we discovered there was one mortgage registered against it.  Mortgage enquiries and a valuation showed there was over £300,000 of equity in the property. 

Taking Court action to settle the debt

First we obtained a Final Charging Order. This means that the Judgment debt is registered and secured against the property as an equitable charge.

We then applied to the Court for an Order for Sale whereby the property would be sold and the proceeds of sale, following the discharge of the mortgage and other costs, would be used to settle the client’s claim. 

Although the Defendant strenuously opposed the application, the Court granted an Order for Sale and ordered the Defendant to vacate the property. They refused to leave.

Full repayment of the debt

At this point the Bailiff was instructed to take possession of the property and the Defendant was evicted.   It was then sold and we recovered full settlement of the debt and payment of legal costs for our client. 

The balance of the proceeds of sale was paid to the Defendant. 

Orders for Sale are granted at the discretion of the Court and the Court may be unwilling to make an Order for Sale if there are young children, elderly or disabled occupiers living in the property.

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