In his second substantive judgment following the trial last summer of the liquidators’ wrongful trading claim against the three directors of Ralls Builders Ltd, Snowden J has dismissed the liquidators’ claim for a contribution to the Company’s liquidation expenses. In so doing, the Judge has provided further clarification of the law in this important and developing area of jurisprudence.
In February 2016, the Judge handed down his first substantive judgment: Grant v Ralls (No 1)  BCC 293. He found that although the directors ought to have known that the company had no reasonable prospect of avoiding liquidation by 31 August 2010 and had not taken every step to minimise the loss to creditors between that time and administration on 13 October 2010), it was not appropriate to order them to make any contribution to the assets of the company because the liquidators had failed to establish that continued trading had caused any loss to the Company. He held that the proper measure of loss to the Company for these purposes was the increase in the net deficiency or ‘IND’ basis, and that the evidence did not establish any IND between 31 August and 13 October 2010. As the directors maintained, their decision to continue trading after 31 August 2010 had in fact produced a better result for creditors as a whole.
At the conclusion of his first substantive judgment, the judge reserved for further argument that part of the liquidators’ claim which sought an order requiring the directors to make a contribution towards the expenses of the administration and liquidation. Having originally sought an order requiring the directors to pay all of these expenses, at trial the liquidators advanced a narrower claim merely for “increased expenses”, namely of investigating and bringing their wrongful trading claim. In his second substantive judgment, the Judge rejected this claim both on the law and on the facts.
In a valuable analysis, the Judge held that:
As a matter of law, the liquidators’ expenses incurred in investigating and preparing a claim for wrongful trading cannot be recovered as part of a contribution to the Company’s assets pursuant to section 214.
Equally, the liquidators’ expenses were not recoverable pursuant to an order for costs since the exception where liquidators use their own employees as the most convenient individuals to give expert evidence – the so-called Nossen principle – did not apply.
Further, the fact that the directors continued to trade after the date on which they ought to have known it could not avoid liquidation did not make their conduct “wrongful”; still less did it provide any basis for ordering the directors to pay the liquidator’s expenses of investigating and bringing a failed wrongful trading claim.
In any event, the liquidators applied to amend and adduce evidence to support their more limited claim for increased expenses far too late. There was no good reason to give them a ‘second bite at the cherry’ and no basis to ask the Judge to direct that there should be an assessment before the Registrar.
The judgment provides welcome clarity in two important areas. First, the Judge’s decision that continuing to trade after the date on which there was no prospect of avoiding liquidation is not of itself “wrongful” comes as close as any judgment in this area to providing a definition of “wrongful trading”. That is particularly useful guidance to liquidators when considering whether they have a good claim under section 214. Secondly, the Judge’s decision that a liquidators’ costs, and expenses in liquidation are not recoverable under section 214 or as litigation costs will be a relief to many defendants who might otherwise face the prospect of claims being significantly inflated by the inclusion (as a head of loss) of liquidators’ time costs of investigating and pursuing a claim.
The liquidators’ application for permission to appeal against the decision in Grant v Ralls (No 1) was also refused. A further hearing to determine costs and other consequential matters will take place shortly.
The defendant directors were represented by Christopher Boardman of Radcliffe Chambers and Christopher Lloyd of New Square Chambers, instructed by Verisona Law.
Further enquires can be addressed to:
T: 023 9298 1000
T: 023 9298 1000