Thursday, 9 February 2012

Implications for Directors following Collapse of Wrongful Trading Case

Mark Copping: Hamlins LLP
The High Court recently ruled that the liquidator of start-up wireless internet provider Langreen Ltd had been wrong to pursue the Company’s non-executive directors for “wrongful trading”

Wrongful trading – under s214 of the Insolvency Act – provides a personal remedy against directors for the company’s debts when it goes bust, if they allowed the company to carry on trading after the point when they “had known, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation”

The High Court Registrar found that the two non-execs were not liable even though the company had:

• always been undercapitalised,

• always traded at a loss, and

• had probably always been insolvent on a cash flow basis

It found that the directors had genuinely and reasonably believed, right up to the point of liquidation, that the company could be saved, and had done all they reasonably could to minimise the potential loss to creditors; and that the main reason for the liquidation was probably the failure of the only available satellite provider.

There are a number of practical points to consider following this decision:

• There is a danger of assessing directors’ conduct with the benefit of too much hindsight. The Registrar said that the question of culpability is based purely on the information which was known or ought to have been known by the directors at the relevant time so it’s vital that the liquidator identifies the precise date upon which he says the company became insolvent and then considers the reasonableness of each director’s conduct.

• This type of liability can apply to “non-executive” directors and the Registrar commented that this term was not recognised in English law. In this case the directors went beyond a passive role in protecting their investments and took on certain management roles but even a director who only attends board meetings has a role to play in essential decisions about the company and will be judged accordingly.

• Resignation is not necessarily the answer once the issues have arisen and should only be considered if a director’s views are being ignored.

• One of the most important lessons is to make careful and dated notes and minutes of all decisions and actions taken to protect the creditors.

Non-executive directors should take particular note. Limiting your responsibilities under the appointment letter won’t count if your actual management role is much more hands-on and it won’t be enough for investor-directors to protest that they were only protecting their investment. The same applies to appointees of Venture Capitalists or Funds.

The only sure-fired way to avoid liability is not to be a director at all but an “observer” with the right to attend the board meeting under contract but not Companies Act director status. It may not give you the same prestige as parking in the Chairman’s reserved parking space but it certainly helps when the chips are down!

Hamlins LLP is a well established, successful commercial law firm based in London’s West End. The firm has expertise in a wide range of sectors including Retail, Travel and Leisure and Property offering corporate legal services to major brand names, growing SMEs and entrepreneurs both nationally and internationally.

To discuss the above or another legal matter contact:  Mark Copping, Partner, Hamlins LLP: 020 7355 6000

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