Trading law reviewed as liquidators fail to establish ‘increase in net deficiency’

A COMPREHENSIVE judgment has reviewed the law of wrongful trading and clarified a number of aspects and apparently contradictory decisions that have caused controversy within the insolvency profession for a number of years.

That’s the view of Verisona Law following the judgement by Mr Justice Snowden who rejected claims brought by liquidators of Ralls Builders Limited, a Portsmouth construction firm established in 1891.

Verisona Law, who represented the defendants, said Snowden’s ruling had clairfied a number of issues, including ‘quantum of claims’ – essentially how the ‘increase in the net deficiency’ (between the ‘point of no return’ and liquidation) should be calculated; considerations for directors trading in the twilight period while awaiting investment and the importance of advice from insolvency professionals.

Another issue affected by the judgment is replacing old creditors with new creditors – when the overall financial position does not deteriorate.

In the judgment, Mr Justice Snowden observed that “the court does not approach the question of whether a director ought to have concluded that his company has no reasonable prospect of avoiding an insolvent liquidation with the benefit of 20:20 hindsight.”

And when moving on to consider the advice provided to the directors at the time by professional insolvency advisers, he noted that none of the communications: “…suggested that the course that the directors intended to pursue was unrealistic or doomed to failure.”

He concluded: “In my judgment, if anything, the figures suggest that the continued operations of the company…produced a modest improvement in the net deficiency of the company.

“There are real reasons to believe that a period of continued trading to complete existing contracts during the busy summer months is likely to have produced a significantly better result for the company…than would have occurred if there had been an immediate cessation of trading.”

The defendant directors were represented by Verisona Law, while counsel was Christopher Boardman of Radcliffe Chambers. Christopher Lloyd of New Square Chambers led.

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