Re Ralls Builders Limited

20 July 2016

[2016] EWHC 1812 (Ch)

Chancery Division (Snowden J)

Corporate insolvency – costs and expenses – wrongful trading – s. 214 Insolvency Act 1986

The company’s liquidators alleged wrongful trading and claimed an order under section 214(1) of the Insolvency Act 1986 that the directors contribute for losses incurred as a result of their trading beyond the point at which they should have seen the company could not avoid insolvent liquidation. Snowden J dismissed this application in February 2016 (see [2016] EWHC 243 (Ch) and the XXIV Insolvency Bulletin May 2016). He found that although there was wrongful trading, no loss flowed from it.

Snowden J now considered whether, irrespective of his earlier decision, the directors should contribute to the costs and expenses of the company’s administration and subsequent liquidation in a sum equal to the increase in those costs and expenses caused by the directors’ wrongful trading. These costs were largely the liquidators’ own time costs (but not legal costs) of investigating and prosecuting the wrongful trading claim.

Snowden J rejected this claim. Parties could not generally recover their time costs as damages in contract or tort claims: Avrahami v Biran [2013] EWHC 1776 (Ch). There was no reason to treat section 214 claims differently, this was merely a statutory mechanism for enforcing the directors’ duties. Snowden J also accepted that office-holders could not usually recover their time costs in litigation: SISU Capital Fund v Tucker [2006] BCC 463.

In any event, the Judge was not satisfied that these costs were caused by the directors’ wrongful trading. It would be illogical to decline to make an order in respect of the directors’ decision to continue trading because there was no increase in the net deficiency, but nevertheless order them to pay for the additional costs incurred by the liquidators in investigating and unsuccessfully trying to prove that some loss was sustained.

This decision provides a fresh view on the sort of losses recoverable in a wrongful trading claim and provides useful guidance on the circumstances in which office-holders’ time costs might be recoverable.