Corporate insolvency – wrongful trading – section 214 IA 1986 – quantification of loss – director’s contribution

Ralls Builders Limited entered administration on 13 October 2010. It subsequently entered insolvent liquidation. The applicant joint liquidators applied for a declaration under section 214 of the Insolvency Act 1986 that the defendant directors were obliged to make contributions of just under £1 million for losses arising from the wrongful trading of the company.

After reviewing in detail the modern authorities on the meaning of wrongful trading (usefully discussed at paragraphs 166 to 179 of the judgment) he found that by 31 August 2010 the directors ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation.

Having made that finding, the Judge went on to consider the principles relating to the quantification of loss. He rejected the joint liquidators’ submission that the relevant loss is the loss actually suffered by the creditors when the company entered insolvent liquidation. The correct approach is to ascertain whether the company suffered loss which was caused by the continuation of the trading by the company. The starting point was to ask whether there was an increase or reduction in the net deficiency as regards the unsecured creditors between the date when the directors ought to have realised that there was no reasonable prospect of the company avoiding insolvent liquidation and the date when the company actually entered insolvency: Re Purpoint [1991] BCC 121 and Re Continental Assurance plc [2001] BPIR 862 applied. Losses that would have been incurred in any event as a consequence of the company going into a formal insolvency process are not recoverable under section 214.

In the instant case, the Judge held that there was no loss that could be causally connected to the decision to continue trading. The defendants’ real sin was that the continued trading allowed the bank, one of many unsecured creditors, to be paid in preference to other unsecured creditors. That was, however, not a loss within the scope of section 214.

This decision provides a useful examination of the practical methods for calculating losses under section 214. It also highlights the limited mischief to which section 214 is directed.