Wrongful trading claim: Pursue at own cost

Summary

The High Court recently handed down the judgment in Ralls Builders Ltd (In Liquidation), Re [2016] EWHC 1812 (Ch). It was held that liquidators and administrators are not able to recover their own costs and expenses of investigating a wrongful trading claim from the directors of a company, even following a finding of wrongful trading under section 214 Insolvency Act 1986.

Background

In an earlier judgment, the court had found that: (i) the directors should have concluded that, by 31 August 2010, there was no reasonable prospect of the company avoiding insolvent liquidation, and (ii) accordingly, the directors were guilty of wrongful trading. However, as it could not be shown that the company’s net deficit had increased after 31 August 2010, the court decided against making a declaration under s.214(1) of the Insolvency Act 1986 that the directors should contribute towards the company’s assets.

In the hearing in question, the court considered the liquidators’ argument that the directors should pay the additional costs and expenses that had been incurred by the office-holders (in the liquidation and the preceding administration) as a result of investigating and pursuing the claim for wrongful trading under s.214. The liquidators argued that if these costs were not met, this would increase the net deficiency of the company, which would be to the detriment of the company’s unsecured creditors. The directors rejected this contention. They argued that such costs were not recoverable by way of damages, but instead by way of an order for costs (in the usual way). The directors argued that following Sisu Capital Fund Ltd v Tucker (Costs) [2005] EWHC 2321 (Ch), the time costs of insolvency office-holders are not recoverable as costs of litigation, except in so far as the office-holders themselves are the most “suitable or convenient experts” to employ in a matter requiring expert evidence.

Decision

Even though insolvency office-holders may be under a positive duty to defend or bring litigation, there was no exception to the general rule that expenses of litigation must be recovered through costs orders. It was held that, generally speaking, a costs order was the only means by which any litigant could recover expenses incurred in investigating and bringing a claim. Such sums could not, for example, be recovered by way of damages for tort or breach of contract and there was no obvious basis for distinguishing a claim under s.214 (or any other insolvency claim) in this regard.

On the facts, Mr Justice Snowden held that the directors were not liable to contribute to the costs and expenses of the liquidation in circumstances where the wrongful trading had not caused a net deficiency in the company’s assets. His view was that it would be “illogical” to decline to make any order in respect of the direct consequences of the directors’ decision to carry on trading after 31 August 2010 because there was no increase in the net deficiency, but nevertheless order them to pay for the additional fees incurred by the liquidators in investigating the claims.

Comment

Combined with Sisu, this decision makes it clear that even where a wrongful trading claim is successful, the liquidators’ own costs of investigating and bringing a claim for wrongful trading will not be recoverable.

It appears to be the case that even where the wrongful trading has resulted in a loss to the company’s net assets and the directors are ordered to make-up the shortfall, the contribution amount may effectively be wiped out by the liquidators’ own costs of investigating and pursuing the claim.

This decision may result in a difficult balance between the duties placed on insolvency office-holders to pursue wrongful trading cases vs. the need to keep the costs of doing so to a minimum to maximise returns for creditors. However, it remains open to a liquidator to engage a third party (such as a lawyer or accountant) to investigate a potential claim and recover the costs incurred in connection with those investigations in the usual way, as a cost of the litigation.