Ralls Builders Limited – Clarification On Directors' Liability For Wrongful Trading

In February 2016, Mr Justice Snowden handed down his judgment in the High Court proceedings concerning Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch). This matter concerned an application by the liquidators of Ralls Builders Limited (in liquidation) (the company) for a declaration regarding the alleged wrongful trading of the company by its directors, under section 214 of the Insolvency Act 1986 (the Act).

The detailed and considered judgment sets out the historical case law regarding wrongful trading, and addresses some of the uncertainty in this area.

Mr Justice Snowden considered, as is usual, the dates from which it was alleged that the directors knew, or ought to have known, that there was no reasonable prospect of avoiding an insolvent liquidation (the usual threshold for a finding of wrongful trading). The directors were found to have been in a position whereby they knew (or ought to have known) by 31 August 2010 that there was no such reasonable prospect. The company went into administration on 13 October 2010, and was since placed into liquidation.

In considering whether the directors ought to be required to personally contribute to the estate of the company in administration as a result of this wrongful trading, Mr Justice Snowden considered whether the directors had taken 'every step' with a view to minimising the loss to creditors to avail themselves of the defence under section 214(3) of the Act. The directors in this case had continued to trade in the hope of making better returns on mostly-completed projects in their (historically) busy summer period, and had also been in negotiations with a potential investor, which ultimately failed.

In assessing the availability of the section 214(3) defence, the court commented that the 'every step' requirement was designed to be a "high hurdle for directors to surmount". It was held that the directors had fallen short of this requirement, because the company's continued trading meant that some creditors, including the company's bank, were paid, while other creditors went unpaid. Mr Justice Snowden was clear in his judgment that this prevented the availability of the defence to the directors and that it was not the purpose of that section of the Act to provide "differential redress for individual creditors." This approach was supported by an observation that any contribution made by directors under section 214(1) would be distributed pari passu (i.e. in the same proportion...