Brooks v Armstrong [2016]
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Brooks v Armstrong [2016] EWHC 2289 (Ch) involves wrongful trading under Section 214 of the Insolvency Act 1986 by Robin Hood Centre plc, a company engaged in a themed tourist attraction business, which entered creditors' voluntary liquidation in 2009. The liquidators initiated proceedings against the directors, alleging misfeasance and wrongful trading.
At first instance, Registrar Jones set out three conditions for wrongful trading: the insolvency condition, the knowledge condition, and the minimising loss defence.
The court placed the burden of proof on the liquidators to establish insolvency and knowledge conditions. Once established, the burden shifted to the directors to prove the minimising loss defence. The court emphasised that "every step" was a more stringent standard than "every reasonable step". The Eurosail test was employed to assess insolvency, indicating that future insolvency inevitability, rather than actual insolvency at the time, was sufficient.
The court also pointed out that companies are permitted to trade while insolvent if directors genuinely believed it could be profitable. It emphasised that directors' conduct should be measured against the expected standard of knowledge, skill, and experience. In particular, directors are required to be aware that insolvent liquidation is unavoidable before the commencement of winding-up while specific dates are not mandatory, directors has the right to know the case against them.
The court also detailed factors for directors to consider in taking "every step" to minimise loss. These included keeping accounting records updated, preparing business plans, informing creditors, monitoring financial positions, obtaining professional advice, and exploring insolvency remedies. The court asserted its unrestricted jurisdiction under Section 214. Compensation aimed to recover losses caused by wrongful trading, with awards intended to bridge the gap between hypothetical and actual liquidation positions. Joint and several liability was applied in cases with multiple defendants. The court ruled against separate awards for misfeasance.
On appeal, David Foxton QC partially overturned the decision, emphasising that the court could calculate the increase in net deficiency even with missing financial information. When assessing compensation, the court will consider factors such as changes to the VAT scheme, the company's profitability, asset depreciation and the honesty of directors.
At first instance, Registrar Jones set out three conditions for wrongful trading: the insolvency condition, the knowledge condition, and the minimising loss defence.
- Insolvency condition: The company must enter liquidation without sufficient assets to meet creditors' claims and winding-up costs.
- Knowledge condition: Directors must, before liquidation, know or conclude that there's no prospect of avoiding insolvent liquidation.
- Minimising loss defence: Directors, including shadow directors, must take "every step" to minimise loss to the company's creditors.
The court placed the burden of proof on the liquidators to establish insolvency and knowledge conditions. Once established, the burden shifted to the directors to prove the minimising loss defence. The court emphasised that "every step" was a more stringent standard than "every reasonable step". The Eurosail test was employed to assess insolvency, indicating that future insolvency inevitability, rather than actual insolvency at the time, was sufficient.
The court also pointed out that companies are permitted to trade while insolvent if directors genuinely believed it could be profitable. It emphasised that directors' conduct should be measured against the expected standard of knowledge, skill, and experience. In particular, directors are required to be aware that insolvent liquidation is unavoidable before the commencement of winding-up while specific dates are not mandatory, directors has the right to know the case against them.
The court also detailed factors for directors to consider in taking "every step" to minimise loss. These included keeping accounting records updated, preparing business plans, informing creditors, monitoring financial positions, obtaining professional advice, and exploring insolvency remedies. The court asserted its unrestricted jurisdiction under Section 214. Compensation aimed to recover losses caused by wrongful trading, with awards intended to bridge the gap between hypothetical and actual liquidation positions. Joint and several liability was applied in cases with multiple defendants. The court ruled against separate awards for misfeasance.
On appeal, David Foxton QC partially overturned the decision, emphasising that the court could calculate the increase in net deficiency even with missing financial information. When assessing compensation, the court will consider factors such as changes to the VAT scheme, the company's profitability, asset depreciation and the honesty of directors.
