Re Produce Marketing Consortium Ltd (No 2) [1989]

Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569, is a significant judgment in UK company law and insolvency law, particularly in relation to the wrongful trading provision of Section 214 of the Insolvency Act 1986.

Eric Peter David and Ronald William Murphy were directors of Produce Marketing Consortium Ltd (PMC), a company involved in importing lemons, grapefruit, and oranges from Cyprus. Despite initial success, PMC faced financial challenges, marked by losses in the years 1981-1983. By 1984, the company's financial situation became critical, with a reported profit of only £43 and a substantial bank overdraft of £91,000. Despite these difficulties, the directors expressed confidence that PMC could meet its liabilities. Banco Exterior SA held a secured debenture on PMC's assets, and David provided a personal guarantee for £30,000. In 1987, PMC entered creditors' voluntary liquidation owing £317,694, with a significant portion owed to a Cypriot shipping firm.

The liquidator sought contributions from David and Murphy under Section 214 of the Insolvency Act 1986, alleging wrongful trading. Knox J, in his judgment, held both directors responsible for a joint contribution of £75,000, with David liable for the initial £50,000. The court found that the directors should have realised in July 1986 that PMC had no reasonable prospect of avoiding insolvent liquidation. The intimate knowledge of the business and a substantial drop in turnover during the preceding year should have alerted them to the company's precarious financial situation.

Knox J applied Section 214(4), considering not only what the directors knew but also what they should have ascertained with reasonable diligence. The court emphasised that, after July 1986, trading was not limited to realising the fruit in cold storage. The court regarded its discretion under Section 214(1) as primarily compensatory rather than penal, focusing on the amount by which the company's assets were depleted due to the directors' conduct. Factors influencing the judgment included the directors' failure to appreciate clear signs of financial distress, the issuance of positive untruths, disregard of auditor warnings, and conduct favouring the bank over unsecured creditors. Consideration was given to the directors' guarantee to the bank and the necessity of benefiting unsecured creditors in determining the contribution amount.

In summary, the judgment held the directors liable for wrongful trading, emphasising their failure to take necessary steps and their contribution to the company's financial decline. The court exercised its discretion to order a joint contribution of £75,000, with specific allocations between the directors based on certain considerations.
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