Rubin v Gunner & Anor

For wrongful trading, the court must assess whether a reasonably diligent director, with the relevant general and personal knowledge, skill and experience, ought to have concluded that insolvent liquidation could not reasonably be avoided. A director may rely on credible assurances of future funding while that belief remains genuine and reasonable. That reliance must cease when the surrounding evidence makes continued optimism objectively unreasonable. From that point, the director must take every step reasonably required to minimise potential loss to creditors under the Insolvency Act 1986. Repeatedly failed funding promises, increasing debts, worsening accounts and the absence of reliable written commitments may establish that threshold. The court granted a wrongful-trading declaration and directed an enquiry into the contribution payable.

The applicant, the liquidator of The Rod Gunner Organisation Limited, sought relief against its former directors under the Insolvency Act 1986 for wrongful trading and misfeasance, and under the Companies Act 1985 concerning transactions involving directors. The company had traded at a loss and relied on promised funding which repeatedly failed to materialise. The central issue was when the directors knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation.

1. The application succeeded on wrongful trading. The court granted a declaration under IA s.214(1) that the Respondents were liable to contribute to RGO’s assets and directed an enquiry to establish the amount.
2. Although RGO was insolvent by April 1998, the Respondents had a genuine and reasonable belief before 15 October 1998 that Mr Stables would provide sufficient funding to avoid insolvent liquidation. They were therefore not liable for continuing to pay salaries during that earlier period.
3. By 15 October 1998 at the latest, the statutory threshold under IA s.214(2) was met. The court applied the objective standard in IA s.214(4), assessed by reference to a reasonably diligent person with both the general knowledge, skill and experience reasonably expected of a director performing those functions and the Respondents’ actual knowledge, skill and experience.
4. By that date, RGO faced intense financial pressure, substantially exceeded its assets with its debts, had suffered sharply falling turnover and increasing losses, and had received inadequate and delayed funding. The promised Letters of Credit, BIL facility, transfer of US$1 million and value from the Paraguayan bonds had not materialised. The failure to fund the Film and the lack of reliable evidence supporting the proposed flotation of G & S further undermined reliance on future funding.
5. The advice and assurances relied upon after that date did not provide a reasonable basis for concluding that liquidation would be avoided. A reasonably diligent director would have treated the proposed NASDAQ flotation and later assurances with particular caution, especially without clear written commitments or actual payment.
6. The Respondents accepted that, once IA s.214(2) was established, they could not satisfy IA s.214(3) by showing that they had taken every step reasonably required to minimise potential loss to creditors.
7. It was unnecessary to decide the allegations concerning a transfer of RGO’s business to G & S or post-February 1999 payments. The court nevertheless found that no formal transfer of the business had occurred and recorded the Respondents’ acceptance concerning the Premier card payment.