Roberts (Liquidator of Onslow Ditchling Ltd) v Frohlich

The court considered claims by the liquidator against the two directors of a special purpose vehicle, Onslow Ditchling Ltd, for misfeasance and breach of duty and for wrongful trading under section 214 of the Insolvency Act 1986. The key legal principles applied were the directors' fiduciary duty to act bona fide in the interests of the company, the common law duty to exercise reasonable skill and care (measured by the standard in s.214(4) IA 1986), and the principle that where insolvency is (or is foreseeable) the interests of creditors must be considered. The judge found that while the defendants honestly believed in the project at acquisition and in early July 2004, by mid-September 2004 the company could not reasonably have avoided insolvent liquidation and the directors persisted in trading and incurring liabilities. The court therefore held that from about 14 September 2004 the directors were in breach of fiduciary duty and of the duty of reasonable skill and care and were trading wrongfully under s.214 IA 1986; remedies and any contributions were to be determined at a later hearing.

Background and parties

Onslow Ditchling Ltd ("ODL") was a special purpose vehicle formed to develop a former quarry into 30 industrial units. The two individual directors, Mr Frohlich and Mr Spanner, each held a £1 share and each played an executive role. ODL was funded by bank facilities from the Bank of Scotland (HBoS), a short site acquisition loan, other loans, and negotiations with Easier plc for the proposed takeover. Fitzpatrick Contractors Ltd (FCL) was to be main contractor. After disputes about the form of contract and significant uncertified liabilities, ODL went into administration and then liquidation; the liquidator (claimant) brought proceedings against the two directors.

Nature of the claim / relief sought

• The liquidator sought declarations for misfeasance and breach of duty by the directors for causing or permitting ODL to commence and continue a speculative, inadequately funded development.
• He also alleged wrongful trading contrary to section 214 Insolvency Act 1986, seeking a contribution to the company’s assets.
• The trial determined only whether liability under those two heads was established; quantification and remedies were adjourned.

Issues framed by the court

• Whether the directors breached fiduciary duties (honest belief test) or the common law duty of reasonable skill and care in causing or permitting the project to proceed.
• Whether, and from what date, the directors knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, giving rise to wrongful trading under s.214 IA 1986.
• Whether any relief under Companies Act 2006 s.1157 (misfeasance jurisdiction) should be exercised.

Court’s findings and reasoning

• The court carefully analysed project financing, the role of Castons as quantity surveyors, the contractual position with FCL and the content and legal effect of letters of intent dated May and June 2004. Contrary to the representations made to the bank and Easier plc, the documentary and oral evidence showed that FCL had been negotiating on an "open book" cost-plus basis with a target price rather than a concluded fixed-price contract required by the bank funding conditions.
• The directors authorised orders and commitments under the letter of intent (notably design and steel/cladding orders) which exposed the company to substantial liabilities without available cash or bank drawdown, and without the fixed-price contract or pre-sales required by the Development Facility.
• The judge accepted that the directors genuinely believed the project to be viable at acquisition and in the early summer of 2004 and that some risk-taking and optimism were involved. However, by mid-September 2004 the reality was that costs had risen, there were no demonstrable pre-sales, the Easier takeover had stalled, the bank required strict compliance with funding conditions and the company was insolvent or realistically bound for insolvency. Continuing to procure further work and to allow FCL to proceed without full disclosure and without halting commitments was inconsistent with acting bona fide in ODL’s interests and fell below the standard of a reasonably diligent director in these circumstances.
• The court therefore found breaches of fiduciary duty and of the duty of skill and care and concluded that wrongful trading under s.214 IA 1986 occurred from about 14 September 2004. The judge declined to grant relief under s.1157 Companies Act 2006 and left quantification of remedies and any order for contributions to a later hearing.

At first instance the court found the claim succeeded in part. The judge held that both defendants were liable for misfeasance and breach of directors' duties and that they engaged in wrongful trading under section 214 Insolvency Act 1986 from about 14 September 2004. The court relied on contemporaneous documents, the legal distinction between cost-plus and fixed-price contracting (and the bank's funding conditions), the absence of pre-sales and the collapse of the Easier transaction to conclude there was no reasonable prospect of avoiding insolvent liquidation by mid-September 2004. Remedies and quantification were adjourned for later determination.