Ralls Builders Ltd, Re

Under section 214 of the Insolvency Act 1986, liability depends on loss caused by the continuation of trading after the relevant date. Establishing that directors should have recognised the inevitability of insolvent liquidation does not itself make all subsequent conduct wrongful, nor does it satisfy causation. Costs incurred by liquidators in investigating, preparing and conducting a wrongful trading claim are litigation expenses and are not recoverable as a contribution under section 214. A very late amendment will be permitted only where the balance of justice under the overriding objective supports it, with a heavy burden on the applicant to explain the delay and demonstrate the strength of the new case.

The joint liquidators of Ralls Builders Limited sought a contribution from three former directors under section 214 of the Insolvency Act 1986. In the earlier judgment, [2016] EWHC 243 (Ch), the court found that the directors ought to have concluded by 31 August 2010 that insolvent liquidation could not be avoided, but found no increase in the company’s net deficiency and made no contribution order.

The remaining issues were whether the directors should contribute the liquidators’ additional costs and expenses of investigating and pursuing the wrongful trading claim, whether the claim should be amended and tried at a further hearing, and whether a disqualification order should be made.

1. Costs under section 214. The application for a contribution in respect of the liquidators’ own costs and expenses was dismissed. The general rule is that a litigant cannot recover expenses incurred in investigating and conducting litigation except through an order for costs. There was no principled basis for treating a wrongful trading claim differently from claims in tort or contract, or for creating a special rule for insolvency office-holders.
2. The reasoning in SISU Capital Fund v Tucker applied. An office-holder’s duty to bring or defend proceedings does not make conducting litigation part of the office-holder’s profession. The Nossen exception did not apply because both sides had independent expert witnesses.
3. Causation and wrongful trading. Section 214 requires more than a bare “but for” connection. Losses which would have been suffered through a formal insolvency process in any event are not attributable to continued trading. Reaching the relevant date, or failing immediately to place the company into administration or liquidation, does not by itself make the directors’ conduct wrongful. Section 214(3) confirms that directors may avoid an order by taking every subsequent step reasonably required to minimise potential loss to creditors.
4. Since the main claim produced no contribution for increased net deficiency, it would be illogical to award the liquidators the costs of unsuccessfully investigating and proving such loss.
5. Late amendment. Applying the principles stated in Quah Su-Ling v Goldman Sachs International, permission was refused. The proposed amendment was extremely late, would require substantial further disclosure, evidence and a further hearing, would waste resources and duplicate costs, and had no good explanation. The overriding objective required the legitimate expectation that the fixed trial would determine the allegations against the directors to be respected.
6. Because no contribution order was made under section 214, the jurisdiction to make a disqualification order under section 10 of the Company Directors Disqualification Act 1986 did not arise.

The judgment itself records the earlier first-instance judgment in the same proceedings, [2016] EWHC 243 (Ch), which determined the principal wrongful trading issues. This judgment determined the outstanding costs, amendment and disqualification issues.