misfeasance and wrongful trading considered by Norris, J - Roberts v Frohlich & Anor [2011] EWHC 257 (Ch) (18 February 2011)

Mr Justice Norris (pictured) has handed down his judgment in Roberts v Frohlich & Anor [2011] EWHC 257 (Ch) (18 February 2011). The case concerned an application by a liquidator under two heads. First, he sought a declaration that the directors of the debtor company were guilty of misfeasance and breach of duty as directors of  the company by causing, procuring or permitting the company to commence a development when they knew or ought to have known that it was speculative, inadequately funded, and bound to fail. The second head of claim is for wrongful trading in breach of section 214 Insolvency Act 1986 ("IA 1986"). The case makes for very interesting reading. Following an exhaustive 114 paragraph exposition of the facts Norris, J held that:

"In the light of my findings on misfeasance and breach of duty I can deal with the "wrongful trading" claim relatively shortly. The requisite elements of liability are set out in s.214 Insolvency Act 1986. The question is whether (at or about 1 July 2004 or at or about 1 September 2004) Mr Frohlich or Mr Spanner knew or ought to have concluded that there was no reasonable prospect that ODL would avoid going into insolvent liquidation: and in deciding that question account is to be taken not only of what they respectively know but what they ought to have known or ascertained as reasonably diligent people discharging their respective functions and having the general knowledge skill and experience which each had: see Re Produce Marketing Consortium [1989] BCLC 520 at 550.

In my judgment each ought to have concluded at or about 1 September 2004 (certainly by (say) 14 September 2004) that there was no realistic prospect of avoiding an insolvent liquidation. By this date ODL was in fact insolvent on a balance sheet basis, as each could have established by drawing up the most rudimentary account and comparing it with the Savills valuation (even if uplifted by the certified value of the enabling works completed to date). It simply could not have met all its debts and liabilities (let alone the additional expense of a winding up). On debts immediately due for payment (and assuming that expenditure on enabling works was reflected £1 for £1 in an increase in the value of the Site) there was a significant shortfall. There were immediate liabilities of £192,000 in respect of enabling works completed by P J Brown and further contingent liabilities in respect of work done but not certified. There were contingent liabilities arising from preliminary works, the steel and other contracts placed by Castons with FCL. ODL was also insolvent on a "cash flow" basis. Existing preliminary creditors (who were expecting to be paid on the Easier takeover) would immediately demand payment. The bank was adopting a highly restrictive approach to funding. There was no hope of a fixed price or "capped" contract being offered by FCL. There was no hope of satisfying that funding condition. The Easier deal had collapsed. The attempt to interest a co-venturer collapsed. The cash flow which purported to demonstrate the viability of the project simply did not hold good on any reading in the events which had happened. With their actual skill and experience as property developers, and employing the general analytical and assessment abilities to be expected of directors participating in financial oversight and project management of a new build development, they ought to have concluded that there was no reasonable prospect of avoiding entering insolvency liquidation. Their continuation with the development after (say) 14 September 2004 constitutes wrongful trading.

What drove Mr Frohlich and Mr Spanner at this stage was wilfully blind optimism; the reckless belief that, provided they did not enquire too deeply into the figures, provided ODL did not let on to FCL that there was no funding and did not let on to HBoS that there was no fixed price contract, then something might turn up (if only because FCL and HBoS could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would "share the pain"). But the hope that "something might turn up" was on any objective view groundless and forlorn. Insolvent liquidation was all but inevitable.

I therefore find and hold that as from 14 September 2004 ODL was trading wrongfully, using credit extended to it by suppliers to trade when (but for their wilful blindness) they ought to have concluded that there was no realistic prospect of ODL avoiding insolvent liquidation."

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