1. Background

The recent case of Re Ralls Builders Ltd (in liquidation) [2016] EWHC 1812 (Ch) has provided clarity, but not necessarily satisfaction, for insolvency practitioners regarding the recovery of costs and expenses of wrongful trading actions.

In the case, the joint liquidators of Ralls Builders Ltd brought an action for wrongful trading under section 214 of the Insolvency Act against the former directors of the company.

In the main case, the court found that there had been wrongful trading but it did not make a declaration requiring the directors to contribute to the company's assets, as there had been no increase in the net deficiency of the company between the date by which the directors ought to have known that the company could not have avoided liquidation and the date on which the company actually went into administration.

A further hearing was ordered to consider, given the finding of wrongful trading, whether a contribution should be required in respect of the amount by which the costs and expenses of the administration and liquidation of the company had been increased during that period.

2. Decision

Ultimately, the court at the further hearing held that the costs and expenses of the administration and liquidation of the company were not recoverable from the directors. In reaching that decision, the court gave the following reasons:

• the directors could not be made to contribute to the costs and expenses when the court had found that the wrongful trading had not caused a net deficiency in the company’s assets;
• the expenses of investigating and bringing a claim are not generally recoverable as damages in other types of cases, and there was no reason to treat wrongful trading claims any differently, regardless of the fact that the ultimate benefit is to the creditors; and
• although the liquidators may be under a duty to bring or defend claims, there was no special rule enabling insolvency practitioner to recover the time spent assisting in the conduct of the litigation as costs of that litigation.

3. Comment

The decision is disappointing for creditors as it shows that the courts are unwilling to make contribution orders even where wrongful trading has been established. It is now clear that there is no strict liability and the insolvency practitioner will also have to show the decision of the directors actually lead to an increased loss for creditors. Furthermore, even where a contribution order is made, it is likely that any such contribution will be swallowed up by the liquidator's costs, leaving nothing for the creditors.

For insolvency practitioners, the decision makes it even more difficult to balance the need to maximise returns for creditors with the duty to pursue wrongful trading cases. However, it is possible that the cost of the employment of an expert third party to investigate potential claims could be recoverable as a cost of the litigation and therefore practitioners may consider appointing an expert as an alternative to assessing the claim themselves.

4. Next Steps

Morton Fraser has extensive experience of advising insolvency practitioners on issues relating to potential claims. If you would like any further information in relation to potential claims then please contact Iain Young, Nicola Ross or your usual Morton Fraser contact.