The perils of trading whilst insolvent - Paris Smith Skip to content

2nd December 2011

The perils of trading whilst insolvent


2nd December 2011

The perils of trading whilst insolvent

Case of Langreen Ltd and the benefit of the doubt

On 21 October 2011 Registrar Derrett gave judgment against the liquidator of wireless internet provider Langreen Ltd (currently unreported), finding that the company’s directors were not liable for wrongful trading despite the fact that the company had always been undercapitalised, had always traded at a loss, and had probably always been insolvent on a cashflow basis. She also found that even if they were trading insolvent, the directors had taken every step with a view to minimising the potential loss to creditors of so trading. The company had been placed into liquidation in 2006.

The case itself was very fact specific; amongst the catalysts for liquidation was the failure of the only available satellite provider. The fact that the directors’ judgement in wrongly concluding that the company could trade through its difficulties was not found culpable in this case does not therefore avail other directors in a similar position, save that it will remind those examining such cases of the dangers of assessing directors’ conduct with the benefit of too much hindsight. It all came down to the information which was known or ought to have been known by those directors at that time. However, the judgment does assist by way of a structured analysis of the law and procedural issues.

The case emphasised that in making allegations of wrongful trading, it is incumbent on the liquidator to identify the date upon which he says the company became insolvent (in the application, not just in the evidence). The Registrar also impliedly criticised a perceived approach to wrongful trading cases whereby an insolvency practitioner identifies liquidations with a suitable deficiency in them and instructs a firm of solicitors with whom they enjoy a close relationship to issue proceedings upon substantially all cases reaching a certain threshold without any real analysis or consideration of the strength of the evidence against the directors or whether the claim is legally meritorious.

This was also apparently a case in which the Liquidator had not obtained valid sanction to commence the proceedings (the application not having disclosed that certain directors being pursued were also by far the largest creditors in the liquidation), as required under the Insolvency Act, and where the benefit of the proceedings, if successful, would likely have accrued only to the Liquidator’s costs.

In summary, therefore, whilst the case may be confined to its facts, and whilst it was heard by a Registrar rather than (as is more usually the case for a substantive wrongful trading hearing) a Judge, it serves as a salutary reminder to office holders that they should be working with their solicitors to identify genuinely meritorious cases and exercising caution and open disclosure when applying for sanction to commence such proceedings. Many Liquidators do involve their solicitors in the sanction process, which is both prudent and almost always best practice, not least because the costs of those proceedings will need to be estimated at the time. For directors, the decision is a reminder that just because you may think you are a ‘silent’ director, in the sense that you take no active part in management, you should not assume that a liquidator will look on you as any less suitable a target for litigation.

For more information on wrongful trading, please contact me.

Stay up to date with our latest industry news

By completing your details and submitting, you are consenting to us sending you relevant legal updates and invitations based on the areas of interest you select. For further details please read our privacy notice.