Where the Burden of Proof lies in establishing a Defence to Wrongful Trading

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Posted in:Corporate and Commercial|September 4, 2015 | Join the mailing list

In the recent case Philip Anthony Brooks and Julie Elizabeth Willetts (Joint Liquidators of Robin Hood Centre Plc) v Keiron Armstrong and Ian Walker [2015] EWHC 2289 (CH), the High Court considered an application by joint liquidators for orders against
the directors of a company under section 214 of the Insolvency Act 1986 (the “IA 1986”) in relation to wrongful trading and considered where the burden of proof lies in establishing a defence under section 214(3) of the IA 1986. This case serves as a useful
reminder of the law surrounding wrongful trading and the operation of section 214 of the IA 1986.

In summary, the High Court considered a wrongful trading application against the company’s directors made by the joint liquidators of the company. Joint liquidators applied for orders against directors of a company under section 214 of the IA 1986 for contribution
by the directors to the assets of the insolvent company in respect of wrongful trading and for an order for compensation under section 212 of the IA 1986 for breach of duty. The court held that, once it had been established that a director knew or ought to
have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, the onus would be on him to establish the defence under section 214(3) of the IA 1986 that he had taken every step to minimise potential losses to the
company’s creditors. On the facts, the directors failed to demonstrate that “every step” had been taken.

Other issues that were considered relevant in determining claims under section 214 were how to assess a director’s knowledge, the relevance of company accounts, the approach to the exercise of the court’s discretion in ordering the director to pay compensation,
whether the director had taken every step with a view to minimising the potential loss to creditors so as to establish a defence under section 214(3) and the calculation of compensation. In so doing the court followed established legal principles.

The case contains a useful and detailed example of how the courts approach the elements of a wrongful trading claim, but it is noteworthy for clarifying where the burden of proof lies in establishing a defence under section 214(3) of the IA 1986. This serves
as an important reminder of how section 214 operates and, importantly, provides clarification as to who carries the burden of proof in respect of a director’s defence that he had taken every step to minimise the potential loss to the company’s creditors.

Should you have any queries regarding a corporate issue, or commercial matters generally, please contact
Stephen Foster, Partner and Head of the Corporate and Commercial Department, at
stephenf@berg.co.uk, or by telephoning 0161 829 2599.
       
The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.

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