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Wrongful Trading
Technical insolvency does not trigger
unfitness within the meaning of S.6. Through temporary cashflow
crises, many companies are unable to pay their debts. Equally,
many companies can only continue to trade with the support
of their bankers. Without more, reasonable and competent businessman
would not find anything repugnant in continuing to trade in
such circumstances. Doing so would not and does not, of itself,
render a director unfit.
Technical insolvency on either
basis (ie balance sheet or cashflow) is only the beginning
of the inquiry, not the end. Were it otherwise, especially
in recessionary times, the burden on directors would be prohibitive
and, itself, against public interest. Likewise, "trading to
the detriment of creditors" is a meaningless phrase in the
context of a S.6 application. Often, evidence against a respondent
comprises many paragraphs directed at establishing insolvency
without going on to explain why or on what grounds it is alleged
the respondent was unreasonable when he caused the company
to continue to trade.
The point can be seen readily in
the following statement of Chadwick J of what constitutes
"wrongful trading" in Secretary of State for Trade Industry
-v- Taylor (1997) I WLR 407 (at 141f-h).
"The companies legislation does
not impose on directors a statutory duty to ensure that their
company does not trade while insolvent: nor does that legislation
impose an obligation to ensure that the company does not trade
at a loss. Those propositions need only be stated to be recognised
as self evident. Directors may properly take the view that
it is in the interests of the company and of its creditors,
that although insolvent, the company should continue to trade
out of its difficulties. They may properly take the view that
it is in the interests of the company and its creditors that
some loss-making trade should be accepted in anticipation
of future profitability. They are not to be criticised if
they give effect to such views, properly held. But the legislation
imposes on directors the risk that trading while insolvent
may lead to personal liability. Section 214 imposes that liability
where the directors knew or ought reasonably to have concluded
that there was no prospect that the company would avoid going
into insolvent liquidation.
If it is established in proceedings
under Section 6 of the Act of 1986, that a director has caused
a company to trade when he knew or ought to have known that
there was no reasonable prospect that the company would avoid
going into insolvent liquidation that director may well be
held unfit to be concerned in the management of a company."
In other words, for the applicant
to make out his case, he must set out why there was "no reasonable
prospect" at the time in question. The test is what a reasonably
diligent person in the position of the particular respondent
should have known or ascertained. The Court must consider
the knowledge skill and experience which someone in the respondents
position should have had and also the knowledge skill and
experience which he did have.
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