Directors Disqualification Case Law - Hindsight principle -Re Living Images Ltd


In the many reported Company Directors Disqualification Act cases where directors have been alleged to be unfit to act as a director in future the Courts have identified a number of legal principles that directors can use in their defence. One such legal principle is known as the "hindsight principle".




The Hindsight Principle


Note, in particular, the comments in Sherbourne Associates concerning the dangers inherent in the use of hindsight. This familiar theme through-out the reported cases was summarised  by Laddie J in Re: Living Images Limited (1996) BCC 112 (at 116H):

"I should add that the Court must also be alert to the dangers of hindsight. By the time an application comes before the Court, the conduct of directors has to be judged on the basis of statements given to the official receiver, no doubt frequently under stress, and a comparatively small collection of documents selected to support the official receivers and respondents respective positions. On the basis of this the Court has to pass judgment on the way in which the directors conducted the affairs of the company over a period of days, weeks or, in this case, months. Those statements and documents are analysed in the clinical atmosphere of the courtroom. They are analysed, for example, with the benefit of knowing that the company went into liquidation. It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming. The court must be careful not to fall into the trap of being too wise after the event."

Professor Goode (Principles of Corporate Insolvency Law (1997) (2nd Edn)) summarises the position as follows:

"It is necessary to be particularly cautious in applying hindsight to cases involving personal liability, eg, for wrongful trading, or the setting aside of a preference. Business life is neither static nor certain. Information has constantly to be updated, predictions made about a range of uncertain events, snap judgements formed, rapid decisions taken and adaptations continually made in the light of shifts in customer demand, tax changes, industrial actions, political events, international relations, and the like. Just as it is all too easy for historians to pick their way leisurely across the battlefields of Waterloo identifying Napoleons errors in the confusions engendered by blazing guns, cavalry charges, mud, darkness, uncertainty as to the current arrivals or dispositions of troops and ignorance of the intentions of the enemy, so also a professional acquainted with subsequent events in a company's life is all too readily beguiled into the view that he would have done things differently, that what is now apparent was obvious from the start.

It is submitted that where the question is whether a director ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation (a question which arises in proceedings for wrongful trading under Section 214 of the Insolvency Act 1986) the directors reliance on a reasonable accounting view that if the company did go into liquidation its assets would be sufficient in value to cover its liabilities and the expenses of winding up should suffice to render him or her immune from liability, even if in the event the assets realise a much lower figure than estimated, with the result that at the time of liquidation the company in fact has an asset deficiency."

If you are pursued as an allegedly unfit director in Company Directors Disqualification Act proceedings consider if you can use the legal principle known as the "hindsight principle" in your defence.

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