Grant & Anor v Ralls & Ors (re Ralls Builders Ltd)

Index

This is an application by the Joint Liquidators of Ralls Builders Limited (“the Company”) for a declaration pursuant to the wrongful trading provisions of section 214 of the Insolvency Act 1986 that on or about 31 July 2010 or 31 August 2010 the Respondents (“the Directors”) knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation. The Joint Liquidators contend that instead of ceasing to trade immediately, the Directors caused the Company to continue to trade wrongfully and to incur further credit with unsecured trade creditors until it was eventually placed into administration on 13 October 2010.

The Joint Liquidators seek a declaration that the Directors are liable to make a contribution to the Company’s assets in respect of the diminution of net assets or the losses to unsecured creditors sustained during that period of continued trading. The amount claimed was originally put at in excess of £1.13 million, but was reduced by the end of the trial to a range of values between £987,725 and £600,522, depending upon the view that I might take as to the relevant date and the basis of assessment.

Summarising the case in the most general of terms, the Company, as its name suggests, operated in the construction industry. Although the Company was profitable in the years up to 31 October 2008, in the year to 31 October 2009 it made trading losses. It also suffered from wholesale disruption in the harsh winter months of January and February 2010 that closed its business, and it incurred substantial liabilities to Hampshire County Council as a result of defective wall-tie works performed by a sub-contractor. In the course of preparation of draft audited accounts for the year to 31 October 2009 it also made significant adjustments to its accounts which were attributed to non- recoverable expenditure for the benefit of a local football club which was part of the same group. By the time that the draft audited accounts for the financial year to 31 October 2009 were produced in June 2010, it was apparent that the Company was heavily balance sheet insolvent. It was also suffering severe pressure from numerous trade creditors and HMRC, whom it was failing to pay as the debts fell due.

In these circumstances, the Joint Liquidators contend that by the end of July 2010, or at the latest by the end of August 2010, the Directors ought to have realised that the Company’s losses and balance sheet deficit were sufficiently large that it had no reasonable prospect of avoiding insolvent liquidation and ought to have ceased trading. They allege that the Company’s financial records were inadequate such that the Directors could not reliably monitor the effect upon creditors of continuing to trade, with the result that losses were caused to creditors. In particular, the Joint Liquidators contend that the consequence of the Company carrying on business was that the secured debt to the Company’s bank was eliminated as a result of receipts from completion of contracts, but that new unsecured credit was incurred to trade creditors, many of whom were never paid.

The Directors deny that at any time until they made a decision to put the Company into administration in late September 2010 they either knew or ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation. They contend that throughout the relevant period from the end of July 2010 they were taking steps which had a reasonable prospect of rescuing the Company and avoiding an insolvent liquidation. The most important of these steps was their attempt to persuade a seemingly wealthy third party (a Mr. George James) to acquire a total of 25% of the Company’s parent company by way of acquisition of shares from the Directors for £1.5 million and the subscription of a further £1 million for new shares. They say that they intended that this £1 million would be injected by the parent into the Company to restore its balance sheet and enable it to pay pressing creditors. The Directors contend that they took the view that continued trading during the summer months would be profitable, that it would enable the completion of contracts and maximise recoveries from customers, and hence that it would not worsen the position of creditors overall whilst they attempted to finalise a deal with Mr. James.

Although the Company’s bank was content not to call in the Company’s overdraft and it is accepted that it benefitted from the elimination of the overdraft from monies collected during August 2010 and September 2010, the Directors point out that the bank was secured, and that they had not given guarantees to the bank and hence derived no personal benefit from this course. The Directors also contend that they received an assurance that it was reasonable for them to continue to trade, or at any rate that they were never told that it was inappropriate for them to do so by Mr. James Tickell, who they had first consulted for advice concerning the Company’s position in late July 2010 and who was then appointed as one of the Joint Administrators in October 2010.

The Joint Liquidators respond that the Directors had made no reasonable enquiries to ascertain whether Mr. James had the money to invest in the group, and that it in fact appeared that he was dependent upon selling his own property to obtain the necessary funding. They contend that by the end of July 2010 or August 2010 it ought to have been apparent to the Directors that they could not rely upon Mr. James to make the necessary investment in a timely fashion or at all. They also deny that any assurance or advice was given by Mr. Tickell at any relevant time that continuing to trade would be legitimate.

The Company was incorporated in July 1997. It had a paid up share capital of £150 and operated from premises known as Ralls House in Denmead, Hampshire. At the relevant times the core of the Company’s business was as a framework contractor for local authorities and other public sector clients.

The three Respondents were the only directors of the Company. They had all started work in the building industry many years earlier. As between them, William Ralls’ primary role was to manage the contracts; Nicholas Ralls’ main role was sales and strategy including introducing new clients; and Gary Hailstones’ main role was supervising the day-to-day running of the Company’s business.

The Company was a wholly-owned subsidiary of Dylex Limited (“Dylex”), which was owned in equal shares by the Directors and owned a small portfolio of shares in other companies and real properties. Among the companies in which Dylex had an interest were Fareham Football Club Limited, (“Fareham FC” - an 85% shareholding), Comserv (UK) Limited (“Comserv” – a 50% shareholding) and Multi Trade Supplies Limited (“Multi Trade” – also a 50% shareholding).

The Company had an overdraft facility with Bank of Scotland (“the Bank”), secured by a standard form fixed and floating charge dated 4 May 2003 which included what purported to be a fixed charge over present and future book debts. The Directors had not given any personal guarantees for the overdraft. The agreed overdraft limit varied over time: it was £1.2m in 2005, reduced to £1m in 2006, reduced further to £500,000 in 2007 and increased to £600,000 in 2008. The overdraft was reviewed annually and fell due for review on 2 August 2010.

The Company had a permanent staff of 23, but most of the work was sub- contracted and overseen by site managers or contracts managers. Apart from the three Directors, the Company’s management team included Paul Kelly and Paul Corfield. Mr Kelly ran the office and liaised with contract managers to ensure that information relating to the Company’s contracts in its contract files and on a “white board” in the Company’s offices was up-to-date. Mr Corfield supervised the input of accounting data into the Company’s SAGE accounting system.

Samantha Warman was a certified bookkeeper who provided part-time accounting and administrative services to the Company and the other companies in the Dylex group through her own company, Benchmark Accounting Limited. Among Mrs Warman’s tasks in relation to the Company was the preparation of management accounts and financial forecasts for the Directors using the information on the SAGE system together with additional information from the Directors, the contracts managers and the white board. Mrs. Warman also dealt with VAT and occasionally with PAYE and other tax matters.

The Company’s statutory accounts were based upon trial balances prepared by Mrs. Warman and forwarded to Geoffrey N. Barnes from the eponymous firm of Chartered Accountants in Portsmouth who was engaged as the Company’s auditor to perform the statutory audit.

As I shall relate in more detail, the Directors consulted Mr. Tickell towards the end of July 2010 in his capacity as a director of Portland Business & Financial Solutions Limited (“Portland”). When the company went into administration on 13 October 2010, it was Mr. Tickell who was appointed Joint Administrator together with one of his colleagues at Portland.

Thereafter, when it was appreciated that there might be claims against the Directors arising out of their conduct in the period leading up to administration during which Mr. Tickell was involved, Stephen Grant, a partner in the forensic accounting and insolvency department of the firm of accountants (Wilkins Kennedy) who were the auditors to one of the Company’s largest trade creditors (Wessex Windows) was approached to conduct a review of whether further investigations and/or claims against the Directors were warranted.

When the Company moved from administration into liquidation in January 2011, Mr. Tickell and Mr. Grant were appointed Joint Liquidators.

Before turning to a narrative of the facts, I should say a little about the evidence and the witnesses.

I regret to say that a good deal of the written and oral evidence on both sides was tainted by a desire of the witnesses to argue the case for one side and to shape their evidence accordingly. This tendency was accentuated by an obvious hostility between the Directors on the one hand and the Joint Liquidators on the other, which had either spread to, or originated from, a manifest antipathy between solicitors and counsel. The unfortunate result was that the parties and their advisers tended to expend a good deal of effort engaging in argumentative skirmishes, often on peripheral factual matters going largely to credit, with the result that much of the live evidence and cross-examination generated far more heat than light.

It was also most unfortunate that, through no fault of his own, I was unable to hear evidence from Mr. Tickell. Only a very few days before the commencement of the trial Mr. Tickell was diagnosed with cancer which necessitated the commencement of an immediate course of intensive chemotherapy and treatment. This made his attendance at the trial impossible and I was told that Mr. Tickell’s treatment was scheduled to last for at least a year. The Joint Liquidators applied for an adjournment of the trial until September or October, which I refused on the grounds that it was uncertain when, if at all, Mr. Tickell would be fit to give evidence; that the advice which he had given to the Directors in meetings was reflected in very detailed letters which he had written at the time and which were accepted as an accurate record of what had been discussed; that Mr. Tickell’s assistant at the time, Adam Price, was available to give evidence in any event; and that since the case concerned events occurring some 5 years’ earlier and was ready to proceed, it would be unfair to the Directors for the preparation of the case to be wasted and for the case to be hanging over them for a further, possibly indefinite, period.

I would make the following specific observations about the witnesses.

Mr. Grant As the Joint Liquidator who had been brought in to investigate the Directors’ conduct after the event, Mr. Grant’s evidence was not directed at his recollection of contemporaneous events. His evidence was avowedly designed to set out the Joint Liquidators’ case against the Directors and he set out his commentary and opinions on what he saw as the insolvency of the Company, the inadequacy of its accounting records, the implausibility of an investment from Mr. James, and the increase in the Company’s net deficiency from continued trading.

Mr. Grant was roundly attacked from the outset by Mr. Boardman in cross- examination for an alleged lack of impartiality arising from his firm’s connection with Wessex Windows and his firm’s interest in being paid his fees in the insolvency. This continued into the closing submissions in which Mr. Grant was accused of being “self-serving, selective, argumentative, opportunistic, unfair and misleading”.

I reject those accusations against Mr. Grant, and I was not assisted by Mr. Boardman’s efforts to play the man rather than the ball. I thought that Mr. Grant explained his views carefully and with appropriate moderation, and to the extent that he was an advocate for a particular conclusion to be drawn from the documents to which he spoke, I accept that he honestly held the view for which he was contending. Whether I accept that view is, of course, entirely another matter.

Mr. Tickell Had Mr. Tickell given evidence, he would doubtless have been subjected to a similar attack as Mr. Grant. As it was, I was invited by Mr. Boardman to reject his written evidence and to give it little or no weight on the basis that he “has a financial and reputational interest in the outcome of the case … a clear motive to conceal the truth and to make a witness statement [to] advance his own cause”. I reject that very generalised attack on Mr. Tickell’s probity, and I note that much of his evidence was entirely consistent with the very detailed letters of advice which he gave at the time.

Mr. Price As I have indicated, Mr. Price was Mr. Tickell’s assistant. He no longer works for Portland and had not been involved in the build-up to the case, but was summoned at short notice when Mr. Tickell was unable to attend the trial. Mr. Price was a manifestly truthful and reliable witness who gave his evidence carefully.

Michael Dyer Mr. Dyer is a solicitor who was consulted by the Directors in September 2010 for assistance to document the proposed transaction with Mr. James. He gave evidence for the Directors, but was interposed in the running order because of a family difficulty. Mr. Dyer was a precise and clear witness, whose evidence I entirely accept.

Steve Godwin Mr. Godwin was and is a fellow director with Mr. Tickell at Portland. He attended an important meeting with the Directors on 2 August 2010 so as to be able to stand in for Mr. Tickell whilst the latter was on holiday. Otherwise he had little involvement with the Company. Mr. Godwin gave his evidence clearly, carefully and neutrally, and I accept it.

Mr. Hailstones Mr. Hailstones gave the fullest witness statement of the Directors and was advanced as their main witness. That responsibility probably contributed significantly to the manner in which he gave his evidence. In my judgment Mr. Hailstones was well aware throughout cross- examination of the implications of what he was being asked and what he was saying, but when it suited him he sought to pretend otherwise. This led to him being at times defensive and evasive, to suggesting that he was not good with details or numbers and that he would have been largely reliant on the other Directors or Mrs. Warman, or indicating that he did not follow the questions he was being asked. On occasions, he gave answers that I think were simply untruthful.

All of these features were evident, for example, when Mr. Hailstones was cross-examined about the questionnaire he had signed after the Company had gone into administration to provide information to the administrators in accordance with the Insolvency Act and the Company Directors’ Disqualification Act 1986. That document contained some obviously inaccurate answers, including some dealing with when the Directors first became aware that the Company was unable to pay its debts when they became due, and whether the business had been continued and debts incurred after that time.

At first, Mr. Hailstones denied that he recognised the handwriting on the questionnaire at all and suggested that it had been filled in by someone else and placed in front of him to sign. He later was forced to accept that it looked like Mrs. Warman’s handwriting, but he still sought to distance himself from its contents by saying that he assumed that Mrs. Warman had been asked to fill it in because she had been working for the Joint Administrators at the time, and he repeatedly suggested that he had signed the document without really reading or understanding it. In fact, when Mrs. Warman came to give evidence, it transpired that whilst she had filled out the forms, she had done so whilst she sat with the Directors and discussed it with them, and she revealed that the Directors had taken legal advice from their solicitors as to how to complete the form before they signed it.

I am by no means saying that I disbelieved all of Mr. Hailstones’ evidence, but I do not think that he told me the unvarnished truth, and as a result I have taken care to check his account against the contemporaneous documents and to seek confirmation of his evidence from other witnesses.

William Ralls William Ralls was a more straightforward witness than Mr. Hailstones, though again I think he was very well aware of the need to toe the Directors’ party line in certain areas and of the potential implications of the answers that he was giving. That led to some answers that were rather assertive and glib, but for the most part I think he attempted to give straightforward and truthful evidence.

Nicholas Ralls Although Nicholas Ralls acknowledged that all decisions were made by the Directors together and they shared responsibility for the Company, he described himself as the “frontman” for the business and claimed that he relied substantially on his brother, Mr. Hailstones and Mrs. Warman in relation to detailed financial matters. In spite of this, Nicholas Ralls was the main point of contact with Mr. James and appears to have had the main responsibility for pursuing an investment from him during the crucial period in the summer of 2010.

Nicholas Ralls was only cross-examined for a limited time, in part because of the time that had been spent on earlier witnesses. This limited cross- examination was not very productive, because Nicholas Ralls was an assertive and combative witness who had a clear vision in his own head of what he wanted to say and was determined to say it, often irrespective of the questions he was asked and in spite of requests that he should stick to the point. Mr. Ralls also seemed intent on seizing the initiative and disrupting the flow of cross-examination by a variety of means. He variously challenged the question, asked more questions back, or simply launched into lengthy speeches which were off the point or evasive. Many of his speeches and some of his shorter answers included the repeated assurance, “To be honest with you”.

I shall return to Nicholas Ralls’ evidence about his dealings with Mr. James in more detail below, but in general terms I should say that I did not find him a remotely convincing or helpful witness.

Paul Kelly Mr. Kelly was employed by the Company and had responsibility for office management and liaison with the contract managers. He gave evidence as to the work done by the Company and relations with creditors during the relevant periods. He also attended a meeting with Mr. James in July 2010 with Nicholas Ralls. Mr. Kelly was a straightforward and truthful witness whose evidence I accept.

Mrs. Warman Mrs. Warman was an important witness to many of the relevant events in this case, and had provided her services to the Dylex group for some time. The Directors liked and trusted her and she was obviously close to them. I perceived Mrs. Warman to be a naturally helpful person who took her responsibilities at the Company seriously and was prepared to speak plainly at the time when she thought that was required. One obvious example of that was an email of 16 June 2010 to the Directors warning them of the “extreme pressure” on cashflow.

I thought that in cross-examination, Mrs. Warman was occasionally, but understandably, a little defensive when her own performance and her good faith was questioned. Notwithstanding this, and her connection to the Directors, I thought that Mrs. Warman generally gave her evidence to the court in a candid and helpful manner, irrespective of whether it might help or hinder the Directors’ case. That was particularly apparent with her evidence as to the way in which the Directors’ questionnaires had been completed. Suggestions were made to Mrs. Warman that she had wrongly deleted emails on her personal computer contrary to instructions from Mr. Tickell, and that she had been involved in drawing up over-optimistic management accounts in an attempt to conceal the state of the Company’s finances from the Bank. I do not find those allegations proven and I accept Mrs. Warman’s explanations in that respect, as indeed I accept the truthfulness of the remainder of her evidence.

Mr. Barnes Mr. Barnes was not cross-examined for any significant length of time. I thought that he was a straightforward and honest witness, though one who was generally sympathetic to the Directors.

The experts Mr. Christopher Lowry and Mr. Antony Fanshawe were the expert witnesses for the Joint Liquidators and the Directors respectively. Both were experienced accountants, but neither produced reports that were at all easy to follow; both sets of reports contained errors and required corrections; and neither was entirely satisfactory as an expert witness.

Mr. Lowry Mr. Lowry’s written reports went beyond the proper scope of an expert witness. He offered a variety of views in those reports, including, in his first report, his views as to whether the Directors’ decision to continue trading was justified by the prospects for trading and for obtaining investment from Mr. James. It also became apparent during his cross-examination that Mr. Lowry had relied to a significant extent upon materials produced for him by the Joint Liquidators without seeking to perform his own verification of the numbers, including in particular the figures which the Joint Liquidators indicated they had taken from the purchase ledger of the Company. That said, I thought that in giving his evidence, Mr. Lowry was balanced and prepared to accept points where appropriate – including that his original reports had strayed into areas beyond his remit.

Mr. Fanshawe Mr. Fanshawe was to some extent the opposite. His written reports were properly limited to matters within his expertise, and he had obviously conducted research and inquiries for himself throughout. But in giving his evidence I thought that Mr. Fanshawe was unduly argumentative – a feature that tended to obscure the points he was making – and tended to slip into giving evidence of factual matters that he had discovered during his investigations and discussions with the Directors and/or Mrs. Warman.

The net result is that overall I found the expert evidence very much less helpful in this case than it should have been. That was regrettable given the obvious importance of accuracy and clarity in such matters in a case of this type.

Having briefly addressed the witnesses, I shall next set out the chronology of events which I find to be established on the documentation and the evidence which I received.

The last audited accounts of the Company prior to its demise were the accounts for the year ending 31 October 2008 which were signed by the auditors on 21 August 2009. They showed that the Company made a profit after tax of £202,792 on a turnover of about £9.2 million. It had net assets of £365,376.

In January – February 2010 bad weather closed all of the Company’s sites for 4-5 weeks. It was also in early 2010 that the Company discovered that a sub- contractor had failed to properly carry out work for Hampshire CC installing wall ties. The Company agreed to undertake the remedial work, which eventually cost the Company around £200,000.

The Directors were introduced to Mr. James in early 2010. They thought he was a wealthy businessman who was interested in acquiring an interest in the Dylex group and providing finance for its activities.

Mrs. Warman had ceased to provide her services to the Dylex group from October 2009 whilst she had a baby. She returned in March 2010, and one of her first tasks was to produce a profit forecast for the Company’s secured contracts for the year from the beginning of November 2009 to the end of October 2010. She emailed this to Mr. Hailstones on 10 March 2010. It showed the Company making losses until the end of February 2010, then making monthly profits until July, and ending the year to 31 October 2010 with a net profit of about £88,000.

On 12 March 2010 the Company received a demand from HMRC dated 12 March 2010 in the sum of £102,295.76 relating to VAT due in respect of the quarters ending 31 October 2009 and 31 January 2010. At about the end of March or the beginning of April, William Ralls spoke to HMRC and explained that the Company had a private investor who was due to invest in the Company “within the next 4-6 weeks”. In cross-examination, William Ralls described that timetable as “hopeful conjecture” on his part. At the suggestion of Mr. James, Mrs. Warman contacted Leonard Curtis (which is a firm which specialises in restructuring and insolvency) on 7 April 2010 to assist the Company to review its financial affairs and to deal with HMRC in relation to the VAT demand. William Ralls signed a form giving Leonard Curtis authority to talk to HMRC and following a conversation between HMRC and Leonard Curtis on or about 9 April 2010, HMRC agreed to defer any action for 21 days pending payment proposals.

On or about 12 April 2010, Leonard Curtis informed Mrs Warman that their fees for preparing a time-to-pay proposal would be £3,000–£5,000. William Ralls gave evidence that the Directors did not want to pay £5,000 to Leonard Curtis to deal with HMRC when it was something they thought they could do themselves. Leonard Curtis were therefore not engaged by the Company. It is unclear precisely how HMRC were persuaded not to issue proceedings thereafter, but I think that the likelihood is that the Company made payments of current quarters on time, and cleared its arrears in stages. When it went into administration, the VAT arrears from the quarter ended 31 October 2009 had been paid, but part of the arrears for the quarter ended 31 January 2010 remained unpaid.

On 9 April 2010 Mrs. Warman sent a package of financial information concerning the Company and the Dylex group to Mr. James. The information included a list of the Company’s key clients and framework agreements, the 2008 audited accounts and a forecast for the Company’s projects for the year to 31 October 2010. Mrs. Warman summarised the forecast to October 2010 as showing that on the orders that the Company had secured it would make a loss of £1,487 on forecast turnover of £6,877,958, but that having covered its anticipated overheads, she expected that the Company would “easily” secure a further £2 million of work which she predicted would generate about £240,000 at a 12% gross profit margin.

A few days later, on 12 April 2010, Mrs. Warman sent the draft trial balances for the Company for the year ending 31 October 2009 to the auditors to assist them in the preparation of the 2009 audited accounts. Mrs. Warman subsequently sent some adjustments through to the auditors in April and May.

During the remainder of April and May 2010 the Directors obtained a valuation of Dylex’s 50% interest in MTS (£332,500) which was forwarded to Mr. James, and they investigated a proposal for refinancing Dylex’s property portfolio, including the sale of Ralls House to the Directors’ pension fund. This was a proposal which Mrs. Warman indicated in an email of 8 April 2010 would have the benefit of “Protecting the asset Ralls House from the trading activities of the group”.

During May and June 2010, a number of creditors threatened to take legal advice or commence proceedings in relation to outstanding debts owed by the Company. As creditor pressure mounted, Mrs. Warman sent an email to the Directors on 16 June 2010 warning them of the problems. That email stated (emphasis added),

“Nick as discussed on the telephone I came in today and talking to accounts department I am concerned that cashflow is under extreme pressure now.

I know you say investment is imminent, but can they at least put in some advance monies (£500k at least but as an absolute minimum £300k) which would enable wages to be paid and to pay HMRC for PAYE to stop the issue of a distraint notice, which they have previously warned they would carry out.

Several people are now at the point of taking court action against the company and I understand you are having issues with contractors pulling off sites and being unable to get people to sites and materials which will affect productivity and deepen the cashflow problem.

I think you also need to be getting advice on your position asapfrom a solicitor and Geoff Barnes as I believe you are possiblyin breach of the bank overdraft requirement and are possiblytrading insolvently and as directors you need to be taking thecorrect course of action if you are.

It maybe worth also seeing if there [are] any funds out of Comserv/MT to assist. I am out at Comserv tomorrow and I will ask if there is any scope for this.”

Mrs Warman’s evidence was that in the days following this email, the possibility of obtaining funds from Comserv or MTS was explored, but those companies were not in a financial position to assist by paying any dividends.

Further substantial invoices, letters of demand and notification of intention to take legal action continued to come in from a variety of creditors during the remainder of June and into the first week of July.

Between 8 and 11 June 2010 two representatives from the auditors attended the Company’s offices to start the audit process. It was not completed, however, first because Mrs. Warman was still carrying out further work to produce adjustments to the trial balances, and secondly because the Bank had not produced a letter confirming that it would renew the Company’s overdraft facilities for a year from the date of the accounts, so that it would not have been possible for the auditors to certify the accounts on a going concern basis.

On 1 July 2010 Mrs. Warman sent some further very significant adjustments to the Company’s auditors in respect of the trial balances for the 2009 accounts. These included over £1 million of write-offs in respect of work done at Fareham FC (£600,000) and a write-off of a loan account debt owing to the Company from Fareham FC of £286,715.04 (which Mrs. Warman suggested should be treated as “sponsorship”). It would seem that these balances had been permitted to build up over a number of years and had been included in the audited accounts for the Company without question. However, when Mrs. Warman asked the directors about the recoverability of the monies from Fareham FC she was told that the monies would not be recovered.

There was also a write-off in respect of a management charge of £100,000 to Dylex, and the provision of a reserve of £100,000 in respect of the remedial works required to the wall-ties for Hampshire CC. Mrs. Warman’s email to the auditors concluded,

“I think this will take us to just under £1 million of losses for 08/09.

There is a further £300k worth of losses in 09/10 but these losses were incurred November 09 – May 10 so I will show this in the management accounts for this year plus also I will establish YTD to June 10 and then put together a proposal going forward on a reduced overhead.

Please can you send me a pdf of the revised 09 accounts as soon as possible.”

When the revised draft accounts to 31 October 2009 (including these large adjustments) were produced by the auditors, they showed that the Company had made a loss after tax for the year of £948,222 and that the £365,376 of net assets shown in the 2008 accounts had been eliminated so as to result in a net deficit on its balance sheet of £582,846. The experts agreed that although not audited, these draft accounts were the most reliable accounts produced for the Company for any relevant period.

As the Company’s overdraft with the Bank was due for review in early August 2010, the Directors had arranged a meeting with their new relationship manager at the Bank, Mr. Ian Townsend, for 5 July 2010. Before that meeting, on 1 July 2010 Mr. Hailstones contacted a solicitor, Mr. Graeme Quar for advice. He provided Mr. Quar with a copy of the 2009 Bank facility letter and sought his advice about it. Mr. Hailstones and Mr. Quar had a short telephone call on 5 July 2010 before the meeting with the Bank. Mr. Quar’s telephone attendance note records that he told Mr. Hailstones that there was no mention of the Directors having given any personal guarantees to the Bank.

Mr. Quar also explained to Mr. Hailstones a number of insolvency measures such as a company voluntary arrangement and the ability of the Bank to appoint an administrative receiver. The note also records that Mr. Quar could arrange a meeting with Portland, which he identified as a firm of insolvency practitioners. Although Mr. Hailstones denied that Mr. Quar had mentioned Portland on the call with him, on the basis of Mr. Quar’s note I find that it is likely that Portland was mentioned.

The meeting between the Directors (and Mrs. Warman) and the Bank took place on 5 July 2010 at the Company’s premises. It is unclear precisely what financial information Mr. Townsend was shown at that meeting, but his recollection was that he saw some draft accounts for the year ending October 2009 showing a net balance sheet deficit, and that they were substantially worse than the management accounts which the Company had previously provided to the Bank. Certainly it would seem that the Bank appreciated (and Mrs. Warman’s evidence was that Mr. Townsend was told) that the Company had breached the financial covenant in its facility with the Bank that required it to maintain a net worth of £300,000 as measured against its annual accounts.

This led to the Bank sending a letter to the Directors on 9 July 2010 enclosing draft security documentation in the form of cross-guarantees for the Company’s debts from Dylex, Fareham FC and two other group companies. The letter recommended that the proposed guarantor companies take legal advice.

A further meeting took place between the Directors (Mr. Hailstones and William Ralls), Mrs. Warman and Mr. Townsend on 20 July 2010. At that meeting, the Directors sought an increase in the overdraft facility of £300,000 from £600,000 to £900,000. It would seem that Mr. Townsend did not dismiss this out of hand, but indicated that he would have to refer it to his head office and said that some form of additional security would have to be offered before he could support the request. It also appears that the Directors told Mr. Townsend of the potential investment from Mr. James at this meeting.

Following the meeting, Mr. Townsend sent an email to Mr. Hailstones, Mrs Warman and Nicholas Ralls. It summarised what Mr. Townsend had been told,

“1.

You will look to obtain a letter of intent from the investor/a share agreement as well as obtaining timescales from your advisors to set expectation on the side of the investor.

2.

You are intending to sell 25% of the shares in Dylex Ltd for £2.5m to Mr. George James within two weeks or before 2nd August.

These funds will on day one be utilised to repay the overdraft with [the Bank] in the name of Ralls Builders Ltd and to clear VAT and PAYE payments and bring these up to date.

Funds will also be used to pull the balance sheet to a positive £250k position whilst clearing any pressing creditors.

3.

If the above does not take place by 2nd August, signed security documents held by your solicitor to your order (Graham Quar of Graham Quar Solicitors) will be released and then formally charged by the Bank.

4.

We would look to take corporate guarantees from Fareham Football Club Ltd & Dylex Ltd as well as a debenture from Fareham Football Club Ltd to further secure our current security position.

5.

We would then look to review the requirements of the ongoing business at the current levels.

Please forward my details to your solicitor (details below) as I would like to have confirmation that these documents sit with him as soon as possible. This will enable me to submit a report requesting an extension to the overdraft until the end of August pending a further report following the outcome of the above whilst the new security is progressed. Obviously if the overdraft is cleared the need for new security goes away but I think that it is prudent to move forward on the basis that the investment is delayed / does not materialise.

Please can you also confirm that this is your understanding and that you will be arranging the above with your solicitors.”

There was no dispute that this was an accurate summary of the discussion, and Mr. Hailstones forwarded this email without comment to Mr. Quar on 22 July 2010.

After the meeting with the Bank, on 21 July 2010 Mr Hailstones also called Mr Barnes to report. Mr Barnes’ attendance note records as follows:

“21.7.10

Dylex

Gary Hailstones called 11.15am

Bank will not extend facility to more than £660k O/D.

No personal guarantees are required but group cross-debentures are required.

Nick Ralls business plan is not something Gary has confidence in.

Good contracts and profits for the future but G.H. thinks they need a financial planner/director.

Nick’s external investor is not looking positive. Phone > Mr Tickell

Later today say 14:30.”

Mr. Barnes spoke to Mr. Tickell at Portland later on 21 July 2010 and a meeting was urgently arranged at Mr. Barnes’ offices which was also attended by the Directors and Mrs. Warman. Mr. Barnes provided Mr. Tickell with the draft annual accounts to 31 October 2009 that showed the loss after tax of £948,222 and an accumulated net deficit of £582,846. The Directors explained that the Company was experiencing severe creditor pressure and cashflow difficulties and that the Bank had sought additional security for its overdraft.

After the meeting, Mr. Tickell sent a detailed and lengthy letter to the Directors on 22 July 2010. That letter included the following points,

“Follow up notes f rom the meetin g yest erday

It was good to meet you all today at Geoffrey Barnes yesterday. I am sorry to hear about the difficulties and I hope we can help you see a way through. I promised to send this note to summarise the points we discussed and how I suggest you might move forward from here.

…..

I hope that you found our initial discussion useful. It’s difficult though to give more than superficial advice about how to move forward without firstly making a detailed assessment of the current financial position and secondly preparing a detailed financial plan to show how the company will work its way through, including assessing how much tolerance you will need from creditors. Typically the approaches adopted in these situations, in order of attractiveness, tend to be as follows…

1.

Borrowing further against business and personal shareholder assets where this is feasible but recognising that shareholders are taking a risk in advancing further funds.

2.

Informally reaching extended payment terms with non-lender creditors, most obviously HMRC…

3.

Putting the deferred repayment plan with creditors into a formal company voluntary arrangement (CVA)…

4.

Hiving the live contracts out to another solvent company controlled by the same management…

I mentioned that there are several available insolvency procedures - receivership, administration, liquidation and CVA but I wouldn’t get too hung up on these. Think of them as tools and they can all do much the same job. Essentially, there are two approaches. Firstly, to stick with the existing company and reach accommodation with creditors, formally or informally, or secondly wind up the existing company and find a safe home for what is worth saving.

The bank is in a unique position because of its debenture, which gives it a charge over all the assets. It is entitled to be paid first from any realisation of assets. It is entitled to receive prior notice of your taking any decisions to implement an insolvency….

On the specific point of whether to grant the bank cross company guarantees, my immediate reaction is to defer that decision at least until your overall plan is clearer….

Of course, if you don’t agree to the guarantees, you are at risk of the bank taking away the facility or reducing it when receipts come in and lower the borrowing. Whether this happens is down to negotiation and the bank will be mindful that if it pulls too hard, it might trigger a collapse that will crystallise a loss because the existing debts do not cover the lending….

In terms of your responsibility as directors in this situation, the principal onus is to avoid wrongful trading. This offence occurs when directors do not take every step to minimise the potential loss for creditors after a point when they should reasonably have known the company could not avoid insolvent liquidation. If a liquidator can establish at court that wrongful trading occurred, then this can result in personal liability for the directors to make good the avoidable losses. It can also lead to disqualification from acting as directors of other companies for a period. To reassure you, these outcomes are not common, given the practical difficulties (such as disproportionate professional costs) in establishing a case. However, it can be expensive and stressful just to defend criticism, so it is best not to get in the firing line in the first place, and you would presumably wish to avoid damage to your reputation in the industry.

It’s not clear to me whether you have yet reached the point where you should know the company cannot avoid insolvent liquidation. It is important that you satisfy yourselves on this point by preparing a projection that shows how you can pay your way with creditor support so they will not be forcing you into liquidation. Of course the situation could change at short notice if a creditor changes his mind about supporting.

What “minimise the loss” means in practice can depend on the circumstances but normally includes:-

Only continuing to trade if i) it is generating a profit or, ii) losses are made then shareholders are making good those losses, or iii) contracts are being completed which ensures a larger pot of funds is available than on an immediate closure.

…

The key step to defend yourselves as directors is to have a documented plan including projections, which show how the company can continue. Then you should monitor that plan closely and be prepared to act early if there are adverse deviations….

In terms of a way forward, I suggested spending a day or so with you to help you prepare a detailed assessment of the financial position and projecting the future prospects. The intention would be to assess which of the approaches outlined above is best and, if the answer is to reach an accommodation with creditors, to assess what support is required. It’s possible that these creditors, in particular the bank and probably HMRC, would require to see a plan so they can see for themselves whether to agree to support. At the same time, you can make a more informed decision about whether to agree to cross guarantees or whether there are better ways of structuring the borrowing.

…

We can, and should, start this work straight away. It would be helpful though if [Mrs. Warman] could pull together some basic financial information before we arrive. This is listed on the attached e-mail.”

The Directors and Mr. Barnes accept that this letter is an accurate reflection of the discussion that took place at the meeting on 21 July 2010, save that Mr. Hailstones maintains that he also discussed Mr. James’ potential investment in the Company. Mr. Tickell’s evidence was that Mr. James was not mentioned, and he is not referred to in the letter of 22 July 2010 or in the list of information sought from Mrs. Warman by Mr. Tickell’s assistant, Mr. Adam Price, on 22 July. Nor did Mrs. Warman or Mr. Barnes’ evidence suggest that Mr. James was mentioned at the first meeting. It seems to me very unlikely that Mr. James was mentioned. The possibility of external investment would have been so significant to Mr. Tickell’s analysis of the Company’s position and the options open to the Directors that if an investment from Mr. James had been mentioned in any material way, I cannot believe Mr. Tickell would entirely have omitted to refer to that when setting out the options for the Directors in his letter of 22 July 2010.

On Thursday 22 July 2010 Mr. Price sent Mrs. Warman a list of basic financial information that Portland wished to see before the next meeting. On the following Monday, 26 July, Mrs. Warman indicated that she would go into the Company’s premises on Wednesday 28 July to collect the information before the next meeting that was scheduled for Thursday 29 July 2010.

Also on 22 July Mr. Hailstones and William Ralls met Mr Quar. Mr. Quar’s attendance note of that meeting records that he was told that the Company had “Trading issues” and that it was “Still trading. Making profits. Paying debts as and when fall due.” Mr. Quar’s note also recorded that Mr. Quar was told that the Company was cutting overheads and had a “Decent turnover [in the] next 3-4 months”. After a rough calculation as to the value of the book debts covered by the Bank’s debenture, Mr. Quar’s note continued:

“7.

Forward plan only works if [the Bank] continues with £600,000 and creditors agree deferred terms – enter James Tickell.

8.

Directors not keen to give personal guarantees.

9.

Do not know what [the Bank] would do when OD in place and personal guarantees in place.

10.

If creditors do not assist forward plan will not work.

11.

Third party investor - not moving forward…much [The Bank] aware.

12.

[The Bank] says execute personal guarantees, hold to [Graeme Quar & Co.] until 2 August 2010. If no investor then release guarantees…

14.

No personal guarantees. 4 company guarantees.”

Mr. Quar’s note then records him giving some advice about the procedure for the execution of company guarantees. At that meeting William Ralls signed the cross-guarantees in the form provided by the Bank, purporting to do so on behalf of Dylex, Fareham FC and the two other Dylex group companies. He also signed certificates purporting to verify that the relevant board resolutions had been passed authorising him to sign for each company. No resolutions had in fact been passed by the companies, and on the day after the meeting Mr. Quar sent an email to Mr. Hailstones and William Ralls in which he explained that he had done some further research and had drafted a letter to go to the Bank to explain that the guarantees had been signed but would not be dated or delivered as deeds until after appropriate board resolutions had been passed. Mr. Quar also indicated that he would prefer Mr. Hailstones and William Ralls not to tell the Bank that certificates verifying the passing of board resolutions had also been signed: he said his preference was that the certificates be destroyed.

On 26 July 2010 Mr. Hailstones had a brief further discussion by telephone and later that morning Mr. Hailstones authorised Mr. Quar to send a revised letter to the Bank confirming that he held executed guarantees and debentures but that the same could not be delivered and dated until after each company had passed the necessary resolutions to confirm the authority of the relevant director to sign the documents.

The directors were closely cross-examined over these matters, and a suggestion was made that these documents were prepared in an attempt to mislead the Bank as to the willingness of the other group companies to provide cross-guarantees. I do not think that this allegation was made out. The execution of the draft documents and the subsequent decision not to reveal the execution of the board certificates was certainly irregular given that no decision had been taken as to whether it was appropriate for the other group companies to enter into such guarantees, but I think that the overall message given to the Bank in the letter of 26 July 2010 was ultimately accurate – the Bank could not assume that the cross-guarantees would be authorised by the boards of the other group companies.

On 28 July 2010, Nicholas Ralls met Mr. James. His electronic diary note, which he said he made on the train on the way home and which was not challenged, recorded that he had asked for confirmation that Mr. James was still “interested in investing in ralls etc”, and that Mr. James had indicated that he was, but that he was still awaiting being able to draw on money from the sale of his house in Eaton Square. Mention was made of Mr. James having problems with his residency permit in Monaco. The note also recorded that Mr. James had agreed to email a letter of intent regarding his “impending investment”.

On 29 July 2010 Mr Townsend chased the Directors, noting that he had not received anything from Mr. Quar in respect of the additional security for the overdraft and asking whether “the investor funds” had been received. Mr. Hailstones replied that he had called Mr. Quar and chased him up and indicating,

“The investor is sending us a letter of intent by the end of this week and has advised us that his professional advisers are working on trying to mitigate his capital gains tax liabilities which he is saying is fairly imminent and that once this has been resolved he will be in a position to invest.”

Mr. Townsend replied to note that he assumed that this meant that the sale of shares would not have taken place by 2 August 2010, and that accordingly “a letter of intent would be helpful for us all.” He added that since this meant that the overdraft facility would expire on 7 August 2010, he would need to do a full renewal application and for that purpose the Bank would need a clear picture of what the Company’s business would look like at the end of August.

As indicated above, Mr Price had arranged to visit the Company’s offices on 29 July 2010 to collect information for the purposes of Portland’s review. Mrs Warman’s evidence was that she understood that the purpose of Mr. Tickell’s assessment was,

“to take a view on the company at that moment to be able to advise the directors on…his view on what they were doing and what they were planning to do.”

Mrs. Warman explained that she collated information to ensure that Mr. Tickell and Portland had the most up-to-date information possible.

The package of documents provided to Portland was reasonably comprehensive, though plainly produced in some haste. Mrs. Warman produced draft management accounts using information from the Company’s SAGE system as at 28 July 2010 (albeit stated to be as at 31 July 2010) which showed a trading loss in the 9 months since 31 October 2009 of £646,364 and a net asset deficiency of £1,257,838 (“the SW July Accounts”). In cross- examination Mrs. Warman said that she thought that due to the speed with which they were produced, these accounts probably understated the contract debts due to the Company for the work since the beginning of the school holidays by about £300,000.

Mrs. Warman also provided an overview of the Company’s framework contracts; spreadsheets setting out the current contracts and retentions; a calculation of provisions including work-in-progress; a calculation of the provision of £100,000 in respect of the wall-ties remedial work for Hampshire CC; lists of the costs and invoices not yet entered on the SAGE system as at 28 July 2010; and lists of the sub-contractors’ applications for work up to 23 July 2010 which were payable on 20 August 2010.

One of the other documents that Mrs. Warman prepared and provided to Portland at this time was dated 28 July 2010 and was entitled “Forecast Viability Projection from 28 July 2010 on current order book”. Mrs. Warman’s evidence in this respect - which I accept - was that this was,

“…based on the information that I received from the directors, the contracts managers, on the contracts we had secured, those were the projections on turnover and gross profitability that I was being informed we should achieve.”

Mrs. Warman’s projections showed the Company making net profits of £322,102 on the contracts it had already secured in the three months from August – October 2010 and was based upon an accompanying spreadsheet showing the projected income and forecast profits from the Company’s current contracts. That net profit figure was slightly increased to £327,284 by a proposal to make a site agent redundant (but was significantly reduced by the £100,000 wall-ties provision). Mrs. Warman commented in her evidence that,

“In the summer holiday period, the sort of July to September period, is historically a profitable time for Ralls Builders. They’re on a lot of the local authority school frameworks. It would have been a profitable period. So, I was not surprised that trading in those three months would have been profitable.”

As to the future beyond October 2010, the notes to Mrs. Warman’s Forecast Viability Projection indicated that all costs and overheads were being reviewed. She concluded, under the heading “Future Orders”,

“If the company was not suffering current cashflow conditions and historic losses and the company were to remain on the existing framework agreements the company should secure 5-6 million of orders over the next 12 months. Based on average margins of 10-12% this should contribute £600-£720k of GP which would produce a net profit of £400k in 2010/2011 allowing for a small increase back in overhead to manage work.”

It is important to note, however, that (as it made clear) this projection by Mrs. Warman assumed a very great deal, namely that the Company did not have the cashflow problems that it in fact faced, and that it would be able to remain on its existing framework agreements and continue to fulfil a very substantial volume of work during 2010-2011 notwithstanding the problems with creditors and the Bank.

None of the original witness statements of the Directors, Mrs. Warman or Mr Tickell attached any great significance to the meeting at the Company’s offices on 29 July 2010 other than as the occasion upon which documentation was provided to Portland.

Mr. Hailstones’ witness statement did, however, include the following paragraph,

“It was at a further meeting, which I believe took place at Ralls House between 2nd August – 24th September 2010 that as the conclusion of the meeting Will asked Mr. Tickell directly whether the Company was able to continue trading given its position and he replied in the affirmative. All three directors were present at this meeting as well as Mrs. Warman, Mr. Barnes, Mr. Tickell and Mr Price. I cannot recall the date of this meeting.”

That evidence was also supported by the witness statements of the other Directors who placed the meeting at which Mr. Tickell was said to have told William Ralls that the Company could carry on trading between the same date ranges in August and September 2010. Nicholas Ralls’ statement cross- referred to Mr. Hailstones’ statement and indicated that he well remembered the exchange, but thought that it had taken place “during a meeting held at Ralls’ offices at a later date”. William Ralls’ evidence was that at the end of a meeting between 2 August and 24 September 2010 which had lasted an hour or so, he had asked Mr. Tickell, “Given all of the information that you now have, are you comfortable with us continuing to trade?” and that Mr. Tickell had replied, “Yes”.

Mrs. Warman’s statement also mentioned a meeting which she could not date at which she recalled,

“William Ralls asking Mr. Tickell at the end of the meeting if the Company could continue trading to which Mr. Tickell responded in the affirmative.”

Given the timescale in which this assurance was said to have been given by the Directors, it was obviously a focus of considerable interest when the trial opened. However, without any prior warning, when Mr. Hailstones was asked to confirm the contents of his witness statement, he said that he thought that the meeting at which Mr. Tickell’s comment had been made was the meeting on 29 July. He identified the people present as the Directors, Mrs. Warman, Mr. Barnes and Mr. Tickell, but not Mr. Price.

Mr. Hailstones returned to this topic at the end of his evidence the following day. Having referred Mr. Hailstones to the correction which he had made, I asked him,

“MR JUSTICE SNOWDEN: My question to you was: you say that you came to this realisation that the date was 29 July …what was it that prompted your recollection that it was the 29th July?

A. Because I knew that it was at Ralls' offices, in Nick's office, and I established that from reading the other information that has been coming forward that the first meeting was at Geoff Barnes' office. The second meeting, I think, was at Ralls' office and the third meeting was at Portland's office.”

That account was consistent with Mr. Barnes’ witness statement which had said,

“…at the first meeting held at Ralls House, William Ralls asked Mr. Tickell if there was any reason why the Company should not continue trading and Mr. Tickell confirmed that all the time that the Respondents were endeavouring to deal with and progress the various options open to them, then it would be premature for the Company to cease to trade.”

The other Directors also gave evidence in chief correcting their witness statements in a similar manner. William Ralls said,

“I think it was during last week, I think it was Wednesday, I [saw] Mr Tickell's own statement where he stated that he'd only been to Ralls House on two occasions. One was on 24th -- sorry, 29th July and one 24th September. So it followed that the date of the meeting had to be on 29 July because that's the only time that he's been at Ralls House and that's where that statement was made.”

Nicholas Ralls made reference to his brother having “deduced” that the meeting at which the statement had been made by Mr. Tickell had been on 29 July and then gave an account of the statement having been made. He said,

“What I remember from that meeting was my brother Will asked Mr Tickell the direct question -- I was sitting on my chair, behind my office desk. Will was sitting on a leather chair by the door, and Mr Tickell was walking towards -- out of the door and my brother, Bill, said, "Are we okay to carry on trading then?" And he just replied -- looked round and said, "Yes". And I distinctly remember that because I thought, "It's an unusual question to ask". That's what I was thinking at the time and it stuck in my memory, my Lord.”

Mr. Barnes and Mrs. Warman both gave oral evidence confirming their written statements. Mrs. Warman said, in cross-examination,

“[Mr. Tickell] did give reassurances that they could carry on trading. I was at a meeting where one of the directors asked: given the information on where the company was in terms of its plans of investment, its plans of selling assets, its plans of a profitable trading over the next few months, is it okay to carry on? And he said it was. I was relieved at that point because I thought we were doing the right thing. If he had have said, "Stop", then I believe the directors would have stopped.”

Mr. Barnes gave evidence confirming his witness statement, which he elaborated at the end of his evidence,

“A. … James Tickell was about to sort of finish the meeting and leave. And Samantha Warman was there, I was there and the question was asked by Will Ralls, "Make sure we are all right, should we be doing something?" And James Tickell said: look, at the moment you have lots of things that you are trying to do, you will be not the right thing to do to stop. Effectively you should carry on and gave [him] the confidence to carry on. That is what happened.

MR JUSTICE SNOWDEN: What discussion had preceded that exchange?

A. There was lots of information about where the company was going, what framework agreements it had, where they could satisfy -- whether they could satisfy -- at that stage it was always possible that the directors could sign the cross guarantees with Dylex. There were lots of things in the pipeline, including investors, potential investors, the selling of fixed assets.”

After this evidence had been given, and in spite of his illness, Mr. Tickell produced a second witness statement to deal with the Directors’ revised evidence that this assurance had been given at the meeting on 29 July 2010. That statement indicated that Mr. Tickell had attended the Company’s premises only for about one hour, and that he could not recall a private discussion with the Directors in Nicholas Ralls’ office. He said that he did not recall meeting Mr. Barnes at all. Mr. Tickell’s statement suggested that he would not have been in any position to given any assurances about continued trading on 29 July and he denied having done so.

I think that this issue needs to be put into some context. There was a dispute that permeated the evidence and cross-examination of both sides as to whether or not the Directors and Mr. Barnes had originally consulted Mr. Tickell simply for advice about the Bank’s request for corporate cross-guarantees (as they maintained) or in relation to the Company’s insolvency (as the Joint Liquidators suggested). I think that this debate rather missed the point. The simple reality is that for whatever reason he had been approached, from the first meeting on 22 July 2010 Mr. Tickell’s advice focussed on an assessment of the financial difficulties of the Company, whether or not the Company or any part of its business could be rescued, and whether or not the Company ought to go into an insolvency process. Mr. Tickell also warned the Directors of the perils of wrongful trading. It was in any normal sense of the concept, advice about insolvency.

I also think that the original written evidence of the Directors as to when an assurance was given by Mr. Tickell was inaccurate and had been advanced in an effort to bolster their defences. I think that a collective decision was made by the Directors to abandon it in the run-up to trial when a review of the evidence was undertaken and it was appreciated that it was inconsistent with the limited number of meetings that Mr. Tickell attended at Ralls House and with Mr. Barnes’ evidence.

But that said, given the clear warning about wrongful trading which had been given at the first meeting and re-emphasised in Mr. Tickell’s letter of 22 July, I do think it is likely that the Directors would have asked Mr. Tickell for a view as to whether they could continue to trade when they next saw him on 29 July. On balance, I accept their evidence, supported by Mrs. Warman and Mr. Barnes, that a brief exchange did take place between William Ralls and Mr. Tickell about the Company continuing to trade as Mr. Tickell was about to leave the meeting on 29 July 2010.

But I also think that it is obvious that Mr. Tickell was in no position to give any considered advice on the subject at the time. Mr. Tickell had only just attended Ralls House for a limited time to obtain the information that Mrs. Warman had pulled together, he was entirely dependent upon what he had been told by those present, and the question was asked as he was leaving. At most I think that William Ralls asked a brief question which received an equally brief response from Mr. Tickell. Importantly, I do not think that this remark was intended by Mr. Tickell to be, and could not reasonably have been interpreted by those present to be, anything other than an impression based entirely on what he had been told, to the effect that the Directors did not need to cease trading that day. Everyone must have understood that Mr. Tickell was going to give his considered advice when he had had the opportunity to review the materials with which he had been provided.

I suspect that Mr. Tickell has no recollection of the brief exchange because he attached little real importance to it in the context of the detailed review he was to undertake; and he would be right to think that he did not give any considered advice at the meeting to the effect alleged by the Directors. The Directors, for their part, sought to give the remark far greater importance than it warranted, and I think that Mr. Barnes and Mrs. Warman had also extrapolated some of the earlier discussion that had taken place at the meeting into the question and answer.

Most importantly, although the early construction of their defence had sought to place a great deal of reliance upon this remark, in the end in cross- examination both Mr. Hailstones and Nicholas Ralls fairly accepted, as I think is right, that Mr. Tickell’s comment was superseded by the more detailed discussions and advice given at the meeting a few days later on 2 August 2010 and confirmed in writing on 6 August 2010.

After Mr. Tickell left the Company’s premises on 29 July 2010, Mr. Price stayed to finish collecting information and then returned to Portland’s offices to begin work on producing a spreadsheet based upon the information he had been provided by Mrs. Warman. That document was reviewed by Mr. Tickell and sent to Mrs Warman during the afternoon of 30 July 2010.

The Portland document started from the balance sheet deficit as shown in the SW July Trial Balance of £1,257,836 and took into account the need for the provision of £100,000 for wall-ties and a £36,100 difference in trade creditors to arrive at a net asset deficiency of £1,393,938 (“the Portland July Balance Sheet”). The Portland document then modelled a company voluntary arrangement (CVA) to reduce the Bank overdraft to £250,000 within 12 months and to pay off the deficiency over a five-year period. It was based on a number of simple assumptions, including flat monthly profits of £33,333 (equating to £400,000 per annum) as suggested in the notes to Mrs. Warman’s Forecast Viability Projection, and a need to retain 20% of cash per month (i.e. £6,667 per month). The model did not take into account any monthly variation in profitability, and also did not take into account Mrs. Warman’s forecast of £327,284 profits for the period August – October 2010.

Mr. Price’s covering email made it clear that the spreadsheet was just,

“an indicative forecasting tool, which attempts to put the arrears and ongoing trade into context”

as a basis for the discussion which was scheduled to take place at the meeting that had been arranged for the following Monday, 2 August 2010. Mr. Price pointed out that based on the assumed annual net profits the Company would not be generating cash but incurring further cash deficits, which the Bank would not accept. In other words, Mr. Price’s spreadsheet showed that on the basis of the figures he had used, a CVA designed to pay off the Company’s creditors over a 5 year period would not be viable.

I think that it is obvious from the speed with which the document was produced and the contents of Mr. Price’s email, that his spreadsheet did not reflect any appraisal or judgment by Portland one way or the other as to the assumptions that he had made. Moreover, the spreadsheet was provided to Mrs. Warman together with a blank (exemplar) spreadsheet into which Mr. Price told Mrs. Warman that she could insert her own figures to run a basic cashflow forecast. I do not accept the evidence from the Directors to the contrary, which rather unrealistically sought to suggest that at the time they thought that Portland must have independently verified the figures.

Whilst the communications with Portland continued, the Company continued to be under extreme pressure from creditors. It received a sizeable number of demands for payment and threats of legal proceedings, and on 28 July 2010 a judgment for £5,857 was entered against it in the Northampton County Court. That had the result that the Company’s credit rating fell to zero, and (coupled with the fact that its 2009 statutory accounts were overdue) meant that its credit insurers suspended its cover at the beginning of August 2010.

On 2 August 2010 there was a meeting at Portland’s offices attended by the Directors, Mrs. Warman, Mr. Tickell, Mr. Godwin and Mr. Price. The purpose of the meeting was to discuss the options set out in Portland’s letter of 22 July 2010 following Mr. Price’s further work. To that end part of the meeting was dedicated to considering the Portland Spreadsheet. By all accounts, the atmosphere was cordial, but not upbeat. At the meeting, among other things, Mr. Tickell clearly advised against the other companies in the Dylex group entering into any cross-guarantees in favour of the Bank (which came as no surprise to the Directors who had reached the same conclusion) and there was a discussion about the possibility of investment from Mr. James.

Although each of the attendees gave evidence as to his or her mindset and impressions of particular aspects of the meeting on 2 August 2010, I think that much of this evidence was shaped by a desire (conscious or sub-conscious) to advance one side of the case or the other, and was rather selective.

One exception was Mr. Price’s evidence which was, I think, an unvarnished reflection of his approach to the meeting. He said, in his witness statement that he thought that the purpose of the meeting was to start planning for an imminent insolvency assignment, and in cross-examination he added,

“It does say start planning and it says insolvency assignment, it doesn’t say insolvency appointment. Insolvency assignment could be anything relating to restructuring, it doesn’t necessarily mean the company is going into liquidation on Monday, or go into administration…

… planning an imminent insolvency assignment to me does not imply it is going to go into a formal insolvency process. It could be a general restructuring.”

Given the difficulties to which I have referred with much of the live evidence, undoubtedly the most reliable evidence as to what occurred at the meeting is the contemporaneous correspondence that followed it. In the evening of 2 August 2010 Mrs. Warman emailed Mr. Tickell to thank him for his advice and added that,

“I know [the Directors] appreciated it and it really helped in terms of clarifying their options. This means that they are better informed to make the decisions that will be needed in the forthcoming days and weeks. I am sure they will be back in touch fairly soon and may indeed take you up on the offer to attend the bank meeting.”

Mr. Tickell’s reply, 30 minutes later, thanked Mrs. Warman for providing the financial information. He continued,

“I am not wholly sure today was what Nick really wanted to hear and equally it’s frustrating for us not to find that magic solution to the woes…Unfortunately I think it is probably too far gone realistically to reach informal deals. It’s more likely that soldering [sic] on would just dig the company deeper into problems as the debts overwhelm the company and it would result in a lost opportunity to save something. I hope that investor George can produce something by way of an offer of immediate funding which would make it that much easier to do that saving.”

Mr. Tickell added that the cross-guarantees were not commercially sensible and concluded, “I will be putting together some notes and sending them over. In the meantime, if you have any queries obviously just shout”.

As promised, on 6 August 2010 Mr. Tickell sent a detailed letter to the Directors, summarising the discussions that had taken place at the meeting on 2 August 2010, adding some information which he had been given subsequently by Mrs. Warman, and providing some advice to the Directors. All of the witnesses accepted that the letter of 6 August fairly reflected what had been discussed at the meeting on 2 August 2010. Before sending the letter to the Directors, Mr. Tickell sent it in draft to Mr. Godwin and Mr. Price under cover of an internal email. In that email Mr. Tickell described his letter as,

“Partly for the record, partly to be helpful, partly to cover off the obvious risk [that] they dig themselves a deeper hole and partly as something to send to Geoffrey Barnes.”

In his response, Mr. Godwin commented that Mr. Tickell’s draft letter,

“Summarises what we discussed and what they should do although I’m not sure the directors really grasp the size of the hole they are in or how frayed the rope is that they intend/want to use to climb out”.

That letter of 6 August 2010 and the surrounding emails are important pieces of evidence in this case. In the letter, Mr. Tickell first stated,

“Since our meeting, [Mrs. Warman] has brought us up to date briefly with subsequent progress. We understand that you are continuing your discussions with your potential investor. On that understanding, Bank of Scotland has agreed to roll over the facility until the month end and will not enforce the demand for a cross guarantee.

Overall, this sounds positive and hopefully your discussions with the investor bear fruit. Clearly it must be best to get in sufficient new money to clear the debts by finding new shareholders, particularly one who is prepared to take a broader and longer term perspective and not be deterred by the immediate liabilities. It is helpful that the bank is showing this tolerance.”

Secondly, Mr. Tickell reiterated a warning about wrongful trading that he indicated had been discussed at the meeting. Under the heading “Wrongful Trading” he made the point that it was the Directors and not the Bank who were taking the risk of wrongful trading and that the Directors could not rely upon the fact that the Bank was prepared to give the Company an extra month. Mr. Tickell summarised the position as follows,

“The particular concern is over taking additional credit from various suppliers in order to continue trading and this is not eventually repaid if the company doesn’t come through. Those creditors will not thank you for using their money to fund the exercise with the investor and you need to monitor closely the liabilities arising during this period and ensure payment is safeguarded.

Similarly, if trading on is going to incur significant losses, then you would need to question whether this is justified against the likelihood of achieving new investment. Your projections suggest that trading is profitable at present but please monitor that carefully.”

Thirdly, Mr. Tickell recorded that neither the Directors nor Portland thought that causing the other Dylex group companies to give cross-guarantees was “a wise thing to do”.

Fourthly, Mr. Tickell went through the spreadsheet that Mr. Price had prepared – which he described as “a simple overview cash flow model…to illustrate the problems in reaching arrangements with creditors”. He concluded,

“Based on this, we doubted that it will be possible both to continue trading and to reach an arrangement with creditors, whether informally or in a CVA. It is also unlikely to be realistic to pay creditors in full, reflecting that the company has a net asset deficiency of around £1.4 million.”

Finally, and perhaps most significantly, Mr. Tickell drew together his thoughts as follows, (emphasis added),

“If you want to continue the business, it would be better to focus resources on protecting contracts and preserving their value, probably through another company and dealing with the creditors in Ralls Builders in an insolvency procedure. You can always structure the arrangement [so] that the existing creditors share in the future profits similar to the way a CVA would provide, except this arrangement [is] inherently more stable for the continuing business.

Alternatively, you could find some additional immediatefunding to improve the prospects of implementing a repaymentplan and we left it that you would talk to the investor to thatend, stressing the urgency and that some advance funds wouldbe required even if he is not yet ready to make the totalinvestment. In order to avoid wrongful trading, you shouldgive this a limited period to succeed.

We hope that this summarises our guidance usefully. If you have any queries, please let us know. In the meantime, best of luck getting the investor to deliver what he has indicated and we should be pleased to consider with you the next steps once the results of that are known.”

On 4 August 2010, Nicholas Ralls made an entry in his electronic diary recording:

“George got residency in Monaco. Completed on house in Eaton Sq. Sending me loi to satisfy bos in short term.”

In the evening of 5 August 2010, Mr. James emailed Nicholas Ralls attaching a rather amateurishly-produced document headed “Mergerland Group - International Investment and Development – London, Paris and Monaco”. The document was addressed to Nicholas Ralls at “Ralls Group” and was entitled,

“Re Mergerland Group Letter of Intent (LOI) for the Acquisition for shares in Ralls Group, Comserve and Multitrade Suppliers and other Companies”.

The document (the “Ralls LOI”) stated that Mergerland would be prepared to purchase 25% of the named companies for £2.5m. It suggested that this sum would be sent to “your Company Account” and that a further £1m would be placed in an escrow account with a “title insurance company”, such monies to be “held and only used should Ralls and other Sister Companies need to use as above.” The Ralls LOI was unsigned, and ended with a postscript from Mr. James that read,

“This is an LOI drawn up by our Lawyers, we will be in funds within a few days and hope to conclude this transaction as soon as possible.”

Later that night, Nicholas Ralls forwarded the Ralls LOI to Mrs. Warman and William Ralls. Mrs. Warman sent it on to Mr. Barnes for his comments, saying “The bank have asked to see a loi from the investor to extend overdraft until end August and this is what Nick has received”. Mrs. Warman then responded to Nicholas Ralls to express some concern about the Ralls LOI. She said that she could not find “Mergerland” on the internet or registered at Companies House, and the address given in the Ralls LOI was for a mirror shop in London. Nicholas Ralls responded that the mirror shop was run by Mr. James’s wife, who was thought to be a member of the Jewson family who operate a well-known building supplies company, that Mr. James could not be found on the internet, and that Mergerland Group was “offshore.”

Mr. Townsend’s evidence confirmed that a copy of the Ralls LOI was found on the Bank’s files, and so it seems that notwithstanding Mrs. Warman’s reservations, it must have been sent to the Bank on the morning of 6 August 2010.

Mrs. Warman gave evidence that at some point shortly afterwards she was responsible for producing a revised version of the Ralls LOI that made a number of substantive and stylistic changes to the document. She said that she did so having received word from William Ralls that he had discussed the changes with Mr. James who was content that they should be made. Mr. Hailstones and William Ralls confirmed that in their evidence. The main change in the revised document (“the Dylex LOI”) was that the letter was readdressed to Nicholas Ralls at Dylex and was amended to be a letter offering to pay £2.5 million for 25% of the shares in Dylex alone rather than for the shares in any of the other companies mentioned in the Ralls LOI. It does not seem that this Dylex LOI was ever sent to the Bank.

In a series of emails between Mrs. Warman and Mr. Price, Portland was kept informed of progress with the Bank and Mr. James. On 6 August 2010 Mrs. Warman informed Mr. Price (with a copy to Mr. Tickell) that,

“I understand that [the Directors] now have a letter of intent from the investor which they are passing to the bank. The investor is also saying that he is days away from the money being available to finalise the deal with the directors. I understand that they are waiting for [the Bank] to confirm whether they can give them an [extension of time] from today. This is not yet in place. The concern being that the overdraft runs out [close of business] today.”

Mr. Tickell forwarded that email with a copy of his letter of 6 August 2010 to Mr. Barnes on 8 August 2010. That email stated,

“The guys are holding out considerable hope in their rich contact who has apparently expressed an interest/intent in investing in the group but he hasn’t so far delivered or committed to a timescale. I am not sure that there is any other option however. Any continuation under the existing ownership is going to require the cross guarantees to secure the existing bank lending and, as you will see from our comments, there doesn’t appear to be a business case for putting those assets at risk. Moreover, it will take a lot more in the form of deferred payment arrangements to see a way forward. We have told Nick to focus on getting an immediate lend, if that can be done more quickly than a full-blown share investment.”

After the meeting with the Directors on 6 August 2010, Mr. Townsend approved an extension of the Company’s overdraft until the end of August 2010. He made an internal report for the Bank on about 14 August 2010 which included the following,

“This is a request to extend the £600k overdraft until 31st August 2010 to allow two things to take place:-

1.

Investor funds of £2.5m to be received into the parent company which will repay our £600k overdraft. (Letter of intent attached).

2.

Review with BSU [Business Support Unit] colleague upon his return from holiday and full proposal put forward to credit / connection transferred to BSU.

…

I have issued cross-corporate guarantee and debenture documentation to be provided by Fareham Football Club Ltd and Dylex Ltd.

Initially this was received well by the directors as they do understand our position! However their advisors have suggested that they receive confirmation of our continued support before offering the extra security.

…

There is also an investor in the background and Mr George James (who we are led to believe is a wealthy business man although I can not find any information on him or his business) has been a consistent distraction and part of the reason why the directors did not reduce costs earlier as the investor funds have been promised for some time and they have been resisting scaling back the overheads as they knew that there would be an increase in turnover towards the end of 2010.

Funds are expected to be received imminently by the investor following a property sale. The investor will become a 25% shareholder in Dylex Ltd by introducing £2.5m he will also make £1m available for funding into the business within the Group if required.

I believe that his main interest in Comserve and Multitrade Supplies however Ralls can be profitable if more focus was put into the business.

We have seen a Letter of intent from the investor although I presume it is draft given the nature of it!! Copy in pack.

Creditor pressure is building with £544k of the £1.4m creditors at the end of June over 90 days although key suppliers are working with them.

VAT £61k overdue being repaid at £16.5k per month with outstanding PAYE of £110k being repaid at around £25k per month. Current VAT & PAYE are being paid up to date.

…

Going forward with the reduced overhead the directors expect to record a small profit/breakeven for this year through Ralls Builders and now that the Group FD has returned from maternity leave there is more up to date financial information and a real emphasis on cost which was missing in her absence.

…

Whilst we recommend the short term extension it is on the basis that the increased security is progressed and a review is undertaken by BSU/transferred to BSU unless our overdraft is fully repaid by the investor funds. However I do not think that we can wait for these funds to come through as the LOI has not been signed and is not worth the paper it has been typed on!

The account has always operated well and in the last month we have seen that the contracts are starting to be delivered with increased [turnover] through the bank account.

…

The directors are finally making big changes to this part of their business as they recognise that they have taken their eye off the ball and have been guided by the investor which has had a detrimental impact on their business.”

On Friday 13 August 2010 Mr. Price sought an up-date and was told by Mrs Warman that she understood that Mr. James had been talking to Mr. Ian Townsend at the Bank and that “He [Mr. James] is apparently in a position to invest next week”. That was a reference to a telephone call between Mr. Townsend and Nicholas Ralls during which Mr. Townsend also spoke to Mr. James who was present with Mr. Ralls.

In fact, nothing happened by the end of the following week, Friday 20 August 2010, and on Monday 23 August 2010 Mr. Townsend sent a further email to the Directors and Mrs. Warman asking for an update on the current position with Mr. James because he needed to complete a report prior to the end of August in respect of the overdraft. Nicholas Ralls responded,

“Hi Ian. I am at Gatwick airport at the mo. About to fly to Nice to meet George in Ville Franche to get deal done over next few days and get monies in the bank.”

On 25 August 2010 Nicholas Ralls texted Mr Kelly asking him for the Company’s bank details to pass on to Mr. James. It appears that Mr. Kelly consulted with William Ralls, who told Mr. Kelly to send Nicholas Ralls the Dylex account details, which he did by text the same day. The monies were not, however, forthcoming. Instead, on his return to the UK, Nicholas Ralls arranged a further meeting with Mr. James on 29 August 2010 at the Powder Mills Hotel, Hastings. That also did not produce any positive result.

The alternative date by which the Joint Liquidators contend that the Directors knew or ought to have known that the Company had no reasonable prospect of avoiding insolvent liquidation is 31 August 2010.

It is common ground that between 1 September 2010 and 13 October 2010 the Company completed a number of contracts and continued to collect in a large amount of cash from its customers. Those monies, which amounted in total to £1,306,349, were paid into the Company’s account at the Bank because the Bank had what purported to be a fixed and floating charge over the Company’s book debts and was entitled to require such monies to be paid to it.

On 1 September 2010 the extension to the Company’s overdraft expired. From this date the Bank approved all payments out of the account on an individual basis. Mr. Townsend summarised the position in an email to William Ralls,

“…until funds are received into the account I am not in a position to pay any further funds away given we still do not have a plan for restructuring the business if the investor funds are not received.”

No detailed evidence was given as to how this worked, or as to the basis upon which decisions were made as to who would, and who would not, be paid. I assume, however, that the payments were made on the basis of perceived commercial necessity to pay wages for the Directors and other employees and to obtain the supply of goods or services for the continued trading and/or to respond to particular pressure by the creditor concerned.

The result of this regime was that the Bank overdraft, which stood at about £530,000 on 1 September 2010, was paid off in full by the time that the Company eventually went into administration on 13 October 2010. Indeed a small credit of £24,000 was left in the Company’s account with the Bank on 13 October 2010. This meant that over the period from 1 September 2010 to 13 October 2010 a total of £751,819 (i.e. the total receipts minus the amounts paid to and left in the Bank account) was paid to creditors (including employees). However, the result of the approach adopted by the Directors and the Bank was that some existing creditors as at 31 August 2010 remained unpaid, and new credit was incurred between 1 September 2010 and 13 October 2010 that also remained unpaid when the Company went into administration.

At the beginning of September 2010, Mr. Townsend requested from Mrs. Warman a set of management accounts produced on the SAGE system. These accounts were produced by Mrs. Warman on Friday 3 September 2010 and were sent to the Bank on the following Monday 6 September 2010. They showed a loss in the ten month period since 31 October 2009 of about £102,000 and a net deficiency of about £705,000. In cross-examination Mrs. Warman was asked to compare these numbers with the figures in the SW July Accounts which she had provided to Portland on 29 July 2010 which showed a net deficit of £1,257,836. Mrs Warman accepted that the Company could not have made a profit of about £500,000 in a month. She said that, after having seen the expert reports, she thought that the likely explanation was that in her haste to produce figures on a conservative basis for Portland at the end of July 2010 she had understated the debtors figure in the SW July Accounts by about £300,000, which would mean that the Company made a profit of about £200,000 during August 2010.

On 3 September 2010 Mr. Price again asked Mrs. Warman for news, and she replied on 7 September 2010, copying in Mr. Tickell,

“The latest update is that the Bank of Scotland are still working with the directors to allow time for them to secure the investment …

They have asked for guarantees to be put in place on Friday if the investment does not come in to allow this situation to continue for another couple of weeks.

Nick has had several meetings with the investor, who is still on board and just needs further time to arrange funds, however the longer this goes on for the more damage is being done with suppliers, contractors and clients.”

The same day Nicholas Ralls sent a text to William Ralls (and others): “believe George being sincere should be sorted this wk…”

Unbeknown to the Directors, on 7 September 2010 a winding-up petition was presented against the Company in the Birmingham District Registry of the High Court by a creditor seeking payment of £15,716.82 for goods supplied between 12 May and 27 July 2010. That petition was not served upon the Company until 17 September 2010.

On 8 September 2010 William Ralls met the Company’s solicitor, Mr. Dyer, at the offices of Verisona Law. Mr. Dyer’s attendance note recorded that he had been told that the Company was in, “immediate and urgent need of funding as a result of the effects of the economic climate if it is to survive and move forward”. Mr. Dyer recorded that Nicholas Ralls told him that he had met Mr. James who “appears to be extremely wealthy and said that he had recently sold a significant property in London generating funds in excess of £45 million”. The note then recorded the proposed deal with Mr. James,

“Subject to Contract and a formal Agreement he has been negotiating with you for the last couple of months to make an investment that would both put money into the company or group with the object of helping Ralls Builders and also buying a 25% stake in the group by a combination of taking shares in the company and buying some shares from each of the three of you.

You say that the deal is that he will buy shares from each of you for £500,000 (each) leaving £1 million to invest in the Company which will be used for the purposes of supporting Ralls Builders. He is to end up with overall a 25% share in Dylex Ltd and on working out the numbers (after the meeting) it would appear that this would be best effected by increasing the holdings of each of the three of you from 5 to 30 shares. Each of you will then sell 5 of your shares for the sum of £500,000. He will then subscribe for 10 new shares for £1 million which money will be invested into Dylex with the object of it going towards Ralls Builders.”

On 10 September 2010 William Ralls and Mr Hailstones met Mr. Dyer to go through the documentation Verisona Law had drafted. That included a draft share purchase agreement, resolutions to increase the share capital of Dylex and allot shares to the Directors and stock transfer forms. William Ralls gave evidence that, “I wanted the documents ready because we were hoping Mr James was going to come through at any time and we wanted the documents ready to process through”.

Mr. Dyer also gave the Directors a letter of advice which recorded that he had been told that “it is your intention, if possible, to complete this transaction…today in London” and that “you say that the intention is that they will provide the funds to you direct”. Mr. Dyer warned the Directors in strong terms against money laundering and noted,

“The urgency of this matter is driven by the financial circumstances of Ralls Builders which requires an immediate investment of capital, and the monies being invested in return for the issue of new shares in [Dylex] are, you have instructed us, to be used for the purpose of supporting Ralls Builders.”

William Ralls also gave evidence that the £500,000 received by each of the Directors for sale of their shares in Dylex would be invested back into Dylex and that “£1 million was going to support Ralls”. That was also the message that William Ralls communicated at the time to Mr. Townsend, to whom he sent the draft documents on 10 September 2010. When Mr. Townsend questioned whether it was the £1.5 million to be paid to the Directors for their shares in Dylex that was to be injected into the Company, William Ralls responded that,

“£1,000,000 will go straight across to Ralls Builders which is the 10 company shares @ £100,000 each. The £1,500,000 is to ourselves to be used for further expansion of the group. At this stage we don’t know how, where or when.”

The Directors were closely cross-examined as to whether they genuinely believed that Mr. James would be willing to pay a total of £2.5 million for 25% of the shares in Dylex, which would have valued the group as a whole at £10 million, and whether they in fact intended that any part of the monies to be received from Mr. James would be invested into the Company, or on what terms. I shall return below to the question of whether such belief was reasonable, but I accept that the Directors genuinely thought that Mr. James was able and intended to make such an investment. I also find that the Directors genuinely intended that the £1 million to be subscribed for Dylex shares would be used by Dylex to restore the financial health of the Company, albeit that they had not given any precise thought as to how this would be achieved (i.e. by way of loan or injection of share capital).

The suggestion to the contrary would mean that a considerable exercise in laying a false trail of contemporaneous evidence and documents would have been undertaken by the Directors with, among others, their own lawyers and the Bank. I can find no reason to think that this is what occurred, still less that the Directors had any motive to take such a course at the time.

On 14 September 2010, Mr. Price responded to Mrs. Warman’s email of 7 September 2010 saying,

“I assume that talks are still ongoing and the bank has not yet done anything rash.

As you have commented, the situation such as it is cannot continue for any great length of time before the implications become more profound than they already are.”

Nicholas Ralls met Mr. James with the draft documents in London on 15 September 2010. His evidence was that Mr. James said that,

“he would take it away and get his lawyer to look at it … He assured me that if his lawyers were happy with the documentation then he could transfer the money straightaway”

After the meeting, Nicholas Ralls sent his fellow directors a text stating:

“Hi lads. George putting paperwork in his solicitors tomorrow. Wants us all to come to London fri – so keep it free if poss, he said will have money Friday, party Friday!”

The money did not, however, come through on Friday, 17 September 2010. Instead, as indicated above, the Company was served with the winding-up petition that had been presented on 7 September 2010. A barrage of demands for payment, threats of court proceedings and statutory demands continued to arrive at the Company over the next week – including one from the Company’s own solicitors, Verisona Law.

In the absence of any money from Mr. James by Friday 17 September, on the following Monday, 20 September 2010, the Directors decided to seek a further meeting with Mr. Tickell. He was apparently not available for a few days and the meeting eventually took place on Friday 24 September 2010. At the meeting it was agreed that unless Mr. James came through with money by the following Tuesday, 28 September 2010, steps would be taken to place the Company into administration with Mr. Tickell as administrator with a view to achieving an orderly winding up of the Company’s affairs.

The same day, 24 September 2010, William Ralls spoke to Mr. Dyer and reported that Mr. James had still not completed the transaction. William Ralls said that Mr. James had indicated that he would pay £1 million by the end of the day with the balance to follow, but that it seemed that Mr. James had “his own cashflow issues”.

Mr. James’ money did not, however, materialise. At the end of the Friday afternoon, Nicholas Ralls sent a text message, which concisely summarised the position,

“Crappo day no hear from George grade A tosser”

In the very early hours of Monday 27 September 2010 Mr. Tickell sent a long email to Mrs. Warman, Mr Barnes and Mr. Price (for onwards transmission to the Directors) setting out how to deal with the fact that a winding up petition was pending against the Company. He suggested that as a first stage the Directors should sign and file with the Court a notice of intention to appoint an administrator and that Dylex should then pay off the petitioning creditor and any supporting creditors with a view to having the winding up petition dismissed to clear the way for the appointment of an administrator. The Directors met in the morning and the appropriate form was duly signed and filed in the Portsmouth County Court shortly after midday on 27 September 2010.

Thereafter the Directors followed Mr. Tickell’s advice. At an early stage, and as indicated in an email copied to the Directors and Mrs Warman on 29 September 2010, Mr. Tickell made the point that the timing of the administration would depend upon the projection of likely receipts, because, as he put it,

“If we have some chunky receipts in the next day or so, it would be worth hanging on as otherwise the customer will seek to hold onto funds once advised of insolvency.”

Similarly, on 30 September 2010 Mr. Tickell sent an email to Mrs. Warman discussing in some detail the likely reaction of customers to the news of the Company’s insolvency, and pointing out the need to minimise the customers’ ability to counter-claim for losses and to use other contractors to complete contracts, which would reduce the amount that could be collected from the Company’s contracts. Mrs. Warman kept in close contact with Mr. Tickell and Portland over the course of the next week; advice was taken from specialist quantity surveyors (Leslie Keats) as to when might be the most efficient time for the Company to go into administration; and inquiries were pursued with the court in which the winding-up petition was pending with a view to accelerating the dismissal of that petition. In the end, that was achieved by Dylex paying off the petitioning creditor and a number of others who had given an indication that they would support the winding-up petition in relation to the Company.

During the run-up to the administration, some consideration was given by Mr. Tickell and Verisona Law to establishing a trust fund for creditors incurred after 25 September 2010. In that regard, on 8 October 2010, Mr. Tickell wrote to Mr. Oliver at Verisona, as follows,

“Unfortunately it is becoming apparent that we could have a wrongful trading argument in this case with creditors potentially looking for a liquidator that might not be us. There is a £1.3 million net liability position in any event. In July when they first saw us, the bank was owed £550k. They continued trading, partly encouraged that the bank was continuing support (but in practice all it was doing was planning to ratchet down the debt) and in the hope that this £1m investor would come good. We now have a position, unfortunately exactly as predicted in our July written advice that the bank is clear, there are £0.5m more creditors and unfortunately mainly different creditors to those in July, so the directors can’t even argue that the same creditors have benefitted by clearing the bank.”

Administration intervened shortly thereafter. On advice from Portland and Verisona Law, a debenture was executed giving an associated company, Ralls Holdings Limited, the power to appoint an administrator, and such appointment was made on 13 October 2010.

After their appointment, as had been envisaged, the joint administrators engaged Leslie Keats to assist in realising the Company’s contract debts. On 3 December 2010 the administrators put a proposal to creditors summarising what had been achieved in the administration and proposing that the Company should move into liquidation.

In my judgment, the statement accompanying the administrators’ proposals fairly and concisely summarised the history of the decline in the Company’s fortunes and the events of 2010 as follows,

“2.6

The company, as with many in the construction sector …was impacted by the onset of recession from 2008 onwards. The company was also specifically affected by adverse weather conditions early in 2010 preventing it completing its contractual obligations on time; customers delaying the commencement of committed works for considerable periods for budgetary reasons; and a rejection by a customer on quality grounds of a significant amount of work carried out by a subcontractor. This is reflected in the significant reduction in the company’s turnover in 2008/2009 and the collapse in profit margins as the company was unable to react quickly enough to reduce overheads. During 2009, the losses had eroded the company’s retained reserves and creditors started to become extended as a result.

2.7

The directors took our advice in late July 2010. This was driven partly by a demand from the bank for additional security, in the form of cross-company guarantees to be secured by charges over property held elsewhere by related Dylex companies, as a condition for renewing the overdraft facility. The directors were unsure about providing this security in the circumstances. We were also consulted about how best to address a backlog of creditors that were pressing for payment. We provided outline advice about the responsibilities placed on directors of companies in financial difficulties and undertook a brief assignment to comment on the options available to the directors to deal with the funding requirement.

2.8

We reported back to the board in early August that we doubted whether it would be possible to negotiate repayment schedules with creditors, either informally or formally through a CVA, given the extent of the deficiency, and also accommodate a reduction in the bank facility. We concluded therefore that a formal insolvency procedure for the company appeared appropriate. There had been an encouraging development, in that a third party, someone apparently successfully involved with property development, had approached the directors with an offer to take a significant shareholding in the group and advance around £1m to the company to enable the creditors to be addressed. The bank had also partly relented and advised that the overdraft facility could be extended temporarily without additional security. On the strength of the prospect of new investment, the directors decided to continue.

2.9

We were consulted again on 24th September. In the intervening period, the directors had held a number of apparently constructive discussions with the potential investor, who continued to state that he was willing to invest but appeared unable to provide the funds and the directors had lost confidence. In the meantime, the company had enjoyed a busy period of trading as it completed contracts during the school holiday break. Yet the bank had clearly been managing the facility carefully, taking the receipts from this work but limiting what could be paid, with the effect that the overdraft of almost£600k in August had been almost cleared but replaced by an increase in trade supplier and tax debt of a similar order. A trade supplier, supported by two others had issued a winding up petition on 7th September involving liabilities totalling £25k, which the bank had duly allowed to be paid shortly after presentation. A number of other creditors were threatening legal proceedings.

2.10

Once the prospect of new investment had been eliminated, it now became apparent that an insolvency procedure would be required. As part of a pre-appointment planning process, we undertook a rapid view of the financial position and at our instigation, Leslie Keats, (a firm of specialist insolvency quantity surveyors), completed a review of the company’s contracts to assess what steps should be taken to preserve the value of each one during an appointment.”

The administrators’ proposals were accompanied by a Statement of Affairs as at 13 October 2010 which is accepted by both sides to be an accurate statement of the book values of the Company’s assets and liabilities at the date upon which it went into administration. That Statement of Affairs shows assets available for unsecured creditors of £1,887,000 including contract debts of £1,679,000 but liabilities of £2,774,000, giving a net deficiency of £884,000. On taking account of the “expected to realise” value of the assets (and in particular the very much reduced sums anticipated to be recoverable in the insolvency in respect of the Company’s contract debts) the net deficiency was estimated to be between £2.969 million and £2.704 million.

In the course of the administration, the Directors were each asked to complete a questionnaire for the purposes of the Insolvency Act 1986 and the Company Directors’ Disqualification Act 1986. The forms were filled in in very similar terms for each of the Directors by Mrs. Warman and were then signed by the Directors under a statement that the answers given were correct to the best of their knowledge and belief. Among the questions and answers were the following:

“When did you first become aware that the company wasinsolvent, i.e. unable to pay its debts as and when they becamedue?

13/10/10

Did any creditor obtain judgment against the company?

No.

W h y w as the compan y’ s business continued after it became insolvent?

It wasn’t.

What debts were incurred after the company became insolvent?

None.

To what causes do you attribute the compan y’ s failure and insolvency?

The main cause was cashflow difficulties caused by

•

Delays with works due to adverse weather conditions (Winter 2009/2010)

•

Delayed start of new build work for example Portsmouth City Council due to budgetary constraints

•

Bank’s overdraft terms being tightened and facility slowly reduced

•

Failure of major investor in holding company to complete.”

As I have already indicated, the circumstances surrounding the completion of these questionnaires gave rise to some of the least satisfactory and least credible evidence from the Directors. In particular, when cross-examined, Mr. Hailstones was singularly evasive about how his questionnaire came to be completed and signed. At first he denied that he recognised the handwriting on the form at all and then suggested that it had been filled in by someone else and placed in front of him to sign. He later accepted that it looked like Mrs. Warman’s handwriting and that he assumed that she had been asked to fill it in because she was working for “the liquidator” at the time. When asked about the answers to a number of the questions concerning knowledge of the Company’s inability to pay its debts as they fell due and whether any debts were incurred after that time, Mr. Hailstones repeatedly suggested that he had signed the document without really reading or understanding it.

When Mrs. Warman came to give evidence, she said that she had indeed filled out the forms in her handwriting, but said that she had done so in discussion with the Directors, and most significantly, that the Directors had received legal advice from Verisona Law before completing the questionnaires,

“It's my handwriting. I believe it would have been completed not necessarily just by me with the directors. I believe they did seek advice from a solicitor on how to complete this questionnaire, but I am the author. It is my handwriting, yes. And I would have been with the directors when they -- when we went through the responses.”

It was subsequently confirmed that the Directors had indeed consulted Verisona Law before the questionnaires were completed. In the circumstances, I think that Mr. Hailstones’ evidence was disingenuous and misleading.

In late January 2011 Mr. James renewed his interest in an investment in Dylex. At that stage he indicated that any investment would be conditional upon Dylex buying out the other shareholdings in Comserv. Mr. Dyer was again consulted by the Directors (in their capacity as shareholders in Dylex) and this time he was put into direct contact with Mr. James’ solicitor, a Mr. Michael Petrou, who practised under the name of Brightstone Law in Elstree, Hertfordshire.

Mr. Dyer and Mr. Petrou spoke on 4 February 2011 and Mr. Dyer set out in an email to Mr. Petrou the then proposed deal, which was for Mr. James to acquire 25% of Dylex from the three Directors for a total of £1,230,000; and for each of the Directors to lend that money to Dylex, together with a matching loan of £410,000 from Mr. James. The proposal was then for Dylex to use £1,050,000 to acquire the 50% shareholdings of the other shareholders in each of MTS and Comserve. However, Mr. James pulled out of negotiations in mid-February 2011, and the deal never completed.

Section 214(1) of the Insolvency Act 1986 gives the court a discretionary jurisdiction to declare that a director of a company in insolvent liquidation is,

“liable to make such contribution (if any) to the company’s assets as the court thinks proper.”

That power may be exercised where the court is satisfied in relation to the director that,

“at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”.

If section 214(1) is triggered, consideration must then be given to section 214(3) which contains a limitation on the circumstances in which the court can make a declaration under section 214(1). Section 214(3) provides that the court should not do so if it is satisfied that after the relevant time at which the director first knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, the director,

“… took every step with a view to minimising the potential loss to the company’s creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into liquidation) he ought to have taken.”

As an initial observation, it is important to note that the fact that a company is insolvent (on a balance sheet or cash-flow basis) and carries on trading does not mean that a director – even one with knowledge of that fact - will be liable for wrongful trading if the company fails to survive. Many companies show a balance-sheet deficit from time to time, but nevertheless have every real prospect of trading out of that position or otherwise recovering from the deficiency and thereby avoiding an insolvent liquidation: see e.g. BNYCorporate Trustee Services Limited v. Eurosail-UK2007-3BL PLC [2013] 1 WLR 1408. Likewise, trading companies often suffer cashflow difficulties and fail to pay their creditors on time, but are able to overcome that cash-flow insolvency by (for example) selling an asset or raising external finance on the security of their assets.

In Hawkes Hill Publishing Co. Limited [2007] BCC 937 at para 28, Lewison J made the point very clearly,

“It is important at the outset to be clear about the relevant question. The question is not whether the directors knew or ought to have known that the company was insolvent. The question is whether they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. As Chadwick J pointed out in Re C S Holidays Ltd [1997] 1 WLR 407 at 414:

“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 to 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 view.””

One other obvious difference between the test for insolvency and that for wrongful trading is illustrated by the fact that for the purposes of assessing whether a company is balance-sheet insolvent under section 123(2) of the 1986 Act, the prospects of the company obtaining further assets which it does not already own cannot be taken into account: see Byblos Bank v Al-Khudhairy [1987] BCLC 232 at 247g-h per Nicholls LJ. But for the purposes of determining whether section 214 is triggered, it may well be relevant to consider the company’s prospects of raising additional capital from an external investor to restore its solvency.

Whilst the question of whether a director knew that there was no reasonable prospect of the Company avoiding an insolvent liquidation is a question of (subjective) fact, the question of whether the director ought to have concluded that this was so is an objective question. In that respect, section 214(4) of the 1986 Act provides that the facts which the director ought to know, the conclusions which he ought to reach, and the steps which he ought to take, are those which would be known, reached or taken by a reasonably diligent person having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the director, and the general knowledge, skill and experience that that director in fact has.

In that regard, in Hawkes Hill, Lewison J observed, at para 41,

“Accepting as I do that the directors ought to have known that the company was insolvent, it still leaves open the question: did they know (or ought they to have concluded) that there was no reasonable prospect that the company would avoid an insolvent liquidation? The answer to this question does not depend on a snapshot of the company’s financial position at any given time; it depends on rational expectations of what the future might hold. But directors are not clairvoyant and the fact that they fail to see what eventually comes to pass does not mean that they are guilty of wrongful trading.”

This emphasises that the court does not approach the question of whether a director ought to have concluded that his company had no reasonable prospect of avoiding an insolvent liquidation with the benefit of 20:20 hindsight. As Lewison J concluded his judgment dismissing the liquidator’s case in HawkesHill,

“Of course it is easy with hindsight to conclude that mistakes were made. An insolvent liquidation will almost always result from one or more mistakes. But picking over the bones of a dead company in a courtroom is not always fair to those who struggled to keep going in the reasonable (but ultimately misplaced) hope that things would get better.”

In contrast, the type of situation in which liability has been held to attach are cases where the director has been held to have had no rational basis for believing that the event that they hoped would save the company would come about. So, for example, in re Kudos Business Systems [2011] EWHC 1436 (Ch), one of the issues was whether the director had a reasonable expectation that his co-director would fulfil various contracts to which the company had been committed by that co-director. Sarah Asplin QC found that,

“Furthermore, save for a couple of informal meetings with friends of Mr Ramsden’s from the DX, there is no evidence of any arrangement having been entered into with the DX at any time. Accordingly, in my judgment there is nothing upon which Mr Stevenson could properly have based a belief that arrangements had been entered into in order to fulfil the DX Contracts at the outset. Furthermore, there is no evidence whatever that after the complaints began to come in, Mr Stevenson or anyone else on behalf of the Company ever contacted any DX provider in order to ascertain whether in fact, it would be possible to provide the services which the DX Creditors had contracted for and paid.”

On that basis Sarah Asplin QC concluded,

“However, given the state of the Company's finances of which he ought to have been aware, the fact that I am unable to accept his evidence that he understood the DX Contracts to be otherwise than with the Company and my finding that there was nothing upon which Mr Stevenson could properly have based a belief that arrangements had been entered into in order to fulfil the DX Contracts at the outset, in my judgment, the rational expectation on 17 March 2006 could not have been other than that there was no reasonable prospect of avoiding insolvent liquidation.”

Likewise, in Roberts v Frohlich [2011] EWHC 257 (Ch), Norris J held directors liable for wrongful trading in circumstances in which their property development company (ODL) was balance sheet and cash-flow insolvent, it could not meet the conditions imposed by its bank for the additional funding necessary in order to be able to employ a building contractor to develop its only piece of land, there was therefore no prospect of entering into a fixed price contract with the contractor, talks with a prospective co-venturer had collapsed, and there had been no pre-sales of units on the site. Norris J held, at paras 111-112,

“111.

In my judgment each [of the directors] ought to have concluded at or about September 1, 2004, (certainly by (say) September 14, 2004) that there was no realistic prospect of avoiding an insolvent liquidation. By this date ODL was in fact insolvent on a balance sheet basis …[and]… on a “cash flow” basis ... The bank was adopting a highly restrictive approach to funding. There was no hope of a fixed price or “capped” contract being offered by [the building contractor]. There was no hope of satisfying that funding condition. The Easier deal had collapsed. The attempt to interest a co-venturer collapsed. The cash flow which purported to demonstrate the viability of the project simply did not hold good on any reading in the events which had happened. With their actual skill and experience as property developers, and employing the general analytical and assessment abilities to be expected of directors participating in financial oversight and project management of a new build development, they ought to have concluded that there was no reasonable prospect of avoiding entering insolvent liquidation. Their continuation with the development after (say) September 14, 2004, constitutes wrongful trading.

112

What drove Mr Frohlich and Mr Spanner at this stage was wilfully blind optimism; the reckless belief that, provided they did not enquire too deeply into the figures, provided ODL did not let on to [the building contractor] that there was no funding and did not let on to [the bank] that there was no fixed price contract, then something might turn up (if only because [the building contractor and the bank] could be sucked into the development to such a degree that, in order to salvage something, they would crack under pressure and would “share the pain”). But the hope that “something might turn up” was on any objective view groundless and forlorn. Insolvent liquidation was all but inevitable.”

In deciding what conclusion a director ought to have come to as regards the prospects for his company, the courts have been prepared to place some weight upon the evidence as to whether the directors took professional advice, and if so, what that advice was. So, for example, in Hawkes Hill at para 45, Lewison J placed some weight upon the fact that the company’s auditor did not advise the directors that the position was hopeless, but in fact told them that the business had a promising future, albeit that he also told them that they needed to find a capital injection or sell the business.

Likewise, in Continental Assurance [2001] BPIR 733 Park J introduced his analysis of the issues in the case as follows,

“106.

In my opinion it would be an extraordinarily harsh result if the directors in this case were liable for wrongful trading. None of the previous cases in which directors have been held to be liable has been remotely like this one. Typically, they have been cases in which the directors closed their eyes to the reality of the company’s position, and carried on trading long after it should have been obvious to them that the company was insolvent and that there was no way out for it. In those cases the directors had been irresponsible, and had not made any genuine attempt to grapple with the company's real position….

107.

In the present case the directors, in my opinion, took a wholly responsible and conscientious attitude, both to Continental’s position and to their own responsibilities as directors, at all times from and after the first crisis board meeting on 4 June 1991 when major and unexpected losses were reported to them. At the adjourned continuation of that meeting on 14 June 1991 Mr Burrows expressly raised the question of whether Continental could properly continue to trade. The directors did not ignore that question (like the directors in many of the other wrongful trading cases). On the contrary, they considered it directly, closely and frequently….

108.

When it was reported to the directors on 20 December 1991 that newly reported losses meant that Continental had become insolvent they gave instructions that it should not do any more business, and took advice from insolvency practitioners (Buchler Phillips, in the persons of Mr. Wacey and Mr. Buchler). The commencement of a formal liquidation did not happen until 27 March 1992, but that was in order to keep open as long as possible the chance of selling the company. Mr. Wacey and Mr. Buchler were aware of that at the time and raised no objections. They both confirmed in their evidence that they made no criticisms of the time which passed from December 1991 to March 1992 before the liquidation commenced.”

Park J later returned to this issue at paragraphs 263-264 of his judgment in the context of considering whether there was ever a realistic prospect of selling the company,

“The question of whether Continental was ever a realistically saleable company has arisen from time to time in the evidence, and all the parties have made submissions about it. One matter to which it might be relevant is one of the elements in the board’s thinking which, in its collective mind, justified the decision on 19 July 1991 that Continental should trade on. That element was that, if Continental was to survive in the long term, it would need an injection of new capital from its owners, replacing the capital which had been lost already. If the existing owners would not inject new capital (as it was soon established that they would not) the only possibility was to sell the company to an outside purchaser which would. The liquidators say that there never was any realistic prospect that Continental could be sold…. The respondents say that there was, and that it was simply bad luck, not an inevitability, that in the event Continental was not sold.”

In answering that question in favour of the directors, Park J placed some reliance on the attitude of the insolvency practitioners involved at the time. In particular Park J commented, at paragraph 269,

“Two other witnesses whom I ought to mention in this connection are Mr. Wacey and Mr. Buchler. They did not say that they considered that Continental could be sold, but they were advising the company during the time from December 1991 to late March 1992 while the liquidation was being delayed. They knew that the only purpose of the delay was to enable the receiver to pursue prospects of selling the company. They did not at any stage then suggest that the delay was pointless, and that there was no realistic chance of ever finding a buyer. Mr. Buchler is now one of the liquidators who are suing the directors, and part of whose case is that the directors ought to have realised, not just in early 1992, but back in July 1991, that there was no chance of finding a buyer for the company.”

Applying these principles to the facts as I have outlined them above, it first of all seems to me obvious (and it was not disputed by the Directors or the experts) that by 31 July 2010 the Company was insolvent on both a balance sheet and cash-flow basis, and had been for some time.

The draft balance sheet of the Company to 31 October 2009 showed a trading loss for the year, accentuated by substantial write-offs relating to Fareham FC, and a resultant balance sheet deficit of over £500,000. The bad winter of 2009/2010 had simply made matters worse. By the Spring of 2010 the Company was unable to pay HMRC its arrears of VAT on time and had begun to suffer increasing pressure from trade creditors who had also not been paid. The fact that the Company obtained time to pay from HMRC does not change the fact that the debts had not been paid when they were due.

It is, moreover, perfectly clear that the Directors were all well aware of the scale of the Company’s insolvency. They had received Mrs. Warman’s email of 16 June 2010 warning them of the “extreme pressure” on cashflow and the need for an investment of an “absolute minimum” of £300,000 to enable wages to be paid and to stop HMRC issuing a distraint notice. They had also received the draft accounts to 31 October 2009 which they had given to the Bank on 5 July 2010 leading to an acceptance that the Company had breached its financial covenants with the Bank.

By 31 July 2010 the Directors had had two meetings with Mr. Tickell on 22 and 29 July 2010. They had received Mr. Tickell’s letter of 22 July 2010 which made it clear that the Company was insolvent and that the only option that Mr. Tickell then saw which did not involve winding up the company was if the Bank was prepared to continue to support the Company by extending the overdraft and the Directors were able to reach an accommodation with the Company’s creditors (formally or informally). That was indeed the message that Mr. Hailstones and William Ralls communicated to Mr. Quar later that day as recorded in his attendance note –

“7.

Forward plan only works if [the Bank] continues with £600,000 and creditors agree deferred terms…

….

10.

If creditors do not assist forward plan will not work.”

As Mr. Boardman submitted, and as I have indicated above, the fact that the Company was, and was known to be, insolvent by this stage does not mean that an insolvent liquidation was unavoidable. In that regard, Mr. Boardman drew attention to a number of factors. These included the assertion that the Company was on reliable framework agreements, that it was entering its most profitable period of trading of the year over the summer, that it had already placed a large proportion of its purchase orders in advance of that period and that it had a secure forward order book.

As I shall consider further below, I accept that there is force in the points that by the end of July 2010 the Company was into what should have been its most profitable period of trading and that an immediate cessation of trading might have resulted in loss from the non-fulfilment of existing contracts where the costs of the work had to a large extent already been incurred. It is also the case that Mrs. Warman’s projections indicated that the work during August - October was expected to produce net profits of £327,284.

But in my judgment, just as knowledge that the Company was insolvent does not mean that the Directors knew or ought to have concluded that an insolvent liquidation was inevitable, the mere fact that continued trading over the summer months might have be anticipated to be profitable does not mean that insolvent liquidation could be avoided by that course alone. Mrs. Warman’s projections for net profits of about £400,000 for the following financial year from the end of October 2010 - 2011 were subject to a number of very substantial assumptions, and as Mr. Price pointed out to Mrs. Warman on 30 July 2010, they gave no basis for believing that the Company had any realistic prospect even of servicing a company voluntary arrangement to pay off its deficit and reduce its Bank overdraft to a reasonable level within a 5 year period.

Although Mr. Price’s illustrative spreadsheet was somewhat simplistic and did not take into account the anticipated profits of £327,284 between August and October 2010, no-one suggested at any time that these profits would make all the difference. In short, at no relevant time was there any realistic basis for concluding that the Company could, by trading alone, eliminate the huge hole of about £1.4 million in its balance sheet, even assuming that the Company’s creditors and the Bank would have been willing to give it the very extended time that it would have needed to do so.

Accordingly, although Mr. Tickell had told the Directors that they did not need to stop trading immediately on Thursday 29 July 2010, it was a matter of days before he confirmed to the Directors at the meeting on Monday 2 August 2010 – the next working day after 31 July 2010 - that no amount of cost- cutting or continued trading alone could save the Company. That advice was confirmed in the extracts from the letter of 6 August 2010 which I have set out in paragraphs 119-120 above.

Instead, it seems to me that as a result of the meeting on 2 August 2010, and at all times thereafter, the Directors and others involved in the efforts to save the Company knew that the only realistic prospect of salvation was if Mr. James could be persuaded to complete a transaction that would introduce a substantial amount of new money to the Dylex group so as to facilitate the recapitalisation of the Company. Accordingly, I think that the critical question under section 214(1) is whether, either by 31 July or 31 August 2010, the Directors knew or ought to have concluded that there was no reasonable prospect of a suitable deal being concluded with Mr. James.

I have already indicated that in my view there is no basis for a finding that at either date the Directors actually (i.e. subjectively) knew that there was no reasonable prospect of a deal with Mr. James. The contemporaneous evidence suggests that right up to the time at which the Directors decided to call in Mr. Tickell on 20 September 2010 and indeed for a short while thereafter, the Directors were still acting in the belief that Mr. James could be persuaded to conclude a deal. Nor do I think that any suggestion to the contrary was seriously advanced by the Joint Liquidators.

Instead, the real issue as regards section 214(1) is whether, and if so, when, the Directors ought to have concluded that there was no reasonable prospect of completing a deal with Mr. James. This requires consideration of what a reasonably diligent person having the same general knowledge, skill and experience as the Directors, would have known and concluded. The Joint Liquidators contend that such a person would have reached the conclusion that there was no reasonable prospect of a deal with Mr. James some time before the Directors eventually came to that conclusion and took steps to consult Mr. Tickell with a view to commencing an insolvency procedure on 20 September 2010.

As a preliminary observation in this respect, I should say that although Mr. Boardman made the point that I ought to consider the particular characteristics of the Directors separately, he did not seek to draw any distinction between the Directors. In my judgment it would be unrealistic to do so. The evidence was that the Directors made their decisions together, albeit that they had particular areas for which they were primarily responsible within the Company. I do, however, fully accept, and take into account, that the Directors were builders who were not professionally trained or qualified in financial matters. In particular, although the ultimate responsibility for the maintenance of accounting records and preparation of accounts was theirs, in practice they relied substantially upon Mrs. Warman in relation to such matters.

As a second observation, it is the case that neither side in this litigation sought to call Mr. James to give evidence or adduced much objectively verifiable evidence about him. I was largely left to form an impression of Mr. James’s financial standing and his interest in the Dylex group from the anecdotal evidence about him given by the Directors – and in particular Nicholas Ralls, who was the main point of contact with Mr. James.

So, for example, the Directors’ assertions about Mr. James included that he was married to Philippa Jewson, a member of the Jewson family who had founded the Jewson’s chain of builders merchants; that he had claimed that he and his wife had made a large amount of money from property dealings and rental properties in Belgravia; that they occupied substantial properties in Belgravia and Monaco; that they had interests in an off-shore trust; and that they drove expensive motor-cars and entertained in lavish style. There was also some evidence that Mr. James appeared to have contacts in the world of property development and had (unsuccessfully) attempted to introduce the Company to some building projects in London and Portsmouth.

There was, however, little if any documentary support for these assertions. I was not, for example, shown any contemporaneous documents resulting from any inquiries by the Directors into Mr. James’ background and finances. When Nicholas Ralls was asked in cross-examination how much research he had done on Mr. James, his glib response was, “A mammoth amount”. However, it was then pointed out to him that he had not found out that Mr. James was not actually the registered owner of the flat in which he lived in London (a mistake that had prompted a correction to his witness statement), which was something which could have been discovered if he had done a search of the property register. Mr. Ralls answered,

“A. I didn't feel the need, ma'am. I brush shoulders with all his wealthy friends, and I knew the property dealers, I have evidence of all of them with me, I have photographs of George, I can corroborate all my evidence in my statement, where I've been, who I've been with. I've got evidence of George's -- of doing a large deal, but it's after the date of our insolvency. But, you know, I believe I did a great deal of due diligence on George because you do check these people out. You don't ask them what's in their bank balance. You don't ask the Queen what's in her purse, with respect to everybody. But you do do due diligence. I know his wife well. You actually question, you know you do sometimes corroborate with -- you know, they can't get that -- they can't get the story straight between two people since 2009 and I have brushed arms with some of his very wealthy, with very wealthy property dealers. I've actually been in another flat owned by a chap called Peter Lucas.

MR JUSTICE SNOWDEN: Are you telling us of events which took place at the time in 2010 or are you just telling us of events which have taken place since 2011 –

A. This is since September of 2009, when I met George. I've actually met his wealthy associates. I've been in some of their houses.”

Nicholas Ralls’ evidence that Mr. James saw the potential for investing in the Dylex group with a view to making a profit from an eventual flotation of the group was also rather vague,

“Q. The real value in these companies is that there is potential value to exploit, which was going to happen in a flotation. Is that right?

A. There's huge potential with Comserv and MTS, ma'am, huge potential.

Q. Presumably, when you were talking about the flotation with Mr James he was giving you figures that you thought you might be able to make on the flotation. Is that right?

A. Well, you know, yeah, I mean -- I think he was floating figures around. I can't remember what --

Q. Very roughly are we talking --

A.

Well, to be honest with you, you know, we wouldn't have took a lot of precedence on that. You know, at the end of the day Mr James saw the unique -- and Mr James is an entrepreneur. He spots an opportunity. I've actually spoke to him in length about the virtues of Comserv and MTS, my Lord, he come down and seen it for himself. He's an untapped -- to be honest with you we have taken it to a level which we're extremely proud of.

But I'm sure, and George was telling me, people up in London who float businesses, they look for new ideas.

And somebody's advisers was also telling him that, who came down to see us, quite a unique business. And, you know, the flotations like Will said, look, we don't fully understand that but, you know, I'd have studied it in great depth if we'd managed to get there, you know. But also, we did feel with George on board, you see, it wasn't just about Comserv and MTS, and flotation, we had some huge capital to do some terrific stuff, building.”

In my judgment these responses well illustrates that Nicholas Ralls was overly-impressed by the superficial trappings of Mr. James’s wealth, and was out of his depth in dealing with him in relation to securing the investment the Company needed. But I equally have no doubt that Mr. Ralls would have been the last to admit that, and he would have sought to give the impression that matters were under control.

Whilst the matters referred to by Nicholas Ralls are an inadequate basis upon which to form a view as to Mr. James’s resources and intentions, the difficulty from the point of view of the Joint Liquidators’ case is that apart from the point in relation to the ownership of the London property, the Joint Liquidators did not adduce any evidence as to what might have been discovered about Mr. James had any more rigorous inquiries been performed. I am therefore unable to form any view as to what (if any) different or additional information would have been discovered about Mr. James by a reasonably diligent director. Nor was there any expert evidence as to valuation or otherwise to indicate what view a reasonable director might have formed as to the credibility of Mr. James’s business plans.

Further, and more importantly, although a number of people (including Mr. Hailstones and William Ralls in conversations with Mr. Quar) expressed doubts from time to time that a deal with Mr. James would eventually be consummated, there was no evidence that at any point anyone suggested to the Directors either that it was inherently implausible that Mr. James would agree to acquire 25% of the shares in the Dylex group for the £2.5 million that would have provided £1 million for the Company, or that Mr. James did not have the means to do so, or that the Directors should be carrying out further investigations into his background, financial standing and business plans.

So, for example, on 2 August 2010 Mr. Tickell was told about Mr. James’ interest, and after further discussions with Mrs. Warman he wrote on 6 August 2010 to the Directors referring uncritically and supportively to the continuation of discussions by them with Mr. James – at least for a limited period. In my judgment, that support, and the lack of any suggestion to the Directors that they should be pursuing a different course, is highly significant.

In terms of section 214, Mr. Tickell was not merely a reasonable person having the general knowledge, skill and experience to be expected of the Directors, who were experienced in the building trade but not in matters of finance. Mr. Tickell was a specialist insolvency practitioner who understood that the Directors were looking to him for expert guidance. By 2 August 2010, Mr. Tickell was well aware of the dire state of the Company’s finances, he had clearly formed the view that the Company could not trade its way out of its problems within any realistic timescale, and he knew how much money would be required by way of an investment from a third party to save the Company. He had also made repeated references to the dangers of wrongful trading and thus had this issue very much in mind. Having only just been told about Mr. James, he must have been both curious and sceptical as to this potential saviour of the Company.

Against this background, Mr. Tickell’s letter of guidance to the Directors on 6 August 2010 was detailed and careful, but did not once suggest that there was something inherently implausible about an investment from Mr. James or that the Directors should pursue further investigations to satisfy themselves that such an investment was credible. Instead, Mr. Tickell expressly advised the Directors,

“Clearly it must be best to get in sufficient new money to clear the debts by finding new shareholders, particularly one who is prepared to take a broader and longer term perspective and not be deterred by the immediate liabilities…”

and,

“Alternatively, you could find some additional immediate funding to improve the prospects of implementing a repayment plan and we left it that you would talk to the investor to that end, stressing the urgency and that some advance funds would be required even if he is not yet ready to make the total investment. In order to avoid wrongful trading, you should give this a limited period to succeed.

We hope that this summarises our guidance usefully. If you have any queries, please let us know. In the meantime, best of luck getting the investor to deliver what he has indicated and we should be pleased to consider with you the next steps once the results of that are known.”

Moreover, quite apart from the advice given directly to the Directors on 2 August and 6 August 2010, none of Mr. Tickell’s communications to his colleagues at Portland or to Mr. Barnes at the time suggested that the course that the Directors intended to pursue was unrealistic or doomed to failure.

Mr. Tickell’s internal email to Mr. Godwin on 6 August recorded that he was aware of “the obvious risk” that the Directors would “dig themselves a deeper hole”, but Mr. Tickell did not amend his draft letter or do anything else to suggest to the Directors that they should not be running that risk, even when Mr. Godwin voiced concern that the Directors might not appreciate “the size of the hole they are in or how frayed the rope is that they intend/want to use to climb out”. Without being over-literal, I would observe that even Mr. Godwin did not suggest that there was no rope at all, or that the Directors had no reasonable prospect of escaping from the hole they were in.

Further, Mr. Tickell’s email to Mr. Barnes of 8 August 2010 plainly showed that Mr. Tickell was appropriately sceptical, given that Mr. James “hasn’t so far delivered or committed to a timescale”. However, he did not suggest that the Directors’ efforts were hopeless or that they should be pursuing any other course: and Mr. Barnes did not respond by questioning the advice that had been given to the Directors.

I have already referred above to the authorities such as Hawkes Hill and Continental Assurance that indicate that when assessing what conclusions a director ought to have come to as regards the prospects for his company, the court will place some weight upon the advice given and views expressed (or not expressed) by appropriate professionals. In the instant case, Mr. Tickell’s involvement in late July and early August is highly significant. To my mind the approach which he took on 2 August 2010, as confirmed in his letter of 6 August 2010 and the associated emails, as regards the prospects of obtaining an investment from Mr. James, must be fatal to the Joint Liquidators’ case that as at 31 July 2010 the Directors ought to have concluded that there was no reasonable prospect of the Company avoiding an insolvent liquidation. In short, the Directors sought and received expert advice from Mr. Tickell on 2 and 6 August 2010, which was to the effect that they were not then trading wrongfully, and I do not think that I have a sufficient basis to reach a different conclusion.

I am reminded in this regard of the position of the directors and the liquidators in the Continental Assurance case. At paragraphs 263-264 of his judgment, in the context of considering whether there was ever a realistic prospect of selling the company, Park J observed,

“The question of whether Continental was ever a realistically saleable company has arisen from time to time in the evidence, and all the parties have made submissions about it. One matter to which it might be relevant is one of the elements in the board’s thinking which, in its collective mind, justified the decision on 19 July 1991 that Continental should trade on. That element was that, if Continental was to survive in the long term, it would need an injection of new capital from its owners, replacing the capital which had been lost already. If the existing owners would not inject new capital (as it was soon established that they would not) the only possibility was to sell the company to an outside purchaser which would. The liquidators say that there never was any realistic prospect that Continental could be sold…. The respondents say that there was, and that it was simply bad luck, not an inevitability, that in the event Continental was not sold.”

In answering that question in favour of the directors, Park J placed some reliance on the attitude of the insolvency practitioners involved at the time. In particular, he commented, at paragraph 269,

“Two other witnesses whom I ought to mention in this connection are Mr. Wacey and Mr. Buchler. They did not say that they considered that Continental could be sold, but they were advising the company during the time from December 1991 to late March 1992 while the liquidation was being delayed. They knew that the only purpose of the delay was to enable the receiver to pursue prospects of selling the company. They did not at any stage then suggest that the delay was pointless, and that there was no realistic chance of ever finding a buyer. Mr. Buchler is now one of the liquidators who are suing the directors, and part of whose case is that the directors ought to have realised, not just in early 1992, but back in July 1991, that there was no chance of finding a buyer for the company.”

Whilst that concludes the case in favour of the Directors as regards the allegation of wrongful trading from 31 July 2010, it does not deal with the alternative date suggested by the Joint Liquidators of one month later, 31 August 2010.

In that regard, although I have placed weight upon Mr. Tickell’s view in his letter of 6 August 2010 that it was reasonable for the Directors to continue to trade whilst pursuing Mr. James, it is important to note that Mr. Tickell expressly indicated to the Directors in that letter that they should give their efforts to obtain an investment from Mr. James “a limited period to succeed”. That advice doubtless reflected a number of factors.

Quite apart from the fact that a considerable time had already elapsed since Mr. James had been sent financial information about the Dylex group in April 2010, had visited the group and had discussions with the Directors, by the end of first week of August, the Company had not obtained a renewal of its overdraft facility but was surviving on a temporary extension of its overdraft from the Bank; it had been under severe creditor pressure for some time and had begun to attract litigation from creditors; and its credit insurance had been suspended. Moreover, any significant further delay in obtaining an investment would obviously threaten the Company’s framework contracts and further harm its relationships with the trade. Mr. Tickell had also pointed out the particular concern over taking additional credit from suppliers to finance continued trading, which even if profitable would largely benefit the Bank.

As well as these factors that made it imperative from the point of view of the Company to secure money from Mr. James in a very short space of time, any assessment by the Directors of the prospect of Mr. James coming up with the necessary money - even if it was only part of the sum necessary to restore the Company to balance sheet solvency - should also have taken into account the fact that Mr. James had told Nicholas Ralls on 4 August 2010 that he had completed the sale of his house in Eaton Square and that he had resolved his residency issues in Monaco. Mr. James had also provided the Directors with the Ralls LOI to assist with obtaining an extension of the overdraft from the Bank on 5 August 2010 and stated in his email that he had instructed lawyers (who he claimed had drawn up the document), that he would “be in funds within a few days”, and that he “hope[d] to conclude this transaction as soon as possible”.

Accordingly, by the end of the first week in August 2010 Mr. James must have been well aware of the extreme urgency of providing funds if the Company was to be saved, and he had represented to the Directors that he was ready to proceed. If he had any real interest in saving the Company, as opposed to investing in the remainder of the Dylex group, the time for him to do so had arrived.

The simple fact, however, is that Mr. James did not live up to his representations that he would provide the necessary money, and no progress was made to that end during the remainder of August. Mrs. Warman’s email of 13 August 2010 recorded that Mr. James had told the Bank that he would be in a position to invest during the week commencing 16 August 2010, but that week passed without sign of any deal, still less any money. Further, even though Nicholas Ralls flew to see Mr. James in France on 23 August 2010 in an effort (as he told the Bank) to “get [the] deal done over the next few days”, still nothing happened. The reality, therefore, was that in spite of the extreme urgency of the Company’s situation, of Mr. James having been told that, and of Mr. James’ earlier indications of willingness to provide monies to assist the Company, Nicholas Ralls returned empty-handed to the UK from France in late August. He also had a similarly unproductive meeting with Mr. James back in the UK on Sunday 29 August 2010.

Indeed, it was seemingly only at the end of August that Mr. James suggested to the Directors that they should get some documentation drafted to form the basis for detailed discussions. It also became clear in cross-examination of Nicholas Ralls that even much later in September, when documents had been drafted by Verisona Law, Nicholas Ralls did not think that it was his task to organise the transaction or finalise a deal with Mr. James, but would have left the financial details to his brother and Mr. Hailstones.

I caution myself against the application of hindsight, and remind myself that I should not too readily criticise the Directors’ contemporaneous actions from the comfort of a courtroom. Nonetheless the lack of any progress with Mr. James and his repeated failures to produce the monies that he indicated would be available during August ought in my judgment to have led the Directors to conclude by the end of August 2010 that there was no longer any reasonable prospect of Mr. James providing the necessary funding in time to save the Company. Although Nicholas Ralls’s evidence was that he was still being assured by Mr. James that he was going to make an investment, and it seems that the Directors still had some faith in Mr. James, I think that this can only have been based on hope and optimism. By the end of August 2010 I do not think there was any longer a rational basis upon which to expect that he would provide the necessary money that the Company urgently needed. In my view, a realistic assessment at the end of August 2010 should have led the Directors to conclude that Mr. James could not be relied upon, and that there was no reasonable prospect of the Company avoiding an insolvent liquidation.

As it was, however, the Directors did not carry out any such assessment themselves or ask Mr. Tickell or Portland to do so. The only contact with Portland after 6 August 2010 appears to have been the short email exchange between Mrs. Warman and Mr. Price on 13 August, and the further short exchange of emails between them on 3, 7 and 14 September 2010. At that stage, as Mr. Price indicated in evidence, Portland was not being asked to provide any further advice, but was simply keeping in contact pending further events materialising. Accordingly, although Mrs. Warman’s email of 7 September 2010, which was copied to Mr. Tickell, gave rather a positive view of meetings between Nicholas Ralls and Mr. James and suggested that guarantees might be given to the Bank to permit the situation to continue for another couple of weeks, I do not think that Mr. Tickell’s silence in response can be treated as affirmation that what the Directors were doing was still reasonable or justified.

Nor do I think that Mr. Price’s own response a week later on 14 September that he assumed that “talks are still ongoing and the Bank has not yet done anything rash” or his observation that the situation “cannot continue for any great length of time before the implications become more profound than they already are” can be taken to be any form of confirmation that Mr. Price regarded it as appropriate for the Directors to have continued trading in the meantime. I accept Mr. Price’s evidence that he probably wrote the email in that way because quite a lot of time had passed and Portland were not getting much information about progress.

My finding that the Directors ought to have concluded by 31 August 2010 that there was no reasonable prospect of the Company avoiding insolvent liquidation does not, however, necessarily result in the Directors being required to make a contribution to the assets of the Company. In that regard, two potential issues arise.

The first is whether the Directors can avail themselves of the defence in section 214(3) that after 31 August 2010 they took every step with a view to minimising the potential loss to the Company’s creditors that they ought to have taken. The second is how to quantify the amount of any contribution that the Directors should be required to make to the assets of the Company.

In both these respects, the Directors’ primary contention, in reliance upon the decisions of Vinelott J in Re Purpoint [1991] BCC 121 and of Park J in ReContinental Assurance [2001] BPIR 862 is that the reference in section 214(3) to minimising the potential loss to the company’s creditors should be read consistently with the basis for any contribution under section 214(1), and that both focus entirely on whether there is an increase in the net deficiency of the company as regards its general body of unsecured creditors which is caused by the period of wrongful trading.

The Directors also contend that when determining whether there is an increase or a reduction in the net deficiency of the company as regards unsecured creditors for the purpose of section 214(1), the court must be careful only to take into account an increase or decrease caused by the wrongful continuation of trading. They contend that any losses resulting directly from the insolvency itself, which would have been sustained irrespective of when trading ceased, should not be included in a contribution under section 214(1). So, for example, they contend that losses caused by debtors taking advantage of the fact that a company goes into a formal insolvency process and refusing to pay their debts should not be included in any contribution if such debtors would have adopted that tactic irrespective of when the company went into administration or liquidation.

On the facts, the Directors contend that even if they ought to have realised by 31 August 2010 that the Company had no reasonable prospect of avoiding an insolvent liquidation, it would still have been entirely appropriate for them to cause the Company to continue to trade for a period, rather than simply to cease trading immediately and to go into liquidation or administration. Several reasons are given for this, but the primary contention of the Directors is that by the end of August 2010 the Company was a substantial way through its most profitable trading period, and in particular had almost completed its major schools contracts during the summer school holidays that began in mid- July and ended on 6 September 2010. The Directors contend that a great deal of the trade credit required for those jobs had already been incurred, that the majority of work had been done, and that an immediate cessation of trading at the end of August would simply have left contracts unfinished and customers entitled to withhold payment. They also contend that they were better able to collect contract debts outside a formal insolvency process.

Hence, the Directors contend, it was in the interests of the creditors as a whole for the Company to continue to trade for a short time after 31 August 2010 to complete its contracts and collect the payments of contract debts on a “going concern” basis. They submit that doing this meant that the overall deficit of the Company as regards its unsecured creditors was thereby reduced between 31 August 2010 and 13 October 2010, and that, correspondingly, the ultimate deficit in the insolvency process that commenced on 13 October 2010 was less than would have been the case had the Company been placed into administration immediately on 31 August 2010. They therefore submit that they have a defence under section 214(3) and ought not in any event to be required to make any contribution to the assets of the Company under section 214(1).

The Joint Liquidators dispute this reading of section 214. They contend that a claim under section 214 is not the property of the company in question and does not focus on loss to the company, but is designed to benefit the actual creditors who are left in the liquidation. They contend that the focus of the section is on the loss suffered by those creditors. The Joint Liquidators contend that when the relevant date is reached, section 214 requires an immediate cessation of trading. They say that a director cannot make out the defence under section 214(3) if, after the relevant date, he permits new credit to be incurred which is not paid, or if he continues to pay himself any money from the company rather than forgo his wages and other benefits so as to benefit the unsecured creditors.

The Joint Liquidators also contend that to the extent that Re Purpoint and ReContinental Assurance indicate to the contrary, they were either wrongly decided or in any event cannot now survive the introduction in 2003 of the Prescribed Part requiring secured creditors to make available a fund for unsecured creditors pursuant to section 176A of the Insolvency Act 1986. Hence, they say, a director cannot make out a defence under section 214(3) simply by showing that continued trading after the relevant date was profitable and reduced the overall deficit to creditors as a general body.

So far as quantification is concerned, the Joint Liquidators accept that the increase in the net deficiency of the company might be an appropriate approach to take in some cases. Indeed, their Points of Claim pleads as the main item of claim an alleged increase in the net deficiency of the Company over the alleged period of wrongful trading.

However, the Joint Liquidators’ quantification of that alleged increase in net deficiency in this case was set out in two Schedules to the Points of Claim which did not (as might have been expected) take the form of balance sheets at 31 August 2010 and 13 October 2010. Instead, the Schedules were computations of creditor movements and cash receipts said to be based upon the Company’s books of prime entry and the SAGE entries in relation to the Company’s bank balances. The stated reason for presenting the claim in this way was said to be the inadequacy (or lack) of accounts for the Company.

The Schedules first took the aggregate increase in the amount of the (trade) creditors of the Company over the period from 1 September 2010 to 13 October 2010. These numbers were said to have been derived from the Company’s purchase ledgers (£600,521.56). This figure was off-set by the reduction in the balance on the Company’s Bank overdraft (£554,530.83) giving a net increase in trade creditors of £45,990.73. To that was added an increase in Crown creditors (from the payroll) after 1 September 2010 (said to be £158,792.25).

The Joint Liquidators’ calculation then also added the entirety of the cash received and utilised by the Company between 31 August 2010 and 13 October 2010 (£1,306,349.37) on the basis that the Joint Liquidators claimed that all these funds derived from trading before 1 September 2010 “and would still have arisen if the Company had ceased trading as at 31 August 2010”. As I understand it, this was on the basis that if the Company had ceased trading on 31 August 2010, all of these monies would have been received into the administration but they would not have been spent. This gave a total of £1,511,132.35.

The only reduction allowed was in respect of the sums recovered in the administration (£541,868), less recoveries of what were taken to be pre-1 September 2010 retentions, namely 75% of retentions of £101,034. The net reduction was therefore £466,092.77. This gave a total claim of £1,045,039.58.

In a revised schedule which was provided by the Joint Liquidators at the start of the trial to allow for events between the commencement of the claim and the trial, the amount of the claim in respect of the period after 31 August 2010 was reduced by a further £111,016 of cash received in the liquidation and a correction to the amounts of the Company’s liabilities for Crown debts of £38,812, giving a total claim of £895,212.

In the Points of Claim, the Joint Liquidators contended, in the alternative, that the Directors should simply be ordered to contribute £600,522, being the aggregate of trade debts incurred by the Company after 31 August 2010. The main cases relied upon by the Joint Liquidators to justify this latter approach were Re Purpoint and Re Kudos. In Re Purpoint, Vinelott J was faced with a “total failure” of the director to ensure that any proper accounting records were kept and adopted a pragmatic solution to quantify the loss to the company caused by continuation of trading, which was to aggregate the debts owed to creditors which were incurred after the relevant date and unpaid when the company ceased trading, together with the Crown debt incurred and unpaid after that date. That approach was followed in Re Kudos.

The Joint Liquidators also included an ancillary claim to recover the entire costs and expenses of the administration and liquidation of the Company in the total sum of £287,071. I shall return to consider that claim briefly at the end of the Judgment.

In Re Oasis Merchandising Services Limited [1998] Ch 170 it was held that any contribution which is declared to be payable under section 214 is not to be regarded as an asset of the company caught by a charge over the company’s property. Instead, the Court of Appeal held that the contribution is the fruit of a statutory cause of action and any monies received will be held by the liquidator upon the statutory trusts for distribution by him in accordance with the statutory scheme for distribution of the property beneficially owned by the company. In the case of a voluntary liquidation, this scheme is encapsulated in section 107 of the 1986 Act which requires that the company’s property shall be used to pay the company’s unsecured liabilities pari passu.

In my judgment, the fact that any contribution to be made under section 214(1) must be distributed pari passu among the general body of unsecured creditors of the company is a significant pointer to the fact that the purpose of section 214 is not to provide differential redress for individual creditors, depending upon an assessment of the extent of their loss caused by the period of wrongful trading. So, for example, a creditor whose debt was incurred after the relevant date cannot claim to recover 100% of his loss in priority to a creditor whose debt was incurred prior to that date and who may only have been marginally disadvantaged (or not disadvantaged at all) by the continuation of trading.

That point was made by Vinelott J in Re Purpoint [1991] BCC 121 at 128-129 (emphasis added),

“Mr Craig, who appeared for the liquidator, submitted that Mr Meredith ought to be ordered to pay all the company's creditors and the costs of the liquidation because that is the only way in which creditors whose debts were incurred after Mr Meredith knew or ought to have known that the company was bound to go into insolvent liquidation, can be paid in full. I think that submission is ill-founded. The court, in making an order under section 214, is concerned to ensure that any depletion in the assets of the company attributable to the period after the moment when the directors knew or ought to have known that there was no reasonable prospect of avoiding an insolvent winding up - in effect, while the company's business was being carried on at the risk of creditors - is made good: see ReProduce Marketing Consortium Limited (1989) 5 BCC 569 per Knox J at p. 597G. The purpose is to recoup the loss to the company so as to benefit the creditors as a whole. The court hasno jurisdiction to direct payment to creditors or to direct that moneys paid to the company should be applied in payment ofone class of creditors in preference to another. Moreover,creditors whose debts are incurred after the critical date in facthave no stronger claim than those whose debts were incurredbefore that date. The former class also suffers to the extent thatthe assets of the comp an y a re depl eted b y wron gf ul trading.”

Likewise, in Re Continental Assurance plc [[2001] BPIR 862 at 864, Park J considered the possible approaches to quantification of a wrongful trading claim. He rejected a claim based upon loss to individual creditors (referred to as the “10C” basis – so-called by reference to the relevant paragraph of the pleading in the case) and accepted that the correct starting point was the increase in the net deficiency of the company. Park J said,

“(5). In my judgment, under a section 214 claim the starting point for measuring the directors' contribution to the assets of the company is, or at the very least is likely to be, the loss to the company caused by the wrongful trading. Mr Atherton said that there are a range of possible starting points, of which the loss to the company is only one. Alternatively, it might be fairer to say that he said that of the range of possible starting points the increase in net deficiency (the IND) is only one. Perhaps there is a range of possible starting points, but if the loss to the company from the continued wrongful trading can be ascertained, I believe that either that is the only possible starting point or, at least, it is the normal starting point….

…

(9). I believe that the starting point for liability under section 214 is any element of loss to the company from its trading on instead of going into liquidation at the earlier date. The continued trading — albeit wrongful — has to make the company's position worse, so that it has less money available to pay creditors, rather than to leave the company's position at the same level. It must make the company's position worse before it becomes appropriate for the court to order the directors to make a contribution.”

In arriving at this result, and rejecting the alternative “10C” basis suggested in argument, Park J also considered the relevance of the fact that some creditors rather than others were paid off during a period of wrongful trading,

“(6). A major plank in Mr Atherton's support of the 10C basis is that, whereas some persons who were creditors at 19th July 1991 were still creditors at 27th March 1992 and received lower dividends in the actual liquidation than they would have done in an earlier July 1991 liquidation, other persons who were also creditors at 19th July 1991 were paid their debts in full, between that date and 27th March 1992. The latter kind of 1991 creditors did considerably better than the former kind. Factually what Mr Atherton says is correct, but I do not accept that it is a justification for invoking section 214 against the directors. The section which is principally relevant to cases where, in the period before an insolvent liquidation, one creditor gets paid but another does not, is section 239, headed “Preferences.” That section does not apply in this case, because CAL and its directors paid the debts of some 1991 creditors in the normal course of continued trading. They were not influenced by a desire to prefer those creditors over other creditors — see section 239(5). The payments which were made to some 1991 creditors were, in the event, preferences in a broad sense of the term, but they were certainly “innocent” preferences and outside the scope of section 239. If the criteria which Parliament has set in section 239 for rectifying transactions which have a preferring effect are not present, I agree with Mr Weitzman that it would be anomalous for a liquidator nevertheless to be able to rectify an “innocent” preference by proceeding instead against the directors under section 214.

(7). In this connection it does not to my mind make any difference if, during the period when CAL paid the debts of some creditors but not others, it ought not to have been trading at all. Payments were still made in the course of trade in discharge of genuine trading liabilities. They did not in themselves inflict any loss on CAL. To repeat a point made in (3) above, if a company has a true trading debt and pays it in full, it does not, by paying its debt, suffer a loss.

(8). With reference to this last point, I describe a simplified example which was much discussed in the argument and which in my judgment brings out the question of principle. Assume that a company ought to have stopped trading and gone into liquidation at one time (T1) but in fact did not. Instead it traded on to a later time (T2), ceased to trade then, and went into liquidation. At T1 it had assets of 5 and liabilities of 10, of which 5 were owed to creditor A and 5 were owed to creditor If it had gone into liquidation at T1 then, ignoring the costs of liquidation, it would have paid 2.5 to A and 2.5 to B. It would then have gone out of existence with a net deficiency of 5. Assume now that, between T1 and T2 when the company was still trading and had not gone into liquidation, it paid 5 to A in discharge of its debt to him but did not repay B. Assume also that in doing this it was not influenced by a desire to prefer A, so section 239 does not apply. Assume, finally, that in the period of continued trading from T1 to T2 the company broke even and paid all the trading debts which it incurred in that period. So when it went into liquidation at T2 it had no new creditors. It still owed 5 to B but it had no assets left. In the liquidation at T2, B receives nothing and the company goes out of existence with a net deficiency of 5.

What is the effect on the company of its trading on until T2, and going into liquidation then, instead of ceasing to trade at T1 and going into liquidation at that earlier time? Mr Atherton says that the company has made a loss of 2.5, because, whereas if it had gone into liquidation at T1 it would have been able to discharge 2.5 of its debt to B, on the actual facts of going into liquidation at T2 it cannot discharge any of its debt to B. I do not agree with Mr Atherton's conclusion. The company makes no loss by trading on. On either date, that is to say T1 or T2, it would have gone out of existence with net liabilities of 5. At the earlier date — T1 — those liabilities would have consisted of 2.5 owed to A, and 2.5 owed to B. At the later date. T2, they consisted of 5 owed to B. That difference in the make up of the creditors whom the company cannot pay does not mean that the company — by going into liquidation later rather than sooner — has made an extra loss of 2.5. It is correct that, as a result of the company going into liquidation later, B makes a loss of 2.5, which is matched by a gain to A of 2.5, but it is B who makes the loss of 2.5, not the company.

It seems to me that one of the propositions which can be supported by reference to this simplified example is the proposition, which I believe to be correct, that the 10C basis is not a calculation of loss to the company at all, but is rather a calculation of loss to CAL's creditors. Further, it is a calculation of loss to one of the creditors, or in the real case, some of them, leaving out of account the fact that there were other creditors in existence at the date who correspond to T1, and who are advantaged, rather than disadvantaged, by the continuation of trading.”

It will be seen that in his analysis, Park J only considered a case in which, during the period of wrongful trading, some existing creditors were paid off rather than others. He expressly assumed that during the period in question, new creditors would be paid in full. I do not, however, think that this makes a difference to the basic approach to section 214. Both Vinelott J and Park J proceeded upon the basis that the structure of section 214 focussed attention on loss to the company as a result of a period of wrongful trading, and held that this must form the basis for the amount which the directors ought to contribute to the assets of the company. Park J thought that section 214 should not be used to provide a remedy against the directors in respect of preferential treatment given to some creditors which did not fall within section 239. Similarly, Vinelott J thought that a remedy under section 214 could not be directed to benefit certain creditors so that, for example, section 214 should not be used to provide a remedy against directors in respect of conduct which may have caused detriment to individual creditors but which does not amount either to a fraud against those creditors or fraudulent trading within section 213 because of the absence of the necessary intent on the part of the directors when the credit was incurred.

From these cases I therefore conclude that the correct approach to determining whether the Directors should be required to make a contribution under section 214(1) is, as the Directors contended, to ascertain whether the Company suffered loss which was caused by the continuation of trading by the Company after 31 August 2010 until the Company went into administration on 13 October 2010, and that as a starting point this should be approached by asking whether there was an increase or reduction in the net deficiency of the Company as regards unsecured creditors between the two dates.

I think that the authorities to which I have referred also make good the submission on behalf of the Directors that there has to be some causal connection between the amount of any contribution and the continuation of trading. Losses that would have been incurred in any event as a consequence of a company going into a formal insolvency process should not be laid at the door of directors under section 214. That factor is of particular importance in this case as a result of the evidence (including the contemporaneous comments of Mr. Tickell) of the particular difficulties in dealing with customers in the insolvency of any construction company.

I do not, however, think that the defence under section 214(3) can be made out, as the Directors suggest in this case, simply by showing that their actions after the relevant case were aimed at reducing the net deficit of the Company.

The function and wording of the two subsections of section 214 are different. Section 214(1) provides for a financial remedy in effect to restore the financial position of the company to what it would have been had the wrongful trading not occurred. Section 214(1) is thus a provision that focuses on the consequences of wrongful trading for unsecured creditors as a whole. In contrast, section 214(3) focusses on the regime which the director puts in place to protect creditors after the relevant time, rather than the result. If a director can show that he took “every step …as he ought to have taken” after the relevant time “with a view” to minimising the potential loss to creditors, he avoids liability under section 214(1), even if he does not actually succeed in his objective.

Given the express wording of section 214(3) (“every step”), I think that it is plain that section 214(3) is intended to be a high hurdle for directors to surmount. I therefore think that it is right to construe section 214(3) strictly and to require a director who wishes to take advantage of the defence offered by that subsection to demonstrate not only that continued trading was intended to reduce the net deficiency of the company, but also that it was designed appropriately so as to minimise the risk of loss to individual creditors. Otherwise a director could make out the defence under section 214(3) by claiming that he traded on with a view to reducing the overall deficiency for creditors as a general body, irrespective of how he achieved that result as between creditors.

The facts of the instant case provide a very good example. Whether or not the Directors succeeded in reducing the net deficiency of the Company as regards its general body of unsecured creditors, they ought not, in my judgment, be entitled to an outright defence under section 214(3) on the facts of this case. That is because the manner in which they chose to continue trading meant that the Bank and some of the existing unsecured creditors were paid at the expense of new creditors who ended up not being paid. Irrespective of whether or not that amounted to a breach of duty to the Company, a preference under section 239, or fraudulent trading under section 213, that is not, in my judgment, a regime which the Directors ought to have allowed to operate after the time at which they ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. Their failure to take steps that they “ought to have taken” to protect the interests of new creditors prevents them from being able to rely upon section 214(3).

Nor do I regard that as in any sense a harsh conclusion to reach on the facts of this case. This point was expressly flagged for the Directors by Mr. Tickell in his letter of 6 August 2010. It is worth repeating that warning in full,

“Wrongful trading

Just one word of caution though that we covered at the meeting. The bank is presumably recognising there is nothing to be gained for it in forcing a closure and is acting in the hope that you succeed with your investor and its position is rectified that way. But you do need to appreciate that it is the directors rather than the bank taking the risk as regards wrongful trading. In other words, just because the bank is giving you the extra month, it doesn’t necessarily mean it is the best option for creditors generally for you to accept it. The particular concern is over taking additional credit from various suppliers in order to continue trading and this is not eventually repaid if the company doesn’t come through. Those creditors will not thank you for using their money to fund the exercise with the investor and you need to monitor closely the liabilities arising during this period and ensure payment is safeguarded.

Similarly, if trading on is going to incur significant losses, then you would need to question whether this is justified against the likelihood of achieving new investment. Your projections suggest that trading is profitable at present but please monitor that carefully.

As we discussed during our meeting, you also need to be alert to the prospects of the bank looking for a prompt exit should there be a sizeable receipt that reduces the overdraft, which it could do without concern as to whether this then leaves you short for the payments that you had planned to avoid wrongful trading. You should either cover this off by obtaining the bank’s specific confirmation that identified payments will be allowed or alternatively create a ring-fenced fund by putting receipts into a separate bank account. You would risk upsetting the bank if incoming revenue is paid into a separate bank account, which would strictly be a breach of the bank debenture. It is however a question of the lesser of two evils and I would expect the bank to appreciate your obligations to protect all the other creditors too.”

In light of that conclusion, it is not necessary for me to deal with the issue of whether the Directors also should not to be able to rely upon section 214(3) because they continued to draw monies from the Company after 31 August 2010 (in the total sum of £16,221.89). However, for completeness I should state that if the Directors were otherwise entitled to a defence under section 214(3) because they were continuing to trade in a manner that was designed to decrease the Company’s net deficiency whilst ensuring that any new creditors were paid in full, I do not think that they should be deprived of that defence merely because they also continued to draw reasonable salaries to which they were entitled for work actually done during the period. Provided that they were genuine salaries and not excessive in amount – and I did not have any evidence to the contrary - I see no reason why the Directors should have been required to forgo their entitlement to payment for the work that they were doing so as to benefit other creditors.

So far as the argument regarding the Prescribed Part is concerned, I recognise that the introduction of the Prescribed Part to the insolvency legislation in 2003 creates a potential complication as regards the operation of section 214, but I do not think that it warrants a departure from the existing approach which I have outlined. The point can be illustrated by an example given by the Joint Liquidators in argument of a company which has £500,000 of assets but £1 million of creditors, made up of £500,000 of debt owed to the holder of a floating charge, and £500,000 to unsecured creditor A. In a liquidation at that point, unsecured creditor A would receive the Prescribed Part of the assets covered by the floating charge which on these figures could be as much as £103,000.

Assume, however, that the company continues to trade after the relevant time under section 214(1) and succeeds in using receipts to reduce the secured debt to nil, but incurs £500,000 of new unsecured debt in the process owed to creditors B to Z. Overall the company will have suffered no loss, but there will now be no Prescribed Part in a liquidation because the secured creditor will have been paid off. Creditor A will, however, be in a better position because he will now receive a distribution of 50% of the assets of the company (i.e. £250,000); but this will be at the expense of the other unsecured creditors, B to Z, who will not recover 50% of the amount of the new credit which they gave.

In my judgment, although the directors could not avail themselves of a defence under section 214(3) in such a case, the overall situation as regards the approach to quantification of a contribution under section 214(1) should not be materially different from the example given by Park J in ContinentalAssurance. If what occurred did not amount to the giving of a preference to the holder of the floating charge (or to the directors if they were guarantors) under section 239, or fraudulent trading under section 213, then I cannot see why section 214(1) should be strained to provide a remedy to address the particular concerns as regards inequality between creditors. That is especially so in the example which I have given, since in order to ensure that creditors B to Z would be fully compensated for their losses, the contribution to the assets of the company under section 214 would have to be £500,000, with the result that the directors would be providing creditor A with a windfall benefit of full recovery.

I therefore turn to consider whether the Joint Liquidators have established that the continued trading by the Company after 31 August 2010 until 13 October 2010 caused a loss to the Company.

I start by noting that the amounts claimed in the Schedules to the Points of Claim were not limited to loss caused to the Company by the wrongful trading. As I have indicated, the claim made by the Joint Liquidators in respect of the period from 31 August 2010 to 13 October 2010 was originally put at £1,045,040. The equivalent claim that was originally made for the period from 31 July 2010 to 13 October 2010 was £1,137,611.51. If these figures were supposed to represent the loss to the Company from continued trading over the two periods, the logical deduction from these two figures would be that trading during August 2010 caused only a small loss to the Company of under £100,000, but that trading for the remainder of the period from 31 August 2010 to 13 October 2010 caused a very substantially greater loss of over £1 million. That would be a very surprising result.

The point was put to Mr. Lowry, the Joint Liquidators’ expert in cross- examination, and he accepted that these figures were not simply statements of the loss to the Company caused by the wrongful trading over the two periods. He accepted that they included losses caused by the process of ceasing to trade and/or realising the assets of the Company (i.e. its debtors),

“Q. Yes. What I suggest to you is that -- appendix B … calculates the loss that is being claimed against my clients at over £1 million for a period of about six weeks.

A. Yes.

Q. So the liquidators are asking the court to infer that the company lost over £1 million in that short period of time.

A. No, this is not to do with trading loss. This is not a loss. This is how the creditors as a body have lost out, not how the company has lost - and that's to do with realisations.

Q. Right, okay. So you accept that the company did not lose £1 million as a result of continued trading between 1 September and 13 October; correct? (Pause)

A. I do accept that.

Q. The calculation of loss therefore is a loss that is largely derived from the cessation of trading; correct?

A. It is derived from the realisation of the debtors.

Q. And the impact of ceasing to trade on the recovery of debtors?

A. That may well be an ingredient. But the loss -- you can have a trading loss if the debtors don't pay. You are linking the two, and logically I'm sort of meeting you on it. If the company continued to trade and no one had paid them, they'd have made a loss. They didn't continue to trade and a few people didn't pay them, so there was a loss. I don't know what would have happened on a going concern basis.

Q. Right. I think the principle between us is accepted, but what you're saying is you can't confirm precisely what element of the loss of over £1 million was caused by the decision to cease trading, and what element was caused by a decision by a debtor not to pay. Correct?

A.

Yes.”

For the reasons which I have explained, I do not think that this is an appropriate basis for quantification of a claim under section 214(1). I do not think that this position was altered when the Joint Liquidators recast the figures in the Schedules to the Points of Claim in an amended format at the start of the trial. The revised format resembled a pair of abbreviated balance sheets which were said to show an increase in the net deficiency of the Company. Those balance sheets were as follows:

Those balance sheets were criticised by Mr. Fanshawe for a number of reasons. First, he pointed out two corrections to the figures which were accepted by the Joint Liquidators: the figure for VAT as at 31 August 2010 should have been £125,744, and the figure of £32,985 for corporation tax should have appeared in both balance sheets.

Secondly, and more importantly, Mr. Fanshawe pointed out that the stated value of the contract debts as at 31 August 2010 was in fact simply the amount of cash received by the Company between 1 September 2010 and 13 October 2010 (£1,306,349); and that the figure used for the value of the contract debts as at 13 October 2010 was the amount recovered from the contract debts (including retentions) in the administration/liquidation (£577,108). He suggested that whether or not such cash receipts could properly be said to reflect the value of the contract debts, those two amounts were not presented on a consistent basis, because they represented the realisations of debts under very different circumstances – i.e. one whilst the Company was still trading (referred to as a “going concern” basis) and the other in the administration (a “gone concern” basis).

Mr. Fanshawe suggested, and I accept, that even though the Administrators engaged specialist quantity surveyors to assist them in the recovery of the Company’s debts, the level of recoveries made from debts owed to the Company after it went into administration is very likely to have been significantly affected by the very fact that the Company had ceased to trade and entered a formal insolvency process. It is, indeed, notable that the Administrators’ Statement of Affairs showed the contract debts at a book value of £1,679,000 (including retentions) but estimated that the recoveries in the administration would be between £360,000 and £625,000. In fact, the contract debts realised about £577,000 (excluding retentions).

Mr. Fanshawe’s primary contention was that the figure of £1,603,000 from the Statement of Affairs should have been used for the contract debts (excluding retentions) in the balance sheet as at 13 October 2010 so as to eliminate the effects of the Company going into insolvency on the collection of the debts (the “going concern” basis). Alternatively (though not as his preferred solution) he was of the opinion that the figure of £1,306,349 for contract debts as at 31 August 2010 should be discounted by the same proportion as actually achieved for recovery of the contract debts in the insolvency - i.e. by a factor of 577,108/1,603,000 = 0.36 (a very similar factor of 0.39 was also mentioned in the evidence). On that basis the value of the contract debts on a “gone concern” basis at 31 August 2010 would have been about £470,000.

The same point was made in a different way by Mr. Boardman in his closing submissions. He submitted that the effect of what the Directors did during September was to keep the Company trading whilst the Bank managed the account, approving only certain payments out of the account while reducing the overdraft. In doing so, the Bank was effectively paid from contract debt realisations over which it had a fixed and floating charge. This, he said, was to the benefit of creditors as a whole, because if the Company had gone into liquidation at an earlier date the Bank would still have had to be repaid the overdraft, but from much lower realisations of debts made on a ‘gone concern’ basis. Assuming the same rate of realisations that actually occurred (of 0.36 or 0.39), the repayment of the Bank’s overdraft of £530,000 as at 31 August 2010 would have required about £1.47m in book debts; but by continuing to trade the Company realised its book debts on a going concern basis without any such discount and was able to repay the Bank and achieve a surplus to benefit the unsecured creditors.

There is much force in this point, and I accept that for consistency, the figure for contract debts in the Joint Liquidators’ balance sheets as at 31 August 2010 and 13 October 2010 should have been included on the same basis in each.

As regards the liabilities side of the balance sheets, Mr. Fanshawe suggested that the actual figure for the trade creditors admitted to proof in the liquidation (£2,001,000) should be used in the balance sheet as at 13 October 2010 rather than the £2,198,000 shown in the Company’s SAGE records. I do not accept Mr. Fanshawe’s suggestion in this respect. The difference (about 9%) doubtless reflects the inevitable fact that some creditors simply do not prove in an insolvency, but I do not see why the lower figure admitted to proof in the liquidation should be used if the balance sheet is being drawn up on a “going concern” basis. I can, however, see that, by parity of reasoning with Mr. Fanshawe’s point about drawing up accounts consistently to eliminate the effect of insolvency, if the balance sheets are being prepared on a “gone concern” basis, a similar reduction (of 9%) should be made to the trade creditor figure as at 31 August 2010.

If these adjustments are made to the Joint Liquidators’ balance sheets, the result is that on a “going concern” basis, the net deficiency of the Company was actually reduced from a deficit of £1,159,374 to £1,026,541 by the continued trading between 31 August 2010 and 13 October 2010. In other words the Company’s net position improved by about £132,833 over the period. If calculated on a “gone concern” basis, including a reduction in the trade creditors as at 31 August 2010, the net deficit would have been very slightly increased by about £3,885 from a deficit of £1,851,989 to £1,855,874 over the period.

I accept that neither Mr. Fanshawe’s adjustments nor Mr. Boardman’s submission as regards the recovery of contract debts are likely to be entirely accurate, because they both assume that the make-up of the debtor book was the same at 31 August 2010 and 13 October 2010. That is unlikely to be the case, since the actual debtors were different and it is likely that the contracts were at different stages of completion. I did not have any satisfactory evidence of this (the point was briefly addressed by Mr. Lowry in cross- examination but not dealt with in the expert reports) and hence I cannot reach any firm conclusions. But even taking this point into account, what Mr. Fanshawe’s analysis of the Joint Liquidators’ figures shows is that it is entirely possible that the continuation of trading between 31 August and 13 October 2010 did not increase the net deficiency of the Company by any, or any material, amount.

Apart from this work done on the Joint Liquidators’ figures in their claim, the experts were not able to reconstruct an accurate balance sheet for the Company at 31 August 2010 which could be compared with the deficiency in the Administrators’ Statement of Affairs as at 13 October 2010.

However, as I have indicated, Mrs. Warman did produce management accounts to the end of August 2010 from the SAGE records of the Company for the Bank in early September 2010. These were only obtained from the Bank and disclosed by the Joint Liquidators to the Directors on 2 June 2015. Such management accounts are, of course, also subject to the difficulty that it was common ground between the parties and the experts that the SAGE records were, by themselves, not capable of producing a complete and accurate set of accounts for the Company at any point in time, but needed to be adjusted.

Nonetheless, in cross-examination, Mr Fanshawe told the Court that he had briefly undertaken the same kind of reconciling analysis he had done for the accounts produced at the end of July 2010 and considered that, while the debtors and creditors position were each overstated, the overstatements cancelled each other out and the net deficiency of £705,000 shown in those accounts was about right. Mr. Fanshawe also said that if he was comparing the August 2010 management accounts deficiency with the Statement of Affairs deficiency of £884,000 (on a book value basis) he would need to remove the employee claims of £129,000 in respect of redundancy and notice, giving a deficiency of about £750,000. On that basis, Mr. Fanshawe’s evidence was that the continuation of trading after 31 August 2010 would have worsened the net deficiency as regards unsecured creditors on a “going concern” basis by about £45,000.

Having regard to the range of figures to which I have referred above, which range between an improvement in the position of the Company by a reduction in the net deficiency of about £132,833 to an increase in the net deficiency of £45,000, I am not satisfied on the balance of probabilities that the continuation of trading by the Directors after 31 August 2010 caused any, or any material, increase in the net deficiency of the Company. In my judgment, if anything, the figures suggest that the continued operations of the Company until 13 October 2010 produced a modest improvement in the net deficiency of the Company.

The Joint Liquidators submitted that it is simply not credible that the position for creditors as a whole could have improved over the period of wrongful trading. They point out that the Company made a substantial loss in the year ending 31 October 2009 and had continued to make losses in the nine months until 31 July 2010, and suggest that it is implausible that this trend could have reversed during August, September and October.

I do not accept those submissions. I have already indicated that there are real reasons to believe that a period of continued trading to complete existing contracts during the busy summer months is likely to have produced a significantly better result for the Company as a result of the enhanced collection of contract debts than would have occurred if there had been an immediate cessation of trading.

Nor do I think that it is incredible that trading during that period could not have produced a net profit or broken even. I have indicated above that the background is that the Company’s financial difficulties in the year to 31 October 2009 were substantially aggravated by the very large provisions made in the accounts for that period which recognised the losses caused by the irrecoverable payments to Fareham FC in earlier years, together with problems caused by the defective wall-ties. The problems were aggravated by the harsh winter of 2010. But these were abnormal factors and extraordinary items in the accounts and did not suggest that the Company’s business was inherently incapable of trading at a net profit.

There is also contemporaneous evidence (including the evidence and projections from Mrs. Warman) which indicates that the Company put measures in place to reduce overheads, and produced detailed projections showing that the Company’s trading between August and October 2010 was anticipated to be profitable. And whilst Portland did not verify the figures produced by Mrs. Warman, Mr. Tickell’s letter of 6 August 2010 did not express any surprise at the suggestion by the Directors and Mrs. Warman that the Company was trading profitably at the time. Nor, when Mr. Tickell was instructed again on 24 September 2010, and inquired far more closely into the state of the Company and continued operations continued for several weeks under his guidance, did Mr. Tickell advise an immediate halt to trading.

Further, although Mr. Tickell expressed concern on 8 October 2010 that there might be a wrongful trading claim, that concern was based upon the fact that the debt to the Bank had been replaced by an equivalent amount of about £0.5 million owed to new creditors, rather than a concern that trading in the interim had been loss-making or had worsened the position of the Company overall. There is also nothing in the Administrators’ proposals to which I have referred in paragraph 159 above to suggest that the Company’s trading during the period immediately preceding the administration had been loss-making.

I also reject the Joint Liquidators’ alternative submission that I should order a contribution based upon the increase in trade creditors over the relevant period. I do not think that the shortcomings that have been identified in the Company’s management accounts produced directly from the SAGE records, or indeed in the Company’s accounting systems more generally, mean that I should simply order the Directors to make a contribution to the Company’s assets equal to the aggregate increase in the purchase ledger over the period from 1 September 2010 to 13 October 2010 of about £600,552.

The reasons for which such a course was adopted in re Purpoint and Re Kudos were markedly different from the facts of the instant case. In both those cases, there was simply no attempt to maintain proper accounting records upon which any form of accounts could be produced or reconstruction could be attempted. In Re Purpoint, no accounts had ever been produced, and Vinelott J described the accounting records as “exiguous”. He indicated that the only documents available consisted of bank statements, a wages book and a cash book: [1991] BCC 121 at page 123C. In re Kudos, although accounts appear to have been prepared for earlier periods, the director gave evidence uncorroborated by any documents that he had “tried to keep a sales-type book on his personal computer” and that he “was aware of the general overheads of the company and the wages and salary costs”: [2011] EWHC 1436 (Ch) at paragraph 37.

Further, in both cases it was clear that throughout the relevant period of wrongful trading, the company in question was making heavy losses rather than engaging in profitable trading. In re Purpoint, Vinelott J expressed the view that it was doubtful that a reasonable director would have allowed the company to commence trading at all due to its lack of a capital base and the fact that it had inherited a loss-making business from another company that had failed. And in re Kudos, it was found as a fact that the company was never in a position to fulfil the relevant contracts for which substantial pre- payments had been made; that those monies had been largely dissipated to the directors; and that the company did not derive any significant profits from other activities.

In the instant case, in contrast, the Company had an accounting system which was operated by a number of staff and overseen by Mrs. Warman. It is certainly true that criticism can be made of the manner in which accounts produced directly from the SAGE system were not reliable and would have to be manually adjusted by Mrs. Warman. I also accept that it is not satisfactory that no accurate management accounts were produced which show the position of the Company as at 31 August 2010. But a claim for wrongful trading is not designed to penalise directors for keeping inadequate accounting records. Further, I do not think that it would be appropriate simply to resort to the increase in trade creditors in circumstances in which that increase in the Company’s debts was off-set to a significant extent by the repayment of other liabilities of the Company to the Bank.

There was, in any event, a material objection by the Directors to the Joint Liquidators’ use of the increase in the trade creditors shown in the Company’s purchase ledgers between 31 August 2010 and 13 October 2010. The Joint Liquidators’ use of the purchase ledger in that way presupposed that all such entries on the purchase ledgers between the two dates represented new credits incurred during the same period. However, the Directors’ expert witness, Mr. Fanshawe, gave evidence that from his work he had ascertained that the Company’s accounting process was to post liabilities on its purchase ledger on receipt of an invoice from the supplier. He had conducted an analysis of the creditor balances of over £10,000 on the ledger as at 13 October 2010, and had found that of a total of £921,151, about one half (£452,839) were the result of a commitment to buy entered into before 31 July 2010, about one quarter (£231,058) were entered into after 31 July 2010, and the origins of the remainder could not be ascertained. It must, I think, follow - and I did not understand Mr. Lowry to dispute – that the increase in the purchase ledger balance reflects the timing of entries on the Company’s accounting systems, and does not accurately correspond to the amount of new credit incurred between those two dates.

Standing back, whatever other criticisms can be made of the manner in which the Directors conducted the business of the Company between 31 August 2010 and 13 October 2010, I think it is entirely plausible that such continued activity did not cause loss to the Company overall or worsen the position of the creditors as a whole. The real sin of the Directors, so far as the unsecured creditors left in the liquidation are concerned, is the manner in which the continued trading facilitated the repayment of the Bank and some existing creditors whilst leaving new creditors unpaid. I have already indicated my view that this is not something that the Directors ought to have permitted to occur, but for the reasons I have explained, I cannot see that it justifies a contribution to be made to the assets of the Company under section 214(1). That may be thought to be a shortcoming in the structure of section 214, but I do not think it is one that I can remedy: any such change would be for Parliament.

For these reasons I do not intend to make a declaration under section 214(1) requiring the Directors to make any contribution to the assets of the Company in respect of any losses said to have been caused to the Company during the period of wrongful trading.

In addition to seeking an order under section 214(1) in relation to such losses said to have been directly caused to the Company, I should add that the Joint Liquidators also sought a declaration that the Directors should make a contribution to the assets under section 214(1) in respect of the costs and expenses of the administration and subsequent liquidation of the Company. As I have indicated, the amount originally claimed in this respect in the Points of Claim attached to the Application was £287,071 which was said to be the entirety of the costs and expenses of the administration and subsequent liquidation of the Company. That contribution was sought independently of seeking the costs of these proceedings if the Joint Liquidators were successful.

On the view that I have taken of the scope of section 214(1) above, that claim was in any event too wide, since the Directors should only be liable to make a contribution in respect of the amounts by which the Company suffered loss as a result of the wrongful trading, and not in respect of the costs of the insolvency more generally which would have been incurred even if the wrongful trading had not occurred. Anticipating that view, Ms. Start indicated at the outset of the trial that the Joint Liquidators would be restricting their claim in this respect to the extent to which the costs and expenses of the administration and liquidation had been unnecessarily increased by any wrongful trading. However, no detailed evidence or disclosure had been given in relation to these matters, and the Joint Liquidators did not offer any alternative figure – stating instead that they wished such sum to be assessed by the Court.

I took the view at the outset of the trial that it would not be possible to reach any decision on this point until after I had resolved the main points of principle in relation to the wrongful trading claim. I was also very conscious that it would simply not be practicable to conduct a detailed review of the costs and expenses of the administration and liquidation in the period allocated for the trial. Although Mr. Boardman objected that the Joint Liquidators had therefore missed their opportunity to raise such a claim at all, I decided simply to “park” any and all issues in this respect until after I had reached a decision on the main issues.

Now that I have reached a conclusion on the main question of wrongful trading, it seems to me that I should invite the parties to consider this matter and address argument as to how to proceed upon this element of the claim in light of my judgment. I will hear argument as to how to proceed following the handing down of this judgment if matters cannot be agreed.

For completeness, I should also add that I was referred to the provisions of section 10 of the Company Directors Disqualification Act 1986. That section provides that where the court makes a declaration that a person is liable to contribute to a company’s assets under section 214(1) of the Insolvency Act 1986, the Court may, if it thinks fit, also make a disqualification order against the person in question. I heard no submissions from the parties in this regard, and as matters stand the jurisdiction has not been triggered, since I have not decided to make any such declaration under section 214(1). This is, however, a further matter that can be addressed if I were to decide to make a declaration under section 214(1) in respect of any part of the costs and expenses of the administration and liquidation.