Insolvency Update – Recovering Costs

Liquidators and administrators cannot recover their costs and expenses for bringing wrongful trading actions against directors

The recent case of Re Ralls Builders Ltd (in liquidation) [2016] EWHC 1812 (Ch) (20 July 2016) has been well reported, the court having decided that despite a finding of wrongful trading the directors were not liable to contribute as there had been no increase in the net deficiency of the company’s assets, but at the most recent hearing the High Court was asked to consider whether, on the basis there had been wrongful trading, the directors should contribute the amount by which the costs and expenses of the liquidation had been increased unnecessarily by the wrongful trading.

The court held that these costs were not recoverable from the directors because:

• The expenses of investigating and bringing a claim are not ordinarily recoverable as damages (for example, for breach of contract), and there was no reason to treat wrongful trading claims any differently. The fact that the claim was for the ultimate benefit of creditors was not a basis for such a distinction. Moreover, a liquidator or administrator may bring other claims against the directors (for example, breach of duty of care) and it would be illogical if different principles applied across different claims;

• Even though an insolvency office holder may be under a duty to bring or defend litigation, no special rule applies enabling insolvency office holders to recover their time spent assisting in the conduct of litigation as costs of the litigation; and

• The directors could not be made to contribute to the costs and expenses when the court had found that the wrongful trading had not caused a net deficiency in the company’s assets.

This is the first time this quantum issue has been considered by the courts. From a creditor’s perspective, the decision is disappointing. Even where directors are ordered to contribute (and such cases are notoriously difficult to prove), the contribution may be wiped out by the costs of investigating and pursuing the claim. It also means office holders must seriously consider the proportionality of litigating before pursuing any claims.

Given the directors were found guilty of wrongful trading, and section 214 permits the court to order such contribution as it thinks proper, and the policy behind the recent wrongful trading changes was to make it easier to pursue claims (and ultimately increase recoveries for creditors), it is perhaps slightly surprising that the court felt constrained by the principles in contract and tort claims. Administrators can also pursue wrongful trading under section 246ZB of Insolvency Act 1986 and so this decision will be equally relevant to claims initiated by them.

For further information about this case or for any insolvency queries please contact Associate Solicitor, Lauren Hartigan-Pritchard on lhartiganpritchard@thursfields.co.uk or 01905 677045.