Philip Anthony Brooks and Another v Keiron Armstrong and Another

Hearing dates: 1–9 and 31 July

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

A) Introduction

Robin Hood Centre plc ("the Company") from July 1988 until its creditors' voluntary liquidation on 6 February 2009 carried on the business of running a Robin Hood themed tourist attraction in Nottinghamshire. The business included a "dark ride" through themed stage sets, a retail shop and a café/banqueting facility.

The Applicants ("the Liquidators") allege in reliance upon section 214 ("Section 214") of the Insolvency Act 1986 ("the Act") that the Respondents ("the Directors") should be made liable to contribute to the Company's assets because they knew or ought to have concluded before 6 February 2009 that there was no reasonable prospect of avoiding insolvent liquidation. They also apply under section 212 ("Section 212") of the Act for compensation against the Directors for breach of duty.

The Directors were appointed officers of the Company on 11 March 1996 and resigned on 6 February 2009. The First Respondent ("Mr Armstrong") was appointed Company Secretary on 15 May 2000.

B) Section 214 — Wrongful Trading

Section 214 confers upon the court a discretionary power to declare that a person who is/was a director is liable to make a contribution to the company's assets if it appears during the course of that company's liquidation that (see Section 214(2):

(a) It went into liquidation at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of the winding up ("the Insolvency Condition");

(b) At some time before the commencement of the winding up (but not before 28th April 1986), that person knew or ought to have concluded there was no reasonable prospect that the company would avoid going into insolvent liquidation ("the Knowledge Condition"); and

(c) That person was a director (including a shadow director) of the company at that time ("the Director Condition").

However, Section 214(3) provides that the court shall not order compensation if satisfied that after the Knowledge Condition was first satisfied, the director concerned took "every step" (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) with a view to minimising the potential loss to the company's creditors as he ought to have taken ("the Minimising Loss Defence"). The onus is upon the Directors to establish this statutory defence on the balance of probability if the Knowledge Condition is proved by the Liquidators.

My attention has been drawn to the notes in Sealy & Milman, "Annotated Guide to the Insolvency Legislation, 2015 edition at page 224 (" Sealy & Milman") in which it is argued otherwise: "On principle and, it is submitted, on the language of the section, the onus of proof to show that a director has failed to take every step that he ought to have taken should be on the liquidator".

That is not my construction for a number of reasons. First, it is not the natural construction of the words used and it does not make sense to require the applicant to prove the director took "every step". Second, if Parliament had intended the burden of proof to be upon the applicant, it would have expressly provided that a declaration would not be made unless (or only if) the applicant satisfied the court that "every step" etcetera had not been taken. Third, it is more logical to place such a burden upon the respondents in circumstances where they have been trading knowing there was no reasonable prospect of avoiding insolvent liquidation. Finally, the relevant facts will be known to the respondents and it is therefore right and appropriate for them to justify continued trading in those circumstances. In the case of Re Idessa (UK) Limited (In liquidation), [2011] EWHC 804 (Ch) at [113], Ms Lesley Anderson QC accepted the submission that the burden of proof is on the respondent in respect of a statutory defence and I follow her decision.

The question of the meaning of "every step" and "minimising potential loss to creditors is addressed in Sealy & Milman at page 223: "The phrases 'took every step' and 'minimising the potential loss to creditors' seem, at first sight, rather overstated. However, there is no doubt that the use of 'every step' was deliberate: a proposed amendment to 'every reasonable step' was expressly rejected in Parliament; and on similar reasoning, we must assume that 'minimise' was fully intended, rather than, say, 'reduce' or 'avert".

This is important to note but Section 214(4) must also be taken into account. It provides that: "the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both — (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions (including any functions entrusted to him/her even if not carried out) as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has" ("the Reasonably Diligent Director Test").

Therefore the deliberate use of "every step" and Parliament's rejection of a filtered down reasonable steps test, must be applied in the context of Parliament having provided instead the Reasonably Diligent Director Test to determine what "every step" should have been.

The Liquidators allege within their evidence and Points of Claim that the Knowledge Condition and the other requirements of Section 214 were satisfied on the following dates:—31 January 2005; 31 January 2006; 9 October 2006; 31 January 2007; 3 May 2007 ("together "the Dates"). An issue between the parties is whether the Liquidators are bound by those dates for both claims ("the Ambit of Claim Issue").

Mr Couser for the Liquidators submits in his skeleton argument that: "… the court is entitled to conclude that the date on which the [Directors] knew or ought reasonably to have concluded that the Company could not avoid insolvent liquidation was some alternative date". He relies upon the decision of Re Sherbourne Associates Limited[1995] BCC 40. Mr Nersessian for the Directors raises issue with this on the basis that the Liquidators must make plain what their case is and they cannot have free range to choose at trial, or indeed in final submissions, any date they wish to propose to the court. He relies upon the same authority.

In my judgment the starting point is that the Act requires the Liquidators to prove the Knowledge Condition at some time before the commencement of the winding-up rather than at a particular, specified date. A starting date does not always have to be specified (although plainly usually useful) and the case will not necessarily be lost if a specific date is not made out (see Re Continental Assurance Co of London Plc[2001] BPIR 733, Annexe B at 899).

Nevertheless that starting point is subject to the basic principle that the Directors must know the case they have to meet and case law establishes that the Liquidators will not be able to claim a different date or period at trial to the one capable of being identified from the application and evidence in support. The case of Re Sherbourne Associates Limited (above) is a good example of the implementation of that approach of fairness.

In this case the Points of Claim plead wrongful trading by reference to the Dates. Then in paragraph 41: "… by continuing to trade after each of the Dates in the alternative, or alternatively after the date upon which the court determines the Company was insolvent, the Directors were in breach of their fiduciary duty to act in the best interests of the creditors.Paragraphs 1 to 40 [the facts and matters relied upon to allege wrongful trading] are repeated".

Mr Nersessian for the Directors submits this means there is a wrongful trading case on any of the Dates down to 3 May 2007 and a misfeasance claim which is similarly limited. Mr Couser submits that the wrongful trading claim is down to 3 May 2007 but subject to a reasonable extension based upon the facts and matters alleged and the misfeasance claim for failing to act in the best interests of the creditors runs throughout the Dates and until the liquidation on 6 February 2009.

During the course of his submissions upon the Ambit of Claim Issue, Mr Nersessian observed that one of the difficulties is the relationship between the evidence in support of the application and the Points of Claim directed to be served after it (in this case by Order made 15 March 2013) when the two may be inconsistent. The evidence was first in time in compliance with Rules 7.3 and 7.8 – 7.9 of the Insolvency Rules 1986 ("the Rules"). Statements of case were subsequently directed pursuant to Rule 7.10(2)(b). Whilst the purpose of the Points of Claim is to set out the facts and matters relied upon in support of the cause(s) of action contained in the application notice, that will also have been a purpose of the evidence in support.

In...