Stephen Paul Grant and Another v William Ralph Ralls and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE SNOWDEN,Mr Justice Snowden |
| Judgment Date | 11 February 2016 |
| Neutral Citation | [2016] EWHC 243 (Ch) |
| Docket Number | Case No: 0671 of 2012 |
| Court | Chancery Division |
| Date | 11 February 2016 |
[2016] EWHC 243 (Ch)
Mr Justice Snowden
Case No: 0671 of 2012
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN THE MATTER OF RALLS BUILDERS LIMITED (IN LIQUIDATION) AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 Rolls Building
Fetter Lane, London,
EC4A 1NL
Ms. Angharad Start (instructed by Pinsent Masons LLP) for the Applicants
Mr. Christopher Boardman and Mr. Christopher Lloyd (instructed by Verisona Law) for the Respondents
Hearing dates: 8–10, 12, 15–19, 22–24, 26, 29–30 June 2015
Index
| Paragraph | Introduction | 1 | |
| Dramatis Personae | 8 | ||
| The witnesses | 18 | ||
| The 2008 audited accounts | 46 | ||
| The first half of 2010 | 47 | ||
| The draft audited accounts for the year ending 31 October 2009 | 58 | ||
| July 2010 | 62 | ||
| Information is provided to Portland | 80 | ||
| The Meeting with Portland on 29 July 2010 | 87 | ||
| The Portland review | 105 | ||
| 2 August 2010 meeting with Portland | 110 | ||
| The Letters of Intent from Mr. James | 121 | ||
| Other events in August 2010 | 126 | ||
| September 2010 | 133 | ||
| The Decision to put the Company into Administration | 150 | ||
| The Administration | 158 | ||
| Mr. James revives his interest in Dylex | 164 | ||
| Wrongful Trading: The Law | 166 | ||
| Section 214(1) | 180 | ||
| Section 214(3) and the quantification of any contribution | 219 | ||
| Did the wrongful trading cause a loss to the Company? | 252 | ||
| Further issues | 281 |
Introduction
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.
Dramatis Personae
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...
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