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Robin Hood's merry men ordered to pay compensation for wrongful trading

6 August 2015

A case was brought by the liquidators of Robin Hood Centre PLC against the former directors for wrongful trading, alleging that the directors knew that there was no reasonable prospect of the company avoiding insolvent liquidation following certain events, such as the year end accounts which showed a loss and a letter from HMRC in 3 May 2007 confirming a VAT liability.

The court held that once the director’s knowledge as to the company’s insolvency has been established, the onus is on the director to show that he had taken every step to minimise the potential loss. The liquidators had to prove knowledge of insolvency at some time before the start of the winding-up, rather than at a particular date. Section 214 of the Insolvency Act 1986 (IA) did not require proof of insolvency at the date of knowledge. In this case, applying the reasonably diligent director test in s.214(4) IA, when weighing up the adverse consequences of liquidation against the potential benefits of trading meant that the directors had taken the correct action by continuing to trade from February 2007. However, by the time of receipt of the 3 May 2007 letter, circumstances had changed and the company was unlikely to make the next rent payment. At that point, the director had failed to take every step to minimise the losses.

As such, the directors were ordered to pay compensation based on the difference between a hypothetical liquidation on 3 May 2007 and the actual date of liquidation.

This case serves as a warning for directors that they need to tread carefully when a company is on the brink of insolvency.

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