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Directors of doomed development project guilty of wrongful trading

Posted: 14th April 2011   In: Dispute Resolution, Corporate Commercial

The directors of a development company have been found guilty of wrongful trading after continuing with a project long after they should have known it was bound to fail.

The case involved the directors of a company which was set up to acquire a plot of land worth £900,000 and build industrial trading units. They borrowed £437,000 on the basis that some of the units had been pre-sold. However, that overstated the position.

The directors then fell into dispute with one of the contractors brought in to work on the site.

The contractor suspended work on the project. The bank was not told about this and went ahead and honoured further payments made by the directors.

The development company then went into liquidation. The liquidator sought declarations that the directors were guilty of misfeasance, breach of fiduciary duty and wrongful trading because they had allowed work to continue on the project when they had known, or ought to have known, that it was bound to fail.

The court held that at the outset of the project, the directors had honestly believed that it would succeed. However, the position changed once work got underway. The contractors quickly carried out work to a value that exceeded the amount available to pay them.

The only honest thing to do at that stage was to stop the development so a full appraisal could be carried out and so the bank could be informed. In spite of this, the directors tried to continue until insolvency was unavoidable.

The court held that the directors should have known that there was no realistic chance of avoiding insolvent liquidation and so continuing with the development constituted wrongful trading.

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