Contractors, don't be outlaws like the Robin Hood directors
The dangers for a contractor who’s operating from inside the apparent protection of a limited company if the worst happens and they’re accused of wrongful trading have been clearly flagged up already, writes Nick Hood of Opus Restructuring.
Now, the High Court has very definitely moved the goalposts on this tricky area of insolvency law. It has also clarified an aspect of the legislation which most insolvency practitioners have known in their water, but not previously seen expressed so clearly by a judge.
The case concerns an evocatively named company - Robin Hood Centre plc which, unsurprisingly, operated in Nottingham – specifically, as a theme park celebrating the legend of the iconic champion of the poor. After running up losses for 12 straight years, it finally succumbed to liquidation in 2009.
The liquidators went to court, accusing the RHC directors of trading on long after they knew, or ought to have known, that they had no prospect of avoiding its liquidation and in doing so, of increasing the losses for the creditors. The case turned on a huge potential VAT liability, which the directors had known about since 2006 and which had finally been confirmed by HMRC in 2007. There was an accompanying issue to do with a major increase in the rent for the site, which the directors ignored in their forecasts and cash flow projections.
Putting the fantastical ways of Robin Hood’s directors aside for a moment, the reality is that despite the numerous cases in the UK of irresponsible behaviour by company directors, successful prosecutions for wrongful trading are rare. There is a straightforward defence; that the directors have taken ‘every step’ to minimise the losses to creditors. Liquidators have found disproving this a considerable challenge and given the need not to waste what little money they have on failed litigation, they have tended to shy away from attacking directors in all but the most blatant cases.
But in ‘riding through the glen’ in this case, the High Court has taken the radical step of stating unequivocally that it is not for the liquidator to have to prove that the directors didn’t take every step. Instead, the burden is on the directors to prove that they did. This will undoubtedly encourage insolvency practitioners to be more aggressive in pursuing this remedy. It represents a major escalation in risk for directors of failed companies.
The High Court also looked at the Robin Hood directors’ attempt to justify their actions by claiming that they behaved responsibly by paying their ordinary suppliers during the gap between 2006, when they first knew of the VAT liability, and 2009, when they finally put the company into liquidation.
Interestingly though, the judge ruled that keeping one group of creditors happy did not fulfil the requirement to minimise the losses suffered by the creditors as a whole. In reality, the directors had ignored the landlord and HMRC and by the time of the liquidation, the overall figure for creditors was higher than it would have been had they stopped in 2007 when the VAT liability was confirmed. There has always been uncertainty on this particular point, but now there is no room for doubt.
The only good news for the Robin Hood directors was that the court also concluded that one of them should not be held more liable to pay more compensation than the others, because he had greater experience of being a director. His previous roles had been in the retail sector, not in leisure. It might have been very different if he had been a qualified accountant or lawyer, but fortunately for him he wasn’t.
Ultimately though, the Robin Hood directors were held personally responsible for the extra loss suffered by the creditors because of their decision to not close the company but instead to battle on until 2009, and were instructed to pay compensation. So unfortunately for them, these one-time promoters of the Nottingham outlaw have much more in common with him than they would have ever imagined.
The non-fictional tale to be told if you’re a contractor operating through a limited company is that you should be very aware of the wrongful trading risks. More importantly, make absolutely sure you take specialist, professional advice if you are in doubt and at the same time, document all decisions to keep on trading once you know you are in financial difficulties. And remember, this band of Robin Hood directors are a lot less merry because they were told they must prove they did take ‘every step’ to minimise the losses to creditors; a reversal on the traditional position that it’s for the liquidator to prove that the directors didn’t.