Introduction
The Insolvency Act 1986 gives a structure for dealing with director liability in cases of insolvent trading. Section 214 specifically addresses wrongful trading, permitting liquidators to seek contributions from directors who knew, or should have known, that there was no realistic prospect of avoiding insolvent liquidation. This provision requires showing the director's awareness of impending insolvency and the time at which that awareness began. The director's obligation, upon recognizing this outcome, is to take every step to reduce potential loss to the company's creditors. The 2021 High Court case of Biscoe v Milner offers a detailed examination of these principles and their use in a specific corporate setting.
The Facts of Biscoe v Milner
The case centered on the insolvency of Indigo Telecom Group Limited (Indigo). The liquidator initiated proceedings against Mr. Milner, a director, alleging wrongful trading under section 214. Indigo, a telecommunications company, encountered financial difficulties leading to its eventual liquidation. The liquidator argued that Mr. Milner continued trading despite knowing, or having reasonable cause to believe, that insolvent liquidation was unavoidable. The case specifically examined the period after Indigo entered into a Company Voluntary Arrangement (CVA), an insolvency process designed to rescue the company or achieve a better result for creditors than immediate liquidation.
Showing Knowledge of Inevitable Insolvent Liquidation
A key aspect of a wrongful trading claim is showing that the director knew, or should have known, that insolvent liquidation was inevitable. Biscoe v Milner affirmed the objective standard established in previous case law, such as Roberts v Frohlich [2011] EWCA Civ 933. This objective test considers what a reasonably diligent director, possessing the general knowledge, skill, and experience expected of someone in the same role, should have known. In this case, the court examined the financial condition of Indigo, the terms of the CVA, and Mr. Milner's actions and decisions in that setting.
The Director's Duty to Minimize Loss
Once a director knows, or should have known, that insolvent liquidation is inevitable, their duty shifts to minimizing potential loss to creditors. This requires active steps to protect creditor interests. In Biscoe v Milner, the court evaluated whether Mr. Milner's actions following Indigo's entry into the CVA aligned with this duty. The judgment reviewed the specific actions taken, or not taken, by Mr. Milner, and their impact on the final result for creditors. This included assessing decisions about ongoing trading activities and financial management.
The Importance of the Company Voluntary Arrangement
The CVA in Biscoe v Milner added complexity to the wrongful trading claim. The court had to determine whether entering into the CVA itself was a sensible step to minimize loss, and whether Mr. Milner's subsequent actions matched the CVA's aims. The judgment reviewed the terms and use of the CVA, and whether its failure could be attributed to Mr. Milner's actions. This examination shows the significance of a CVA's proper use and the continuing duties of directors even within such an arrangement.
The Court's Findings and Effects
The High Court ultimately ruled in favor of the liquidator, concluding that Mr. Milner had engaged in wrongful trading. The court found that he continued trading too long after it became clear that insolvent liquidation was inevitable, even within the context of the CVA. The judgment emphasized the need for directors to constantly monitor the company's financial condition and take decisive action when necessary. Biscoe v Milner serves as a reminder of the potential liabilities directors face under the Insolvency Act 1986, especially in situations involving insolvency processes like CVAs. It confirms the importance of seeking professional advice and acting decisively when a company faces financial difficulties. The decision also clarifies the use of the objective test for determining director knowledge and emphasizes the ongoing duty to minimize loss to creditors.
Conclusion
The Biscoe v Milner judgment significantly contributes to the law surrounding wrongful trading under section 214 of the Insolvency Act 1986. The case clarifies the use of the objective test for assessing director knowledge of inevitable insolvent liquidation and confirms the director's duty to minimize creditor loss. The decision's focus on the relationship between wrongful trading and a CVA provides useful guidance for directors dealing with such insolvency processes. By examining the specifics of Indigo's financial troubles and Mr. Milner's actions, the court offered practical advice on the use of these complex legal principles. This case serves as an important reference for understanding director liabilities and stresses the need for active and responsible corporate governance in times of financial stress. The judgment also emphasizes the need for directors to be well-informed about their legal duties and to seek professional advice when needed to avoid potential personal liability.
