Grant v Ralls [2016] BCC 293 (Ch)

Facts

• Grant v Ralls examined the conduct of company directors who continued to trade amid financial distress.
• The case involved the application of the Insolvency Act 1986 provisions relating to wrongful trading.
• The directors’ knowledge and actions were assessed to determine if they knew, or ought to have known, that insolvent liquidation had become unavoidable.
• The judgment considered the company’s financial situation, available advice, and directors’ decision-making in the relevant period.
• The case illustrated the process of evaluating directors’ efforts to reduce loss to creditors once insolvency was inevitable.

Issues

1. Whether the directors knew, or should have known, that insolvent liquidation was unavoidable.
2. Whether the directors fulfilled their duty under the Insolvency Act 1986 to take reasonable steps to minimise losses to creditors.
3. How courts should determine the precise point at which insolvent liquidation becomes inevitable for the purpose of wrongful trading claims.
4. What evidence and standard of proof are required to establish wrongful trading liability against directors.

Decision

• The court held that assessing wrongful trading requires a fact-specific analysis of the company’s financial status, the directors’ actions, and consideration of all relevant factors.
• It was confirmed that hindsight cannot be applied; evaluation must be based solely on information reasonably available to directors at the time.
• Directors have a statutory duty to minimise creditor losses once insolvent liquidation is unavoidable, which may require cessation of trading, professional advice, or restructuring efforts.
• The evidence required to prove wrongful trading must demonstrate that the directors knew or should have known liquidation could not be avoided, supported by financial records and contemporaneous documentation.

Legal Principles

• Under the Insolvency Act 1986, wrongful trading occurs when a director continues to trade while knowing, or having reasonable grounds to believe, insolvent liquidation is unavoidable.
• Directors must act to minimise losses to creditors once the point of no return is reached.
• Courts determine the inevitability of liquidation based on contemporaneous information, not with hindsight.
• The conduct of directors is assessed against the standard of a reasonably diligent person having the general knowledge, skill, and experience that may reasonably be expected of a director in that position.

Conclusion

Grant v Ralls [2016] BCC 293 (Ch) clarifies that directors facing insolvency must promptly assess the company’s position and take reasonable measures to protect creditors. The judgment stresses the importance of accurate financial evaluation, timely action, and obtaining professional advice to avoid personal liability for wrongful trading under the Insolvency Act 1986.