Union Music Ltd v Watson [2004] BCC 37

Facts

  • Section 306 of the Insolvency Act 1986 allows the court to order a director to make contributions to a company's assets if the director knew, or should have known, that the company could not avoid liquidation but continued trading.
  • In Union Music Ltd v Watson [2004] BCC 37, Mr Watson, a director, relied on professional advice and believed the business could recover despite impending liquidation.
  • The court determined that Mr Watson's reliance on professional advice was unreasonable in light of the company’s financial situation.
  • The court found that Mr Watson continued to trade while there were clear indications that liquidation was inevitable.

Issues

  1. Whether Mr Watson, as director, should have known that the company could not avoid liquidation and nonetheless continued trading.
  2. Whether reliance on professional advice could excuse continued trading in the face of clear financial distress.
  3. How the objective and subjective elements under Section 306 should be applied when assessing director conduct in wrongful trading claims.

Decision

  • The court held that Mr Watson’s reliance on professional advice was unreasonable given the deteriorating financial position of the company.
  • It was concluded that Mr Watson continued trading despite clear evidence of impending liquidation.
  • The court reiterated directors' duties to monitor the company’s finances closely and to challenge professional advice when appropriate.
  • The case became an important reference point for applying Section 306 to directors who trade while insolvent.

Legal Principles

  • Section 306 requires both an objective and subjective assessment of directors’ conduct, considering what a reasonably diligent person in the same position would have done and the actual knowledge of the director.
  • Greater expectations are placed upon directors with specialized skills or experience.
  • Reliance on professional advice does not automatically absolve directors if such reliance is unreasonable in the circumstances.
  • Directors have a duty to limit creditor losses once liquidation becomes unavoidable by taking reasonable steps such as negotiating with creditors or reducing expenses.
  • Subsequent cases have affirmed the need for director accountability and responsible behavior when facing financial difficulties.

Conclusion

Union Music Ltd v Watson [2004] BCC 37 clarified how courts assess directors' liability for wrongful trading under the Insolvency Act 1986, emphasizing both the objective and subjective standards, and underscoring the necessity for directors to be vigilant and proactive in the face of financial distress.

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