Case summary - re. Cubelock Ltd
In this case the court helpfully confirmed that trading whilst balance sheet insolvent does not necessarily amount to wrongful trading.
This was a case decided by Park J on 22nd May 2000 concerning disqualification proceedings. The Secretary of State for Trade and Industry sought orders under the Directors Disqualification Act 1986 disqualifying 4 of Cubelock's directors. One of the grounds was a "wrongful trading" allegation that they knowingly continued the company's business beyond a date when there was no realistic prospect of payment of all creditors.
The directors forecasted that Cubelock would make a loss in its first year, break even in its second year and make a profit in the third year. They secured limited funding at the outset by way of loans secured by all monies debentures. On the basis of monthly management accounts, however, it could be seen that half-way through the second year, the accounts showed a loss of GBP37,000 and the directors decided that Cubelock should go into a creditors voluntary liquidation.
The liquidator claimed that, on the basis of the forecasts and accounts, Cubelock should never have started trading as it was insolvent from the outset.
The Judge said that the bare fact of balance sheet insolvency does not necessarily constitute wrongful trading. The law has to leave room for cases where it was acceptable for directors to take the view that their company, though insolvent in balance sheet terms for the present, was going to trade its way back into credit so that all the creditors would be paid. The Judge acknowledged that balance sheet insolvency is extremely common in the early period of a company's trading.
For further information, please contact Sophie Elboz on Tel: 020 7367 2958 or e-mail: spe@cms-cmck.com
