Re Brian D Pierson (Contractors) Ltd

Brian D Pierson (Contractors) Ltd built and maintained golf courses. It fell into difficulty after contracting parties failed to pay on two projects. It continued to trade. In June 1994 the auditor reported a ‘fundamental uncertainty’ about whether the company would continue as a going concern. (Importantly, this was not, however, what is known as a ‘going concern qualification’ of the accounts which would amount to an expression of the auditor's ‘significant doubt’ about the company's ability to continue as a going concern.) It went into insolvent liquidation in January 1996. The liquidator, amongst others, applied for a contribution for wrongful trading for the period after June 1994. The court considered whether at that point in time the directors ought to have realised that there was no reasonable prospect of avoiding insolvent liquidation.

Hazel Williamson QC held there was wrongful trading from June 1994, but company's losses were partly due to extraneous actors like bad weather. The order was accordingly reduced by 30%. She noted that under IA 1986 s 214, ‘One cannot be a “sleeping director”; the function of “directing” on its own requires some consideration of the company's affairs to be exercised.’ Furthermore, the absence of warnings from one's advisers is no excuse for wrongful trading.

Mr Pierson submitted that as at 13 June 1994, he could not reasonably be expected to have concluded that the company was heading inevitably for an insolvent liquidation, for several reasons. First, he urged that the court must have regard to the particular industry in which he was engaged and its nature, as he described, and I have recorded, above…He emphasised that his business had always been run, and had to be run, according to his 'gut feel' based on experience, and said that his decision to trade on was perfectly reasonable, based on his experienced view of the position at the time. He attributes the eventual downfall of the company mainly to the consequences of bad weather conditions in 1994 and 1995 - unduly hot dry summer weather and unduly inclement winter weather - causing extra cost, the need to repeat work and the withholding of payments.

As regards what could be expected of him in appraising the position, he points out that he is not an accountant. He says that he relied on his trained staff to inform him of the facts. He would only look at the 'bottom line' of a set of accounts and would derive nothing more subtle than that from them without assistance. He says he had advisers in the shape of Mr Weeks and Mr Brunt, and was accustomed to confer with, certainly, the latter quite often.

He relies on the fact that the 1992/93 accounts were not qualified, and that there was no suggestion that the 1993/94 accounts were going to be qualified either, according to Touche Ross's working papers. No-one, neither his advisers, nor his former accountants, nor the bank, had suggested at or before the relevant time that the company ought to go into liquidation, or was in serious difficulty, and he submits that the relaxed tenor of Touche Ross's working papers for the 1993/94 accounts supports the view that the company was not obviously in terminal difficulty.

With regard to the trading position, he submits that he was entitled to rely on the fact that the company had a healthy order book at the time, and he refers to a letter written to the bank on 13 June 1994 by Paul Mould, enclosing the company's May management figures and a Contract Position Statement, this being information which the bank had requested on a monthly basis. On reading, this letter lists contract work in hand at about £1.7m, with a further £1.45m all but signed up, and a further £4.185m or more projects 'under negotiation'. In addition, he says that the signs in the press, and so forth, all pointed to the market's having recovered from the depressed state of 1992/93 and being ready to improve - an opportunity that the company was therefore poised to use to its advantage, not least because several of its competitors were foundering.

The question, I have to answer is whether a reasonable director in Mr Pierson's position and with the knowledge which was available to him, would, or ought, to have concluded, at or shortly after 13 June 1994 that there was no reasonable prospect that the company would avoid insolvent liquidation. Whilst the burden of proof is on the liquidator to prove his case, the combination of points which he makes is formidable. Nevertheless, I heed the injunction that it is easy to be wise with hindsight. I am also very conscious that the standard to be applied is that of the reasonably prudent businessman, a breed which is likely to be less temperamentally cautious than lawyers and accountants. I must therefore give proper respect to Mr Pierson's evidence as to how his industry operates, and his judgment based on experience, remembering also that he had operated this business, apparently successfully, for many years before its collapse. I am not dealing with an enterprise which never became properly established at all. Also, this is not the case of a company suffering losses continuously over several years. The loss in 1992 was exceptional, and at the material time, only one further complete and one almost complete year of further loss occurred.

Nevertheless, in my judgment, the liquidator's case is made out. I am satisfied that the directors of this company ought to have concluded at or about 13 June 1994, that there was no reasonable prospect that the company would then avoid an insolvent liquidation. The company's business had consistently had difficulties with maintaining current cash flow. It had had additional burdens placed upon it by the losses of resources, occasioned by [the bad debts from the two failed projects]… Its recent results suggested clearly that the basic core of its business was not capable of generating profits in those circumstances, let alone sufficient profits, quickly enough, to improve the cash flow position and restore the company's health. [The court continued to cast severe doubt on the value of bad debts from the two failed projects and on the directors judgment in regard to assessment of the value of this debt]….

However, the audited accounts for 1992/93 revealed a modest loss and a small balance sheet insolvency, and, most importantly, they contained the warning of the 'fundamental uncertainty' paragraph. Mr Pierson emphasises that the auditors' opinion was 'not qualified in this respect'. However, that was no excuse for ignoring the auditors' comment as being nothing serious. In my judgment receipt of that report was a warning, which ought to have brought about a careful and cool appraisal of the company's position. There is no evidence that any such analysis occurred…

With regard to the strength of the company's order book, the letter to the bank dated 13 June 1994 looks impressive, but was clearly written for presentation purposes, and includes only the positive side of the picture. I can see nothing to suggest that it showed such a change in the company's fortunes as to be regarded as stemming the decline which had set in and justifying ignoring the 'fundamental uncertainty' and the worsening picture in the intervening 10 or 11 months. Moreover, I cannot place great weight on the justifiability of Mr Pierson's relying on his 'feel' that the business was improving, given that his judgments [of the value of the bad debt from the failed projects] were so obviously grossly optimistic.

I find that, in practice, Mr Pierson simply hoped that, by carrying on as before, everything would come right, somehow. He gave no proper thought to whether that was a realistic possibility… Mr Pierson has argued that if he ought to have appreciated that the company was heading for an insolvent liquidation...

Mr Pierson has argued that if he ought to have appreciated that the company was heading for an insolvent liquidation, nevertheless, after the date on which the liquidator relies, he 'took every step with a view to minimising potential loss to the company's creditors that ... he ought to have taken' within the meaning of s 214(3) of the Insolvency Act 1986, such that the defence afforded by that sub-section is available to him.

In my judgment Mr Pierson cannot make out that defence. There was no question, in mid-1994, of his taking any steps to 'minimise loss to the creditors'; the company simply continued trading in the same way as before. In my judgment this section is intended to apply to cases where, for example, directors take specific steps with a view to preserving or realising assets or claims for the benefit of creditors, even if they fail to achieve that result. It does not cover the very act of wrongful trading itself, just because this would have been done with the intention of trying to make a profit. (emphasis added).