Re Produce Marketing Ltd, No 2, 1989 BCLC 520

Citation:Re Produce Marketing Ltd, No 2, 1989 BCLC 520

Rule of thumb:When does wrongful trading occur? It depends on accounting evidence. It occurs when the organisation has been making losses for many years & there is no objective business plan which can be shown to suggest it could ever make profits.

Judgment:

The facts of this case were that Mr David and Mr Murphy imported fruit. They stored the fruit in a warehouse and made commission on any sales of it. That they were £130,000 in debt with profits of a maximum of around £25,000 per year, and they were consistently making losses for many years. It became clear due to repeated losses for many years that the company was not being successful with the business model not working. The Court held that in this particular case then these directors should have filed for insolvency at that point and not continued trading, and the Judge made the 2 directors personally liable to repay £75,000.

Ratio-decidendi:

‘The issue is whether at some time after 27 April 1986 and before 2 October 1987, when it went into insolvent liquidation, they knew or ought to concluded that there was no reasonable prospect that PMC would avoid going into insolvent liquidation... so that the facts which Mr David and Mr Murphy ought to have known or ascertained and the conclusions that they ought to have reached are not limited to those which they themselves showing reasonable diligence and having the general knowledge, skill and experience which they respectively had, would have known ascertained or reached but also those that a person with the general knowledge, skill and experience of someone carrying out their functions would have known, ascertained or reached... an intent to defraud... (requires)... the need for actual dishonesty involving real moral blame... I pause here to observe that at no stage before me has it been suggested that either Mr David or Mr Murphy fell into this category... It follows that the general knowledge, skills and experience postulated will be much less extensive in a small company in a modest way of business, with simple accounting procedures and equipment, than it will be in a large company with sophisticated procedures. Nonetheless, certain minimum standards are to be assumed to be retained. Notably there is an obligation laid on companies to cause accounting records to be kept which disclose with reasonable accuracy at any time the financial position of the company at that time... The knowledge to be imputed in testing whether or not directors ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation is not limited to the documentary material available at the given time... includes a reference to facts which a director of a company ought not only to know but those which he ought to ascertain... factual information not only what was actually there but what, given reasonable diligence and appropriate level of general knowledge, skill and experience, was ascertainable... Mr David and Mr Murphy... did know that the previous trading year had been a very bad one... A major drop in turnover meant almost as night follows days that there was a substantial loss incurred, as indeed there was. That in turn meant again, as surely as night follows day, a substantial increase in the deficit of assets over liabilities... that includes the deficits over assets of £132,000 (with profits on average at around £25 per year beforehand)... Taking all the circumstances into account I propose to declare that Mr David and Mr Murphy are liable to make a contribution to the assets of PMC of £75,000’, Knox J.

Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.