Vantage Fabrications: wrongful trading, preferences and the bank's charge
Vantage Fabrications Ltd made steel frames and had traded at a loss all year. On 1 February the directors received management accounts showing net liabilities of £150,000 and a forecast showing that, on current orders, liabilities would reach £400,000 by the summer. They resolved to 'trade through' in the hope of winning a tender, which they did not win. On 12 March the company repaid a £60,000 loan to its sales director, Diane, who had lent the money two years earlier. On 20 April it paid £45,000 in full to Harrow Metals Ltd for an invoice not due for another six weeks, while other suppliers waited. On 5 May it granted its bank a floating charge over all its assets to secure an existing overdraft of £120,000, of which only £10,000 was new lending. On 30 June the company entered creditors' voluntary liquidation with a deficiency of about £400,000.
1. Are the directors exposed to a wrongful trading claim, and how would the court measure their contribution?
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Section 214 Insolvency Act 1986 applies where a company has gone into insolvent liquidation and, at some time before the onset of insolvency, a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, yet the company continued to trade. The knowledge test is objective with a subjective overlay under section 214(4): the general knowledge, skill and experience reasonably expected of a person carrying out those functions, plus what this director actually knew.
A forecast of £400,000 of liabilities against a hoped-for tender is precisely the situation in which the statutory conclusion should have been drawn by 1 February. Trading on to 30 June looks like wrongful trading. The defence in section 214(3) requires every step with a view to minimising the potential loss to creditors. Chasing a tender that might rescue the company is not a step to minimise loss; taking advice, cutting exposure, seeking a pre-pack sale or an administration would have been.
The measure is compensatory: the increase in the net deficiency attributable to the continued trading, so up to roughly £250,000, payable jointly and severally as the court directs. The liquidator must bring the claim, and the court may also disqualify under CDDA 1986 for up to 15 years, as well as pursue misfeasance under section 212.
2. Can the liquidator recover the £60,000 repaid to Diane and the £45,000 paid early to Harrow Metals?
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Both payments are potentially preferences under section 239, which requires a payment to a creditor that puts it in a better position on insolvency than it would otherwise have been, made within the relevant time, and made with a desire to produce that effect. The relevant time runs from the onset of insolvency; for a creditor who is a connected person it is two years, otherwise six months (section 240).
Diane is a director and therefore a person connected with the company under section 249. The two-year window is met and, crucially, section 239(6) presumes the requisite desire, so the liquidator need not prove it. Repayment of a director's loan while trade creditors go unpaid is very hard to defend, and the court will order the £60,000 restored.
Harrow Metals is unconnected, so only the six-month window applies and the desire to prefer must be proved. Re MC Bacon requires more than an intention to pay a debt: there must be a desire to improve the creditor's position. Paying an invoice six weeks early while other suppliers wait is evidence, but the company may say it acted to secure continuity of supply, a commercial motive that negates the necessary desire. The outcome is genuinely arguable. If the payment is avoided, Harrow may prove in the liquidation for the underlying debt.
3. What is the effect of the floating charge granted to the bank on 5 May?
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Section 245 Insolvency Act 1986 invalidates a floating charge created within 12 months before the onset of insolvency, except to the extent of the value of new consideration-money paid, or goods or services supplied-at the same time as or after the creation of the charge, together with interest on it.
The charge was granted on 5 May, less than two months before the liquidation on 30 June, so it falls squarely within the window. The bank's protection is limited to the £10,000 of new lending plus interest on that sum. The £110,000 of pre-existing overdraft is not secured by the charge, and the bank ranks as an unsecured creditor for it.
The analysis changes if the bank took fixed charges over specific assets such as book debts, because section 245 attacks floating charges only. The liquidator should also check registration at Companies House within 21 days, since failure to register renders the charge void against the liquidator and creditors. The bank will still be able to set off any credit balance it holds against the company's debt under the insolvency rules, so the practical recovery picture must be assessed before advising.