What was in issue

When a company is heading towards insolvency, a director’s duty shifts from the shareholders to the creditors. The question was when exactly that happens — at the point insolvency becomes probable, or only once it is inevitable.

How it ran

We acted for the joint liquidators. The trial evidence was largely board minutes and cash-flow forecasts prepared in the six months before administration, and the argument was about what the directors knew at each point rather than what they later said they believed.

The result

The Court of Appeal held that the duty engages when insolvency is probable, not merely when it becomes inevitable. The decision is now the usual starting point for advising directors in the zone.

Office-holder claims of this kind turn on a date rather than on a document, and the date is almost never recorded. The court is asked to fix the point at which the directors should have concluded that insolvent liquidation was unavoidable.

What decided it

The management accounts and the correspondence with the lender told a consistent story about when the position became irrecoverable, and it was materially later than the liquidator had pleaded. Continuing to trade in the intervening period was a decision the board was entitled to take.

Why it matters

The decision is a useful corrective to hindsight. Directors are judged on what a reasonably diligent person would have concluded at the time, on the information then available, and not on the outcome.