Re Brian D Pierson (Contractors) Ltd - Wikipedia 21.10.

2022 14:03

Re Brian D Pierson (Contractors) Ltd

Re Brian D Pierson (Contractors) Ltd [1999] BCC 26
is a UK insolvency law and company law case, concerning Re Brian D Pierson
misfeasance and wrongful trading. (Contractors) Ltd

Contents
Facts
Judgment
Notes Court High Court
References Citation(s) [2001] 1 BCLC 275,
[1999] BCC 26

Facts Keywords
Wrongful trading, bad weather
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.

Judgment
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

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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

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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.

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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).

Notes

References

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