Eric Peter David and Ronald William Murphy ran Produce Marketing Consortium Ltd, importing lemons, grapefruit and oranges from Cyprus (previously, more Spain).

David replied that they knew liquidation was inevitable in February with the accounts, and trading was continued because there was perishable fruit in cold store.

They should have concluded in July 1986 there was no reasonable prospect of avoiding this, and though they did not have the accounts till January 1987 they had an intimate knowledge of the business and must have known turnover was well down on previous years.

Under these latter successive enactments the intent to defraud had to be established in relation to the particular person sought to be charged, and although in Re William C Leitch Bros Ltd [1932] 2 Ch 71, Maugham J. held (at p 77) that if a company continued to carry on business and to incur debts at a time when there was to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it was, in general, a proper inference that the company was carrying on business with intent to defraud, there were authorities which exonerated from liability under the fraudulent trading legislation persons who honestly hoped that creditors would be paid off one day, albeit that this was not a reasonable expectation by any objective standard.

Thus I was referred to an unreported decision of Buckley J in Re White & Osmond (Parkstone) Ltd (30 June 1960), in the course of which he said: “In my judgment, there is nothing wrong in the fact that directors incur credit at a time when, to their knowledge, the company is not able to meet all its liabilities as they fall due.

However, there is nothing to say that directors who genuinely believe that the clouds will roll away and the sunshine of prosperity will shine upon them again and disperse the fog of their depression are not entitled to incur credit to help them to get over the bad time.” Buckley J also referred to another decision of Maugham J in Re Patrick and Lyon Ltd [1933] Ch 786, where (at p 790) he expressed the opinion, regarding s 275 of the Companies Act 1929: “that the words ‘defraud’ and ‘fraudulent purpose,’ where they appear, in the section in question, are words which connote actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame.” The Insolvency Act 1986 now has two separate provisions: s 213 dealing with fraudulent trading – to which the passages which I have quoted from the judgments of Maugham J and Buckley J no doubt are still applicable – and s 214 which deals with what the side-note calls “wrongful trading”.

First, the requirement for an intent to defraud and fraudulent purpose was not retained as an essential, and with it goes the need for what Maugham J. called “actual dishonesty involving real moral blame”.

The second enlargement is that the test to be applied by the court has become one under which the director in question is to be judged by the standards of what can be expected of a person fulfilling his functions, and showing reasonable diligence in doing so.

[1] In addition directors are required to prepare a profit and loss account for each financial year and a balance sheet as at the end of it (Companies Act 1985, s 227(1) and (3)).

The knowledge to be imputed in testing whether or not directors knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation is not limited to the documentary material actually available at the given time.

In my judgment this indicates that there is to be included by way of factual information not only what was actually there but what, given reasonable diligence and an appropriate level of general knowledge, skill and experience, was ascertainable.

It was a deficit that, for an indefinite period in the future, could not be made good, even if the optimistic prognostications of level of turnover entertained by Mr. David and Mr. Murphy were achieved.

Once the loss in the year ending 30 September 1985 was incurred PMC was in irreversible decline, assuming (as I must) that the directors had no plans for altering the company's business and proposed to go on drawing the level of reasonable remuneration that they were currently receiving.

It was stated by Mr. David that the persons and companies with whom PMC did business were in the main long established trading partners.

Nor, in my judgment, do the facts that the bank was throughout willing to continue its facilities and that Mr. Tough, although expressing the grave warnings that he did when the accounts for the years ending 30 September 1985 and 1986 were available to him, was willing to accompany Mr. David and Mr. Murphy to the bank in February 1987 to see if further facilities would be granted, detract from the conclusion I have reached that Mr. David and Mr. Murphy ought to have concluded at the end of July 1986 that there was no reasonable prospect that PMC would avoid going into insolvent liquidation.

Mr. Teverson gallantly attempted to establish that – assuming that the first time when the respondents ought to have concluded that there was no such reasonable prospect was February 1987 when they actually signed the preceding two years' accounts – their decision to trade on so as to realise the fruit in cold store to the best advantage satisfied the requirement of s 214(3) .

I would not have accepted that submission in any event because the continued trading was far from limited to the realisation of the fruit in cold store, and Ramona were not told, as they should have been, what the true financial picture was so as to be given the opportunity of deciding for themselves what to do.

On that basis she submitted that the proper measure was the reduction in the net assets which could be identified as caused by the wrongful activities of the persons ordered to contribute.

The discretion given to the court was to enable allowance to be made for questions of causation and also to avoid unjust results such as unwarranted windfalls for creditors.

The court has a discretion over the matter of relief, and it is permissible for the delinquent director to submit that the wind should be tempered because, for instance, full repayment would produce a windfall to third parties, or, alternatively, because it would involve money going round in a circle or passing through the hands of someone else whose position is equally tainted.” In my judgment the jurisdiction under s 214 is primarily compensatory rather than penal.

Naturally Mr. Teverson was not in a position to make submissions to me how matters should be dealt with as between his two clients, and I should be sorry to see the costs, which must already run the risk of eroding the benefits which the section is intended to confer on creditors, further increased.