Facing Insolvency After Losing a Client Through No Fault of Your Own?

Loss of major clients is a common cause of corporate insolvency, but a link between the two events can be hard to prove. Exactly that challenge was faced by a cable installation company that was already making substantial losses when it was dropped by its principal customer.

The client was claimed to have withdrawn its business as a result of the company having supplied it with defective or non-compliant cables. The company, which was said to have been previously successful, went into liquidation – with a deficiency of £2.4 million – soon after it was removed from the client’s list of approved tenderers.

The company’s rights were later assigned to another company, which launched proceedings claiming about £8 million in damages from the original supplier of the cables, alleging breach of contract, misrepresentation and deceit. The supplier, however, applied to strike out the latter two claims on the basis that they stood no real prospect of success.

The supplier submitted that the company was already in dire financial straits before the defective cabling issue arose and that there was no evidence of a causal link between that issue and the loss of the company’s client. The company had sustained trading losses of almost £2.8 million in the two years before it went into liquidation and its insolvency was in any event said to have been inevitable.

Ruling on the matter, the High Court noted that the assignee faced real difficulties in establishing the required link. Given the company’s pre-existing financial difficulties, the amount of damages claimed also appeared excessive. In dismissing the strike-out application, however, the Court found that the assignee had a real, as opposed to fanciful, prospect of succeeding in the claim. The issues could only be resolved on consideration of full evidence and the entirety of the assignee’s claim would therefore proceed to trial.