The High Court has handed down an important judgement against two former directors who were ordered to pay liquidators £13.5 million each for wrongful trading.
Background:
The Joint Liquidators, Mr. Wright and Mr. Rowley of FRP Advisory Trading Ltd brought claims against Mr. Henningson and Mr. Chandler for wrongful trading, misfeasance trading and individual misfeasance. The Joint Liquidators have brought claims on behalf of four companies in the BHS Group.
In April 2016, the four companies went into administration and over the years they entered creditors’ voluntary liquidation. Mr. Chappell, Mr. Henningson and Mr. Chandler were directors of all four companies.
In December 2020, the Joint Liquidators commenced proceedings under sections 212 and 214 of the Insolvency Act 1986. They alleged that, from the date of their appointment, the directors knew or should have known that there was no reasonable prospect of avoiding insolvent liquidation. The trading misfeasance claim is based on the argument that even if they were not liable for wrongful trading, they failed to consider the interests of the creditors. Had they done so, they would have immediately filed for administration.
Decision:
The Court was not convinced by the Joint Liquidators’ argument that the directors knew or ought to have known that liquidation was inevitable within 1 month of their appointment and dismissed the claims with respect to four other dates of knowledge. However, the Court agreed that by September 2015, the directors had such knowledge. As a result, the directors were ordered to pay £6.5 million each in damages.
Leech J first noted that the directors breached their duties under the Companies Act 2006 by failing to promote the success of the companies or the interest of their creditors. Indeed, the Judge found that the continuation of trading had been undertaken in breach of the directors’ duty to have regard to the interests of creditors from 26 June 2015 which is significantly earlier than for wrongful trading. He went on to say that, had the directors complied with their duties, the companies would have not continued trading and gone into insolvent administration earlier.
Leech J also noted that even if Mr. Henningson or Mr. Chandler had complied with their duties, the majority shareholder and dominant director would have found a manner for the transaction to still take place. The question of causation is, therefore, important in the context of misfeasance trading claims. The Court found that “it would not be just to impose liability upon Mr. Henningson or Mr. Chandler for sums of this order without giving the parties an opportunity to make further submissions on the appropriate measure of equitable compensation before I make a final determination.” This means that there will be another judgement to decide on the quantum of liability for the directors.
The Court also found that the directors breached their duty not to accept benefits from third parties under section 176 of the Companies Act 2006 which resulted in individual misfeasance awards. Mr. Henningson was, therefore, ordered to repay the £300,000 he accepted to the liquidators.
Finally, the Court found it inappropriate to impose joint liability on both directors due to the difference in their involvement.
Implications:
This is now the highest value wrongful trading claim brought since the provision was introduced by section 214 of the Insolvency Act 1986. It is also one of the rare (if not the first time) that a ruling for misfeasance trading has been made by courts.
The findings of misfeasance trading should serve as a warning to directors to be vigilant about their statutory duties, especially when the company enters financial difficulties. Following this lengthy judgement, it is clear that directors should take actions to minimise loss to creditors to avoid it being considered wrongful trading. Finally, the judgement made clear that directors can be found to have committed misfeasance trading much before they are found liable for wrongful trading.
Claimants must be able to prove causation in misfeasance trading claims especially when the allegations relate to a passive director. Misfeasance claims do require to demonstrate that the knowledge test is met.