Welcome to the August edition of the R&I Update.
Also in this edition:
The High Court has granted the largest ever wrongful trading award and the first award for breach of duty on the grounds of "misfeasance trading".
Background
British Home Stores Group Ltd was part of a group of four companies (the Group). On 25 April 2016, the Group went into administration owing more than £1 billion to creditors. The Group subsequently went into creditors' voluntary liquidation and joint liquidators were appointed.
The joint liquidators brought proceedings against the former directors for wrongful trading and for breach of duties including “misfeasance trading”.
Wrongful trading
If directors allow a company to continue trading beyond the time when they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration (the Knowledge Date), they can be held personally liable for the increase in the net deficiency in the assets (the IND).
The judge found that by 8 September 2015, the latest of the six Knowledge Dates put forward by the joint liquidators, the directors of the Group knew or ought to have known that insolvent administration or liquidation was inevitable because:
- the Group was cashflow insolvent
- there was no option to finance the business or prospect of achieving the target business plan
- they were operating a "degenerative strategy", selling off the Group's assets to fund its losses, and
- there was no strategy to deal with the pension deficit.
The only potential defence, a high hurdle to overcome, is to show that the directors took every step with a view to minimising the potential loss to the company's creditors. The court found that a defence was not made out and two of the directors were each ordered to contribute £6.5 million towards the £45.5 million IND between September 2015 and April 2016.
The joint liquidators' claims against the principal director, Mr Chappell were considered separately at the end of June 2024 and reports indicate that he was ordered to contribute £50 million to the Group’s assets. No judgment or order is currently available.
The judge declined to cap the directors' liability by reference to their directors' insurance cover or ability to pay, saying that doing so would send the "wrong message" to risk-takers.
Misfeasance trading
Directors have a 'creditor interest duty' when a company is insolvent or bordering on insolvency or an insolvent liquidation or administration is probable (see our Alert).
The judge ruled that the directors had breached their duties by "failing to promote the success of the companies or to consider the interests of their creditors" in the “zone of insolvency” when entering into an extortionate loan transaction on 26 June 2015. This so called "misfeasance trading" occurred nearly three months before the liability for wrongful trading arose. If the directors had complied with their duties, the Group would not have continued to trade and would have gone into an insolvent administration.
The judge also found for the joint liquidators in relation to three out of nine other individual misfeasance claims advanced against the directors. The quantum of liability for the misfeasance trading claim is still to be determined but could be £133.5 million – being the IND between June 2015 and April 2016.
Key takeaways for directors
This case is a reminder that “insolvency deepening activity” can amount to a breach of duty by directors at a time when insolvent liquidation is probable but not inevitable and there is no liability for wrongful trading.
It highlights that it is important for directors to:
- maintain appropriate levels of D&O coverage
- obtain and follow advice from financial and legal advisers – but it remains the duty of the directors to make decisions
- ensure that board minutes reflect the directors' discussions and decisions
- consider creditors' interests when entering into transactions "in the zone of insolvency" and record why directors believe there is “light at the end of the tunnel” and liquidation is not inevitable. Professional restructuring advice is critical at this stage.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Restructuring and Insolvency team.
Wright & Ors v Chappell & Ors [2024] EWHC 1417 (Ch)
