Largest Wrongful Trading judgment ever – don’t let it happen to you!
27 June 2024
A recent judgment handed down by Mr Justice Leech found the former directors of British Home Stores (BHS) liable for both Wrongful Trading and Misfeasance Trading – the first recognised case of the latter. Between the two directors, over £18 million was ordered to be paid to the liquidators of BHS.
The insolvency landscape has been changing significantly in the last few years. For instance, the recent case of BTI v Sequana, with its judgment containing substantial comment from the Supreme Court on how directors of a company should act when that company experiences financial difficulties, made significant waves and changed how many think about actions taken by directors of a company facing insolvency. The judgment in Sequana noted that there appeared to be a gap in the law in terms of a legal remedy for certain acts of directors which prejudice the interests of company creditors, and this new judgment involving BHS provides the precedent for that remedy – Misfeasance Trading.
The Companies Act 2006 places a wide range of duties on company directors. In particular, this case focused on the duty to consider the impact of the company’s continued trading and actions beyond a particular date on both its shareholders and creditors. The closer a company comes to insolvency, the more the creditors’ interests should be taken into account.
Of note in the BHS case was the fact that the directors caused the company to continue trading as opposed to filing for administration or liquidation, a decision that did not give appropriate consideration to the interests of the company’s creditors.
Exactly how this precedent will be applied by courts in future cases remains to be seen, but directors should be cautious to ensure that they are complying with all of their duties and considering the effect of their decisions on both the company’s shareholders and its creditors before acting. This includes staying fully informed as to the company’s financial and general trading position, and when insolvency is a realistic possibility, acting in a rational and justifiable manner to avoid liquidation, if possible, and to not prejudice the interests of creditors in any event.
To avoid any pitfalls and to ensure that you are acting in a way that avoids the risk of any such claims, or if you are already facing such a claim, contact Joshua Jaworski or a member of the Insolvency Team for advice.
-
Joshua Jaworski
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2024.