Landmark Ruling on Trading Misfeasance
Recent £150 Million Judgment Highlights Risks for Company Directors
In a ground-breaking decision this August, the English Court has set a new precedent for how trading misfeasance claims are to be assessed. This ruling has significant implications for business Directors and has stemmed from the long-running British Home Stores (BHS) case.
Understanding Trading Misfeasance
The court has officially termed this new offence as “trading misfeasance.” This occurs when company directors, faced with insolvency, prioritise continued trading over the interests of creditors in an attempt to overcome financial distress.
The BHS Case
British Home Stores entered administration in 2016, only 15 months after a consortium with no previous retail experience purchased the company for just £1. On June 11th 2024, the main judgment resulted in the largest-ever award (£150m) for wrongful trading under Section 214 of the Insolvency Act 1986.
Assessing Liability
The new court decision sets out how much directors owe for failing to act in the company’s best interests. The court applied a “but for” test of causation on a joint and several basis against the directors. The court proceeded to reject arguments that this new cause of action exposed directors to significantly greater liability than the established statutory offence of wrongful trading.
Measure of Compensation
The court dismissed the argument that compensation for trading misfeasance should be limited to losses arising from a single misfeasant transaction. Instead, it ruled that the starting point for liability is the increase in net deficiency caused by continued trading contrary to creditors’ interests.
Causation and Scope of Duty
While the principle of remoteness does not apply to these claims, the court stated that it’s still necessary to prove that the breaches of duty were the effective cause of the company’s losses. The court also introduced a common law concept of scope of duty when analysing the quantification of damages for breach of fiduciary duty.
Implications for Directors
This ruling serves as a stark warning to Directors of companies facing financial pressure. Even Directors with limited involvement at board level may face substantial personal liability if found to have breached their duties.
As the legal landscape continues to evolve, staying informed about these developments is crucial for both directors and insolvency professionals. This landmark ruling may well shape the approach to director liability and corporate insolvency for years to come.