In
its recent judgment, the High Court highlighted the importance of
directors being able to recognise, and act accordingly, as a company
heads towards insolvency.
The
judgment v. the former directors of BHL found them personally liable
for at least £18m (quantum pending) as a result of: (i) wrongful
trading; (ii) trading misfeasance; and (iii) individual misfeasance.
Wrongful
trading
occurs when directors continue to trade when they knew, or ought to
have known, that there was no reasonable prospect of the company
avoiding insolvent liquidation or administration. The bar is a high
one with both an objective test and a subjective test having to be
met, the latter being based on that director’s personal
qualifications and expertise.
Misfeasance
is an “umbrella” term, capturing claims where a director can be
held personally liable for misapplying or retaining company money,
for example, or acting in breach of their statutory and/or fiduciary
duties.
With
a 553-page judgment, it is very difficult to concisely summarise all
points made by the High Court, however, most notably, the Court has
taken a new approach to misfeasance, considering for the first time
and granting in favour of the liquidators, a finding of “misfeasance
trading”.
Under
section 172 of the Companies Act 2006, directors have a duty to
promote the success of the company. These interests should shift to
promote the interests of the company’s creditors as a whole in the
period leading up to an insolvency event.
On
a date ahead of the company being “cash flow” insolvent, or the
BHL directors knowing, or ought to have known, that insolvent
liquidation or administration was inevitable, the Court found that
the directors knew or ought to have known that insolvent liquidation
or administration was probable and failed to consider the interests
of the company’s creditors as a whole. Had the directors
discharged their duties towards the company’s creditors when
appointed, they would have placed the company into administration
straightaway, rather than undertaking “insolvency-deepening”
activity. These failures amounted to “misfeasance trading”, and
with it, personal liability of the directors.
On
the one hand, we expect this judgement to be seen by directors as a
cautionary tale. And on the other, as a real positive for the
insolvency industry as a whole, with the courts willing to allow for
the development of a more rigorous approach, scrutinising the actions
of directors beyond the better-established “wrongful trading”
longstop. With a potentially lower bar to meet, the risk profile of
litigating these types of cases is altered and creditors are likely
to see opportunities to ingather funds, that may previously have been
beyond reach. While this new development has not yet been considered
by the Scottish Courts, English authorities on insolvency cases are
often relied on by the Scottish Courts for guidance. This case will
be welcomed by those operating within the insolvency industry, both
North and South of the Border.
