Following the successful prosecution of the BHS directors for both wrongful trading and what is being called ‘misfeasant trading’, Stephen Goderski, Partner and Head of Restructuring, outlines the differences between the two elements of the liquidators’ claims.
The more straightforward is wrongful trading, a concept that’s nearing its 38th birthday and which has produced surprisingly few successful claims in that time. In a nutshell, wrongful trading applies where a board continues trading a business when it should be obvious the business cannot avoid liquidation or administration, and by doing so worsens the position for creditors.
The liquidator or administrator applies to court for an order compelling the directors to make good the additional deficiency they have caused by continuing to trade. The directors have only one possible defence: that they did all they could to minimise the loss to creditors (ie they demonstrably put creditors front and centre of all their decision making) and did not play fast and loose with creditors’ money.
The key to a successful action is, of course, being able to demonstrate that the board ought to have concluded that resistance was futile – not always an easy matter. In the BHS case, the liquidators suggested six alternative dates for the point at which the directors ought to have concluded that an insolvency process was inevitable, the judge accepting the latest.
Interestingly the directors claimed they had acted in accordance with professional advice throughout. But that argument was given short shrift by the judge, who ruled that the advisers were never in possession of the full picture and that responsibility for continuing to trade lay with the board alone.
Wrongful or ‘misfeasant’: the plot thickens
The second element of the liquidators’ claim is more intriguing. They persuaded the judge that the directors were guilty of misfeasance by not ceasing to trade some 10 weeks before the date which the judge accepted as a tipping point for the wrongful trading claim.
At that time BHS was not cash flow insolvent and insolvency was not inevitable. But the date in question saw the company undertake an expensive debt refinance. The judge accepted that the refinance made insolvency more likely and ruled it was therefore undertaken without putting creditors’ interests first.
So we have the strange situation where the same directors and the same set of facts produce different (though intertwined) dates of culpability. Technically, ‘misfeasant trading’ is not a legal term (the directors were found guilty of misfeasance under section 212 Insolvency Act 1986). But the fact that they were not guilty of wrongful trading at a given point does not mean they were also not guilty of misfeasance, based on exactly the same circumstances.
Doubtless this conundrum will lead to greater scrutiny of directors’ conduct in the lead up to any insolvency proceedings. And any decisions not clearly made in the interests of creditors could potentially lead to an action against the directors.
