English Court Sets Precedent with Landmark Judgment for Trading Misfeasance Under New Law
In a groundbreaking ruling on 19 August 2024, the English Court delivered a significant judgment that sheds light on the implications of the trading misfeasance offence for directors. The court awarded a staggering £150 million against two former British Home Stores (“BHS”) directors, marking a pivotal moment in the legal landscape regarding breaches of fiduciary duties.
The case revolved around the collapse of BHS into administration in 2016, a mere 15 months after it was sold for a nominal sum of £1 to a consortium lacking retail experience. The judgment not only addressed the quantification of trading misfeasance claims but also clarified the calculation of equitable compensation for breaches by directors under the “modified Sequana duty.”
Trading misfeasance, as outlined by the court, refers to the failure of directors to prioritize the interests of creditors when a company is insolvent or on the brink of insolvency. Instead of taking necessary steps to address financial distress, directors opt to continue trading in an attempt to navigate the troubled waters, often exacerbating the situation.
The ruling in the BHS case represented the largest-ever award for wrongful trading under Section 214 of the Insolvency Act 1986. Furthermore, it delved into the concept of “trading misfeasance,” a novel cause of action introduced for the first time in English law through this particular case.
Key findings of fact and law were established by the court regarding liability and causation in both wrongful trading and trading misfeasance. The judgment elucidated the directors’ breach of fiduciary duties by sustaining trading activities through costly borrowing, despite being aware or should have been aware of the looming insolvency risks.
A crucial aspect of the ruling was the application of a “but for” test of causation, which held the directors jointly and severally liable for their actions. The court dismissed claims that the new cause of action imposed significantly higher liability compared to the established offence of wrongful trading, which had previously resulted in a much smaller quantum of £6.5 million against two directors.
Moreover, the court rejected the defendants’ argument that compensation for trading misfeasance should be confined to losses stemming from a single misfeasant transaction. Instead, the judgment emphasized that when directors engage in transactions that allow the company to continue trading to the detriment of creditors, the starting point for assessing liability is the increase in net deficiency caused by their actions.
While the principle of remoteness was deemed inapplicable to these claims, the court stressed the necessity of proving that breaches of duty were the effective cause, if not the sole cause, of the losses incurred by the company. Additionally, a common law concept of the scope of duty was introduced to evaluate damages for breach of fiduciary duty, ensuring that only losses directly linked to the breach would be recoverable.
In the context of BHS, burdened with a substantial pensions deficit, the court ruled that losses arising from fluctuations in pension fund values due to market conditions were unrelated to the directors’ breaches and, therefore, not recoverable. However, losses attributable to the directors’ actions left each individual liable for approximately £150 million.
The ruling in the BHS case serves as a stark warning to directors of companies facing financial challenges, highlighting the potential consequences of failing to uphold fiduciary responsibilities. Even directors earning substantial salaries and holding limited involvement at the board level were held accountable for their actions in this case.
Jones Day represented the liquidators of the BHS Companies, FRP Advisory, in this landmark legal battle. The insights provided by Jones Day offer valuable perspectives on the implications of the judgment, emphasizing the need for directors to act prudently and in the best interests of stakeholders.
Throughout this case, the court’s meticulous analysis of trading misfeasance not only clarified the legal framework surrounding breaches of fiduciary duties but also set a significant precedent for future cases involving directorial misconduct in the context of insolvency. This judgment underscores the importance of accountability and integrity in corporate governance, holding directors responsible for their decisions and actions during times of financial distress.
Moving forward, the legal landscape for directorial responsibilities and liabilities is likely to undergo further scrutiny and refinement, guided by the principles established in the BHS case. Directors are urged to exercise diligence, transparency, and ethical conduct in their decision-making processes to avoid potential legal repercussions and safeguard the interests of all stakeholders involved.
In conclusion, the English Court’s landmark judgment in the BHS case represents a pivotal moment in company law, emphasizing the significance of upholding fiduciary duties and ensuring accountability in corporate governance. This ruling sets a precedent for future cases involving trading misfeasance and wrongful trading, underscoring the need for directors to act responsibly and ethically in the best interests of all stakeholders.
