Tuesday June 11, 2024

FRP Advisory successfully argued that BHS directors breached wrongful trading laws and secured the UK’s first ever judgement of ‘misfeasance trading’.

In what is a notoriously difficult cause of action, FRP Advisory (acting as Liquidators of the BHS Group of companies) successfully convinced the Court that the directors’ actions breached the threshold for Wrongful Trading. In so doing, Mr Justice Leech has handed down the largest Wrongful Trading award since its introduction under the Insolvency Act 1986.

The 533-page Judgment indicates that an even larger award will be granted to recognise how the directors breached their fiduciary duties by continuing to trade rather than putting the company into an insolvency process, thereby failing to promote the success of the company in not considering the interests of their creditors. Identified as ‘Misfeasance Trading’, this is the first time such a claim has been successfully recognised and marks a significant legal development in the insolvency space. A final decision on overall quantum is due following a further hearing later this month.

In confirming that directors may be found liable for “Misfeasance Trading” at a date prior to when they are found to have been wrongfully trading, the Judgment is likely to have significant repercussions to the insolvency market – not only to the future of Wrongful Trading claims, but also as to how insolvency advice is presented to directors of distressed companies.

Mr Justice Leech has provided an answer to the lacuna identified last year by the Supreme Court in Sequana when Lord Hodge suggested that: “there may be more egregious circumstances in which the absence of a remedy beyond [wrongful trading] would appear to be a lacuna in our law”.

After hearing hours of witness testimony from those who led, worked for and advised BHS, in 2016 a Parliamentary Select Committee noted that “BHS’s demise has created many losers. Its 11,000 employees face an uncertain future seeking work or facing unemployment. Its 20,000 current and future pensioners face substantial cuts to their entitlements … the reputation of business, the engine of prosperity, has been damaged, to the dismay of responsible investors, owners and business leaders. The episode is not, however, without winners. Many of those closest to the decisions that led to the collapse of BHS have walked away greatly enriched despite the company’s failure”.

The various proceedings initiated by the Liquidators since their appointment in 2016, which have most recently culminated in the Judgment this morning, have sought to readdress that balance and their work on many fronts has led to very substantial recoveries for the estate including, in particular, the Pension Protection Fund.