BHS court case and misfeasance trading

Sponsored feature | Emma Potter, solicitor, HCR Hewitsons

Various claims can be made against a director when they are involved in authorising a relevant company to continue trading while insolvent:

- Wrongful trading

- Fraudulent trading

- Breach of duty or misfeasance.

Trading insolvently is not in itself an offence. In broad terms, it is whether the director “knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration” or in the case of misfeasance, “where the company is bordering on insolvency” and continued to trade in any case.

Continuing to trade effectively builds up arrears, with no prospect of settling them, making the creditor position worse. Consequently, the director could also be in breach of their duties outlined in the Companies Act 2006.

Typically, wrongful trading claims are brought alongside breach of duty claims. As such, it is pertinent for a director to consider whether there is light at the end of the tunnel. If the answer to the latter is yes, and a notional director would have thought the same, then it is likely a judge will not consider that the director has committed an offence.

Importantly the landmark case of Re BHS Group [2024] has now clarified the scope of misfeasance claims arising directly out of trading, “misfeasance trading”.

The concept of misfeasance trading

Lord Leech in Re BHS Group [2024] did not spend much of his 533-page judgement forensically going through the elements required to establish a successful misfeasance trading claim, however, it would appear that the following elements must be satisfied:

- Breach of directors duty (Sections 171-177 Companies Act 2006) by continuing to trade and failing to consider the interests of the company’s creditors when a company is insolvent or bordering on insolvency, or when an insolvent liquidation or administration is probable

- Causation: what would have happened if the directors had complied with their relevant duties and would the company would have suffered loss in any event – relying on and supporting the case of Lexi Holdings plc (No 2) [2008] 2 BCLC 725. In addition, when considering this, the court must ask the question as to whether the company would have continued trading and suffered losses if the director had not committed the breaches of duty.

The latter was emphasised to be of particular importance in the context of misfeasance trading. The judgement helpfully clarifies that a claim for misfeasance trading can arise and be generally linked to an increase in total creditors.

This in turn opens the door for misfeasance claims relating to the deteriorating position of specific individual creditors – such as lenders or HMRC – where previously there was concern around how a loss to the creditors could be established.

For more information, contact Emma Potter, solicitor, restructuring and insolvency team, on 01223 447401 or 07741 006158.

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