BHS: A case of misfeasant trading – quantification

The court provided guidance on the qualification of the wrongful trading and misfeasance trading claims.

We reported earlier this year that the court handed down a substantial judgement finding that directors were liable for both wrongful and misfeasance trading. Directors were held to be liable in misfeasance by causing the company to enter into further loan agreements instead of concluding administrators should have been appointed.

That decision was novel in that the court found a director acting within its duties would not have caused the company to carry on trading, but at a point in time earlier than a wrongful trading claim could have been established. In a wrongful trading claim, the usual remedy is to order the director to make good any increased in the creditor deficit between the date trading should have ceased.

What then of a misfeasant trading claim in circumstances where it is alleged, in substance, that the continuing of trade was a breach of duty? Is the loss to the company, in effect, the increased creditor deficit as well and does the court have the power to apportion liability between the directors as it can with wrongful trading? This was explored by the court in a 2-day hearing in July.

The court accepted that in a misfeasance claim, the starting point when assessing loss when the breach complained of is causing the company to trade is the increased net deficit. The liquidator still had to demonstrate the breaches were an effective cause of the trading losses, not just an occasion for them to take place. This required an examination of the scope of the duty owed, including the harm the individual assumes a duty to the company to protect, and whether there is sufficient nexus between that and the loss suffered.

In this case the finding underpinning the breach was that the directors caused the companies to enter into facilities on disadvantageous terms. The company continued to trade at a loss and funded those losses by charging assets on terms not beneficial to the company. The court accepted that breach was the effective cause for the entire increased net deficit. The increased pension deficit was not – the fact trading continued was simply an occasion for those further losses, and so that loss was excluded from the calculations.

The liability for wrongful trading was apportioned between the directors. The principle of joint and several liability of defaulting trustees was well settled and the court held it would be a very substantial departure from that to go on to hold directors were only severally liable for breaches of the same duty. That being the case, liability would not be apportioned. In any case, had the court been asked to relieve one of the directors from his liability, it would have declined. They were serious breaches reflecting a period of disastrous stewardship.

Re: Wright and Rowley v Chappell and others [2024] EWHC 2166