BHS Liquidators Win Record Wrongful Trading Judgment—And Establish New "Misfeasance Trading" Law

Jones Day


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FRP Advisory Trading Limited won the UK's largest wrongful trading claim and established a new "misfeasance trading" claim against former BHS directors, emphasizing directors' critical responsibilities in managing financially distressed companies.
UK Corporate/Commercial Law
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FRP Advisory Trading Limited won the United Kingdom's largest-ever wrongful trading claim and successfully established the first "misfeasance trading" claim against former directors of British Home Stores ("BHS"), highlighting the critical responsibilities of directors managing financially troubled company assets.

Just over eight years after BHS made the headlines by falling into administration and then liquidation with more than £1 billion worth of creditors, FRP Advisory Trading Limited has succeeded in the largest-ever wrongful trading claim since the statutory offence was introduced under the UK Insolvency Act 1986. The liquidators also successfully argued that the former directors should be liable for "misfeasance trading"—continuing to trade to the detriment of creditors when there is a reasonable prospect of insolvency—setting a new legal precedent for directors' duties in the United Kingdom. The judgment constitutes a stark warning to those directors who deal with a company's assets without fully considering the impact on all stakeholders and whether the company may be in financial difficulty.

Mr Justice Leech's judgment of 11 June 2024, one of the longest in Chancery Division history, has been keenly awaited since it will have a significant impact on how boards are advised. It highlights the risks directors face, in terms of the standard to which they will be held, and the limited protection professional advice will afford if it is not properly targeted.

The judge also commented on directors' duties and effectively warned boards that they must ensure that they: (i) maintain appropriate levels of D&O coverage; (ii) have minutes that reflect the reality of directors' discussions; and (iii) properly assess their duties at regular intervals and, in particular, when entering into transactions or commitments that may impact creditors when a company is "in the zone of insolvency". In those circumstances, there is no substitute for professional restructuring advice.

A further hearing to assess quantum will be heard on 24-25 June 2024. This decision is likely to have significant practical consequences for any directors of companies facing potential financial distress.

FRP Advisory Trading Limited was advised by Jones Day in this matter.

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