Corporate Law Update: 22 - 28 June 2024

28 June 2024

This week:

Court finds BHS directors liable for wrongful trading and misfeasance

The High Court has found two former directors of the BHS group of companies liable for wrongful trading and misfeasance under the Insolvency Act 1986.

Three individuals had been appointed as directors of four companies within the BHS group, including the group’s principal operating company, following its acquisition by a consortium company. Within just over a year of that acquisition, those directors had placed each company into administration. The companies subsequently entered creditors’ voluntary liquidation.

The joint liquidators brought claims against all three directors alleging wrongful trading under section 214 of the Insolvency Act 1986.

They also alleged that the directors had committed misfeasance under section 212 of the Insolvency Act 1986 by virtue of breaching their duties under the Companies Act 2006, including section 172 (to promote the success of the company) and section 171(b) (to use their powers for a proper purpose).

The court held two of the three directors liable for both wrongful trading and misfeasance. (Proceedings against the third director are still ongoing.) The key points are as follows.

  • The threshold for wrongful trading is higher than for misfeasance but, in this case, it was met.
  • Whether the directors knew they were trading wrongfully will be measured against the knowledge of each individual director, rather than the board as a whole.
  • The standard expected of a director is commensurate with the size and sophistication of the company. The court may take account of material to which a director reasonably has access. Directors must ensure they receive key management information. It is no excuse that management information is voluminous or provided late.
  • Directors can conclude that a company should continue to trade at a loss if they believe that it can trade out of difficulty, but that belief must be rational. They cannot engage in blind optimism.
  • Directors are not liable for wrongful trading if they took every step to minimise potential losses to creditors. However, it is not enough to show that the directors continued trading with the aim of reducing the company net deficit. They must demonstrate that they intended to minimise the risk of loss to individual creditors and took every step to do so.
  • Directors cannot simply rely on taking professional advice. It is the directors themselves, not their advisers, who decide whether there is a reasonable prospect of avoiding insolvent liquidation.
  • As part of their duty under section 172, the directors had to have regard to the interests of creditors. However, this requirement arises before the point at which insolvency is inevitable and, therefore, before the onset of wrongful trading. As a result, there may be a period in respect of which directors are liable to compensate for misfeasance but not wrongful trading.
  • A director’s duty under section 171(b) includes reviewing whether to place a company into administration. By failing to do so, the two directors had breached this duty.

You can read more about the High Court’s decision that two former directors of BHS were liable for wrongful trading and misfeasance in our colleagues’ in-depth piece.

Court had power to extend takeover scheme longstop date

The High Court has held that it had the power to extend the longstop date for implementing a public company takeover by way of a statutory scheme of arrangement.

In the matter of Network International Holdings plc [2024] EWHC 1545 (Ch) concerned the public takeover of a payment solutions company.

The takeover (which is ongoing) is structured as a statutory scheme of arrangement under Part 26 of the Companies Act 2006, which is by far the most common structure for a recommended UK takeover.

The scheme of arrangement was approved, as required, by the company’s shareholders at the usual court-ordered meeting. The approved scheme is conditional on obtaining regulatory clearance for the takeover in various jurisdictions.

The terms of the approved scheme stated that, if those clearances were not obtained by 9 April 2024 (the Longstop Date), the scheme would not become effective and the takeover would not occur.

It became clear that the clearances would not be obtained before the Longstop Date, but that they might be obtained within a short period after that date.

As a result, the company, having already agreed an extension with the bidder and with the Takeover Panel (the regulator of public takeovers in the UK), applied to the court to extend the Longstop Date to 9 October 2024.

The Companies Act 2006 says nothing about extending the longstop date for a scheme of arrangement. The question before the court, therefore, was whether the court was comfortable that it had jurisdiction to extend the longstop date itself.

The judge found that the court does have jurisdiction to approve an extension to a longstop date for a scheme of arrangement. Given that Part 26 of the Companies Act 2006 gives the court power to approve a scheme, it would be odd if the court did not also have power to amend one.

This was underscored by the fact that the Companies Act 2006 gives the court a range of controls over a scheme, including the ability to give directions in relation to the sanctioning of a scheme.

Indeed, the judge held that, not only does the court have power to extend a scheme longstop date, the court’s approval is required to do so. The court should be able to scrutinise any extension or other variation before it takes effect. A bidder and target cannot simply extend the scheme longstop themselves without court approval.

This is not the first time the High Court has had to consider this issue (and, indeed, is not the first time it has ordered an extension to a scheme longstop date).

However, the court’s decision in this case is the first reasoned judgement on the point and will give significant comfort that parties in similar circumstances have the option of applying to court to extend any deadlines for satisfying offer conditions.

To do so, however, parties should ensure that the scheme document specifically contemplates the ability to apply to court for an extension. And, if the takeover is subject to the jurisdiction of the Takeover Panel, the parties will also need to seek approval from the Panel.