In a recent decision Chandler -v- Wright [2022] EWHC 2205 (Ch) – Mr Justice Edwin Johnson in the High Court has found that myriad claims against the former directors of the retailer BHS fall to be struck out in the context of the high-value, complex litigation being brought by the joint liquidators of the BHS companies against the former directors of those companies.
The decision serves as a stark reminder to ensure that key ingredients concerning causation and quantum arising under s.212 (misfeasance) and/or s.214 (wrongful trading) Insolvency Act 1986 (IA) claims are fully pleaded – to avoid statements of case being struck out. It also re-emphasises the importance of providing a specific date(s) when pleading the date of directors’ knowledge (actual or constructive) as to when a company could not avoid entering insolvent liquidation in s.214 claims.
Background
The proceedings arise from the collapse of the BHS group of companies. The Appellant was one of four individuals (‘Defendants’) against whom the appeal respondents had commenced proceedings. The four Defendants were all (save for one) directors of the companies. The appeal respondents are joint liquidators of four companies formerly part of the BHS Group (‘Liquidators’) and the four companies themselves (‘Companies’). The Companies went into administration on 25 April 2016 and thereafter went into liquidation. On 11 December 2020 the Liquidators brought claims against the Defendants pursuant to sections 212 and 214 IA.
The allegations (s.212 & s.214 IA)
It was alleged that the Defendants breached their duties as directors and consequently deteriorated the financial position of the Companies, which would have been avoided had the alleged breaches not occurred.
It was also alleged that the Defendants wrongfully allowed the Companies to continue trading when they knew or should have concluded (knowledge test) that there was no reasonable prospect that the Companies would avoid going into insolvent liquidation. It was alleged that in doing so the Defendants deteriorated the financial position of the Companies, which would have been avoided had the wrongful trading not occurred.
The sums claimed pursuant to sections 212 & 214 are substantial with the principal claim totalling c. £163 million.
Procedural history – first instance strike out application
At first instance, the Appellant had sought (inter alia) to strike out parts of the Liquidators’ pleadings for wrongful trading on the basis that pleading the claims by reference to alternative dates or unspecified dates (in relation to the knowledge test) was defective and should be struck out. Further, it was alleged the Liquidators had failed to plead causation and quantum in relation to this head of claim. As regards the claims brought under s.212 it was also alleged in the strike out application that the Liquidators’ case on causation and quantum was not appropriately pleaded and additionally that it was not acceptable to leave the date by which it was alleged the Defendants should have stopped trading as an alternative, as an open-ended date.
At first instance, the judge dismissed the strike out application reiterating that if a claim under s.214 is to succeed it has to be shown that (i) there has been a loss and (ii) that there is causal connection between the continuation of trading and the loss. The decision also reminds us that where breach of common law duty of care is alleged, loss and causation must be demonstrated.
Appeal Hearing
On appeal of the first instance decision, the judge noted the appropriate guidance for pleading claims under sections 212 and 214 (based on subsisting case law) was to ensure that the pleadings set out clearly what the defendant failed to do, what it should have done, and/or what the defendant did that it should not have done, what would have happened but for those acts or omission and the loss that eventuated.
Pleadings as regards wrongful trading claims – Issue of Directors’ knowledge (s.214) & causation & quantum
The judge found no specific rule in the authorities as to what was permissible in terms of pleading requirements regarding the timing of directors’ knowledge. However, the present case was very complex involving very substantial claims and it appeared to him unsatisfactory if the date of knowledge (in relation to the knowledge test) was allowed to remain ‘at large’ over a specified period in the pleadings. The judge considered that the Liquidators ought to be more specific.
It was further alleged that the Liquidators’ case on causation and quantum was not adequately pleaded. The issue arose in relation to the pleadings where the date of directors’ knowledge was held as being one of five Alternative Dates. On these alternative cases, the judge could not find any pleadings of the Respondents’ case on causation and quantum. The judge reiterated that subsisting case law made it clear that causation and quantum must be proved in a s.214 claim as they are essential elements of the claim. In the judge’s view the Liquidators’ statements of case did not do this.
Misfeasance Claim (s.212)
For the same reasons, concerning the date referred to in the pleadings by which the Defendants would have caused the Companies to cease trading, if they had not breached their directors’ duties (cessation date). As pleaded, it was the Liquidators’ case that the cessation date fell on 17 April 2015 or alternatively on any date falling with the specified period. The judge considered that this latter element of the Liquidators’ pleaded case was not satisfactory.
The judge reiterated that causation and quantum must be shown where the allegation is one of common law negligence. With reference to the Liquidators’ pleaded case, the judge found that the claims made under s.212, so far as they were based on a cessation (of trade) date falling after 17 April 2015 fell to be struck out as the critical elements of causation and quantum were not pleaded.
Summary
Accordingly, the judge upheld three of the four grounds of appeal raised. In determining that the dismissal of the strike out application by the first instance judge should be set aside, the judge then went on to consider what should be done in relation to the strike out application. Notwithstanding his findings on the Liquidators’ pleaded case, the judge concluded that he would allow the Liquidators an opportunity to retrieve the position as regards their pleadings. He canvassed an order being made in *unless* terms, whereby the relevant parts of the Liquidators’ statement of case would be struck out unless within a certain period of time (28 days was canvassed) they applied for permission to amend their statements of case to cure the defects in their pleaded case and thereafter permission was granted for the relevant amendments to be made.
For further information, please contact:
Laura Smith, Hill Dickinson
laura.smith@hilldickinson.com
