Insolvencies remain high, hitting construction, retail, and manufacturing hardest.
Insolvency statistics for October 2024
The insolvency statistics for October 2024 indicate that whilst company insolvencies are lower compared to the same month in 2023, the figures remain much higher than those experienced both prior to and during the COVID-19 pandemic (between 2014 and 2021). The main industries impacted include construction, wholesale/retail and manufacturing.
Today’s insolvency numbers show that companies continue to face additional costs and further external pressures. The significance of the recent increases to national insurance contributions announced in the Budget, coupled with persistent obstacles to maintain a consistent cash flow, mean that it is ever more important for directors, regardless of title and status, to remain conscious of all of their duties.
Update – directors’ duties to consider creditors’ interests
Where an insolvency event occurs, directors’ decisions and actions (in addition to inactions) will be scrutinised by the appointed insolvency practitioner, including whether to commence legal proceedings against any former director for losses incurred by the company.
There has been an increased focus on directors’ duties, particularly in the wake of the Supreme Court decision in October 2022 in BTI 2014 LLC v Sequana SA [2002] UKSC. In Sequana, the court was required to consider at what point a director’s duty switches from the interests of the shareholders to the interests of creditors in the event of an insolvency. Directors need to be mindful, therefore, of taking decisions where the inevitable outcome is to result in insolvent administration or liquidation, as that will fully engage the duty to creditors.
Although the decision in Sequana is not novel, the duty to creditors and the new directors’ duty of trading misfeasance was considered by the courts more recently in Anthony John Wright & Ors v Dominic Joseph Andrew Chappell and Ors (Re BHS Group Ltd) [2024] EWHC 2166 (Ch). The BHS case addresses for the first time how equitable compensation should be calculated for breaches by directors, and what has been termed the “modified Sequana duty”. The BHS landmark judgment was highly publicised due to the fact that the company in question was a well-known British high street brand coupled with awarding a staggering £150 million against two former directors of BHS for trading misfeasance. The joint liquidators of BHS successfully argued that the directors had failed to consider the interests of creditors and caused the companies to continue trading when they knew or ought to have known that insolvency was inevitable. The court considered that the directors’ actions, (entering burdensome credit arrangements), amounted to a breach of their fiduciary duties to creditors.
The High Court handed down judgement detailing how a trading misfeasance should be quantified. In summary, it must be established that:
(1) the breach of duty must have caused the company’s losses; and
(2) quantification of loss will be calculated by taking the increase in net deficiency, being the difference between the net assets and liabilities of the company before the transaction was entered into (or when the act occurred) and when the company ultimately entered insolvency.
The significant decision in the BHS case, and what is considered the largest wrongful trading award handed down since its introduction under the Insolvency Act 1986, may prove a more efficient route to the desired outcome for insolvency practitioners and illustrates the personal liabilities that directors can be exposed to if they fail to comply with their statutory duties.
With company insolvencies on the rise, and on reflection of these two high-profile cases, directors will need to be alert to their duties generally and when their duties to creditors are engaged. Please note that the BHS case is understood to be under appeal with a hearing listed for April 2025.
It is important that any director, unsure of their duties or who is concerned about the possibility of insolvency, seeks advice (and to check any D&O insurance policy in place) to ensure that they are taking all necessary steps that are expected of them.
Shauna joined Weightmans in 2018 and has over 6 years’ experience in dealing with debt and asset recovery litigation. Her extensive experience and technical capability in dealing with matters relating to the Consumer Credit Act, wrongful interference of assets, and title disputes, has meant that she has been a trusted advisor for various clients regulated by the Financial Conduct Authority.
Shevy specialises in all aspects of contentious insolvency (personal and corporate) acting for both defendants and claimants in the UK and abroad. She has a strong track record in defending director disqualification claims by the Insolvency Service on behalf of the Secretary of State.
