When directors misbehave the consequences can be swift and severe. Ignorance is no defence when it comes to directors’ duties. In this article, we explore two court rulings which lift the lid on some of the real-world misbehaviour that gets Directors into serious trouble.
Court ruling 1: Stacks Living Limited v. Shergill and others
The first case concerns the affairs and failure of two closely linked businesses operating as furniture retailers, both of which went into Liquidation in 2019. Mention is also made of two other failed furniture retailers previously run by Mr Shergill (the principal Director), from which the judge infers that he had learnt how to incur liabilities with no intention of ever paying them.
The full details of the case can be found in the analysis by lawyers, Wedlake Bell. The misdeeds exposed by the judgment took place in 2018 and 2019, but the reckoning finally caught up with the Directors concerned in January 2025.
The Liquidators of Stacks Living Ltd and its successor Company, Staffs Furnishing Ltd (Staffs) took action successfully against the principal Director of both Companies and an inactive Director of one of them for Wrongful Trading, Fraudulent Trading and Misfeasance in respect of substantial debts owed to Stafford Borough Council and HMRC. These types of litigation are famously hard to win because of evidential challenges and the standard of proof required.
There were three key takeaways for Directors and their advisers from the Liquidators’ success:
1. Wrongful Trading established against an inactive Director
It was obvious from the evidence that one Director of Staffs (the inactive Director) had no role in the management of the business. Despite her lack of actual knowledge as to the financial affairs of Staffs, none of the facts were actively concealed from her by the principal Director. Her duties were the same as any Director’s and the Court found that if had she fulfilled even the most basic of her duties, she would have known that Staffs had no hope of avoiding insolvency.
The inactive Director was ordered to pay a contribution towards the losses suffered by the creditors. The Court decided that her total inactivity as a Director was not reasonable in the circumstances.
2. The basis for a Fraudulent Trading claim
The Court considered what conduct is required to establish Fraudulent Trading. The judge considered that the principal Director knew that liability to HMRC and the Council did or might arise but instead chose deliberately to ignore it by failing to register for tax.
In the Judge’s view, he had run the Companies with “impunity” and “deliberately engineered” the outcome to avoid crystallising tax liabilities that he had no intention or means with which to pay. This was conduct “involving actual dishonesty and real moral blame according to the objective standards of ordinary people”.
3. The importance of company records in Misfeasance claims
The Misfeasance claim against both the principal Director and the inactive Director highlighted that a lack of contemporaneous documentation and company records could be significant. The substance of the claim was that numerous payments were made from the Companies’ funds to the principal Director personally and to various suppliers whilst the Companies were insolvent. There were also significant unexplained withdrawals of cash from the Companies’ bank accounts.
Because there was no documentation to prove that these payments were made for the benefit of the Companies or their creditors, adverse inferences could be drawn from the absence of such documentation. Unusually, a lack of evidence didn’t frustrate the Misfeasance claim, it actually supported it.
Court ruling 2: Bilta (UK) Ltd (in liquidation) v. Tradition Financial Services Ltd
In the second important case, the UK Supreme Court has provided clarity on who can be held liable for Fraudulent Trading, ruling that potential liability is not confined to insiders of the Company, such as Directors. It decided that liability can be extended to third parties and that these can be required to make contributions to the losses suffered by the creditors of a Company if they were knowingly parties to its Fraudulent Trading. The details of this case can be found in the summary from Pinsent Masons.
The importance of the judgements for Directors
These cases confirm a number of potentially painful realities for errant Directors and their associates:
- Directors cannot avoid liability for their misdeeds by claiming that they took no active part in the management of their Company.
- It is possible for Directors to be found guilty simultaneously of Wrongful Trading, Fraudulent Trading and Misfeasance despite the high burden of proof required for a successful prosecution.
- A lack of Company records and documentation will not necessarily frustrate prosecutions for offences under the Insolvency legislation.
- A far wider range of parties can be held responsible for Fraudulent Trading than just the officers of a Company.
The playing field between irresponsible Directors and the victims of their wilfully or negligently damaging conduct has been levelled to at least some extent as a result of these outcomes.
Getting advice
Growth and the managerial, operational and cash flow management pressures it creates can limit bandwidth for dealing with problems as they emerge. Executives can be become too preoccupied with day-to-day issues to take strategic decisions with the independence they demand. Seeking advice from experienced outside professionals, who are properly briefed, can provide a net benefit through their input, rather than an additional cost.
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At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to us, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.