Restructuring and Insolvency analysis: The respondents to a claim brought by the joint liquidators of BHS Group companies have successfully struck out parts of claims brought under sections 212 and 214 of the Insolvency Act 1986 (IA 1986) on the basis of open-ended pleadings as to the relevant date of knowledge that insolvent liquidation was inevitable and trading should have ceased.
Chandler v Wright and others [2022] EWHC 2205 (Ch)
What are the practical implications of this case?
This is a useful judgment offering guidance to office-holders bringing misfeasance claims under IA 1986, s 212 and wrongful trading claims under IA 1986, s 214. It confirms that the question of what is required by way of a proper pleading is case sensitive and will vary from case to case.
However, there is general principle that office-holders are afforded greater leeway than other litigants in terms of the strictures of the pleading. When wrongful trading claims in particular, are tried, courts enjoy a degree of flexibility in fixing the relevant date by which the respondents knew or should have known that there was no realistic prospect of the company avoiding insolvent liquidation and this may be different from the date pleaded.
While there was no obligation on the office-holder to plead one or a number of specific dates of knowledge, what is not permissible is the pleading of a broad time period in which the relevant date is said to have arisen. The court cited with approval the dicta of Mr Justice Cockerill in King v Stiefel [2021] EWHC 1045 (Comm) in which three functions of pleadings were noted:
- to enable the other side to know the case it has to meet
- to ensure the parties can properly prepare for trial, and
- to operate as a critical audit for the claimant and its legal team that it has a complete cause of action or defence
What was the background?
This is an appeal in relation to an interim matter in ongoing proceedings brought by the joint liquidators of four companies within the BHS Group. The claims are brought against former directors of those companies under IA 1986, ss 212 and 214.
In respect of the IA 1986, s 212 claims, it is alleged that the defendants breached their duties to the companies and that those breaches led to a deterioration of the financial positions of those companies. In respect of the IA 1986, s 214 claims, the central allegation is that the defendants wrongfully allowed the companies to continue to trade when they knew or should have concluded that there was no reasonable prospect that the companies would avoid going into insolvent liquidation.
The sums claimed in the proceedings are in excess of £163m.
One defendant, Mr Chandler, applied to strike out parts of the pleaded claims against them, specifically those parts which related to five alternative grounds for alleged wrongful trading. The object of the strike-out application was to restrict the claim to a claim based on the relevant date of knowledge (in relation to the unavoidability of insolvent liquidation) of 17 April 2015. Mr Chandler argued that the alternative claims were not properly pleaded and it was not appropriate (as they had) to leave the relevant date of knowledge open-ended.
The application came before Deputy Insolvency and Companies Court Judge Schaffer at a case management conference in December 2021. The strike-out application was dismissed and Mr Chandler sought permission to appeal. A rolled-up hearing was ordered to consider both the application for permission to appeal and, if permission was granted, the substantive appeal itself.
What did the court decide?
The appeal was brought on four grounds. They were:
- that the judge misdirected himself as to the issue which he had to determine on the strike-out application
- that the judge failed to address the so-called 'Overarching Case' which, it was argued, seeks to pursue a claim pursuant to IA 1986, s 214 without specific reference to the date of knowledge
- that the judge erred in applying a different standard to claims pleaded by office-holders than claims brought by ordinary litigants, and
- the judge erred in finding that there was no unfairness caused to Mr Chandler in allowing the proceedings to continue in the current form
Mr Justice Edwin Johnson granted permission to appeal on all four grounds and granted the appeal on grounds 1, 2 and 4.
After reviewing the authorities, Edwin Johnson J concluded that there was no requirement that claims under IA 1986, s 214 must always be pleaded by reference to a specific date or dates. Nor is it the case that where a specific date is pleaded and that date is not established as the correct date of knowledge at trial that the claim must fail. The court enjoys a degree of flexibility in such circumstances.
However, when it comes to pleading the case, claimants cannot simply leave the relevant date of knowledge at large over a broad period of time. The claimants here were entitled to rely on a pleaded case that the date of knowledge was 17 April 2015 or one of a number of alternative dates specified. Insofar as the pleading left open a broader range of dates, it stood to be struck out.
The same logic applies to the part of the IA 1986, s 212 claim which pleads to the date on which the defendants would have caused the companies to cease to trade if they had not been in breach of their duties.
The claims based on the alternate dates were, however, also defective in their pleading, as the Points of Claim fail adequately to plead causation and quantum based on those alternate dates.
The third ground of appeal, however, lacked merit. The judge was right to note that the extent to which matters needed to be pleaded is case-sensitive and there will be flexibility from case to case, including where claims are brought by office-holders. In any event, the third ground was based upon comments made by the judge in refusing permission to appeal and not in the judgment itself.
In terms of relief, Edwin Johnson J was prepared to afford the claimants an opportunity to retrieve the position by giving them a period of time in which to apply for permission to amend their pleadings and properly introduce their claims based on the alternative, specific dates.
Case details
- Court: Business and Property Courts of England and Wales, Chancery Appeals
- Judge: Mr Justice Edwin Johnson
- Date of judgment: 19 August 2022
Article by Phillip Patterson - first published by LexisNexis
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
