duty

Single typo costs Companies House £8m

Companies House liable for mistakenly saying Company had been wound up

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Background

Companies House has been held responsible for the financial collapse of Taylor & Sons Ltd, of Cardiff, a 124 year old engineering company. On 20 February 2009, Companies House mistakenly recorded on the register that a winding up order had been made against it. But there was a typo; it was an entirely unconnected company with a very similar name, “Taylor & Son Ltd” that had been wound up. After 3 days the error had been corrected. By then it was too late.

Companies House had sold the records to credit reference agencies. Customers and suppliers wouldn’t trade with the blameless and solvent Taylor & Sons Ltd; they lost business, income and credit. Within two months the business, which employed 250 people collapsed and it was forced in to Administration.

 

Negligent Misstatement

 The Co-Owner and managing director of Taylor & Sons Ltd, Philip Sebrey took proceedings against Companies House, an executive agency of the Department of Business, Innovation and Skills. His claim was based on the law of negligence, which has been developing continuously since the leading 1963 Case of Hedley Byrne v Heller[i], extending the law of negligence. Where a careless statement is made which causes economic loss, the victim can claim damages. That now includes cases involving the careless exercise of statutory powers.

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Decision

After a 4 year battle, the claim for compensation succeeded. Sebry v Companies House [2015] EWHC 115[ii]. Although damages have not yet been decided, the claim is for approximately £8m.

The Judge, Mr Justice Edis said that the long standing 3 stage test in Caparo[iii] applied:

  • Forseeability: this was “obvious”
  • Proximity: the duty was owed to one individual company whose identity was readily discoverable. To say that it was also owed to every other company on the Register is only to say for example that a hospital owes a duty to each patient which it treats, and may come to owe duties to many thousands of people in the course of a year. Whilst true, this is not a reason for denying that the hospital ever owes any duty. Very large organisations such as hospitals who impact on the wellbeing of a very large number of people owe a very large number of duties to a very large number of people. The class is limited and its members ascertainable at the stage when treatment is given
  •  Whether it is fair, just and reasonable to impose a duty: The Judge could find no proper ground on which to conclude that it would not be fair, just and reasonable to impose a duty to avoid foreseeable harm to a sufficiently proximate victim.

Conclusion

“…..the Registrar owes a duty of care when entering a winding up order on the Register to take reasonable care to ensure that the Order is not registered against the wrong company. That duty is owed to any Company which is not in liquidation but which is wrongly recorded on the Register as having been wound up by order of the court. The duty extends to taking reasonable care to enter the Order on the record of the Company named in the Order, and not any other company. It does not extend to checking information supplied by third parties. It extends only to entering that information accurately on the Register….”

Ultimately, Edis J could see no legal principle or policy excusing Companies House for its negligence. Where there is a legal wrong, there ought to be a remedy. If Companies House had escaped liability, Mr Sebrey would have had no redress. The previous understanding of the law has been applied, and moderately extended under the doctrine of “incrementalism”.

For liability to be established, a claimant has to prove that it suffered losses directly as a result of reliance on a negligent misstatement. An executive agency carrying out a statutory function was not immune. However, the liability in these particular circumstances did not extend to other, less proximate or easily identifiable parties, including lenders and employees.

 

[i] [1963] 2AC 465

[ii] http://www.bailii.org/ew/cases/EWHC/QB/2015/115.html

[iii] Caparo Industries v Dickman [1990] 2 AC 605

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Directors Hoodwinked out of €100 million broke duties to their Company

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The High Court has decided that two directors tricked by fraudsters failed in their duties to exercise reasonable skill and care. They paid €100 million of Company money in to a sham investment scheme induced by fraudulent misrepresentations.

Mr Justice Peter Smith said that, like many such fraud cases superficially the document looks technical and highly detailed. On closer reading it is full of incoherent phrases and expressions and is completely meaningless.

It is impossible to overstate the level of incompetence demonstrated by [the Group Legal Counsel’s] evidence at this trial. He did no checks on the background of these people trying to sell this transaction to him…He discovered nothing about the details of the transactions…He accepted without challenge anything they said. Finally in October 2011 he signed away control of €100 million, despite being required never to agree anything like that…He took comfort from documents that were meaningless…If he were uncertain as to the law, he should have obtained advice from somebody else. That is what one would expect of a senior in-house legal counsel who might have knowledge of generalities, but would not necessarily have knowledge of specifics. It is plain that he had no idea what the investments were, but was content to accept the vague descriptions provided by the defendants and fell into the trap of believing in the secrecy of everything.

The Directors committed the Company’s funds in a “ridiculous and reckless” way. It was difficult to understand how the directors had failed to spot the scam: an extremely modest level of probing the deal would have shown that it would fall apart. Their conduct was seriously inadequate regarding the discharge of the duties that they owed to Company as officers and senior employees / directors to perform their duties with reasonable skill and care.

Although this case was decided under Maltese law, the High Court’s conclusion that two directors were in breach of duty is noteworthy. The general application of English law was made clear. Directors in this situation could face personal liability to the Company for losses caused by third party fraudsters.

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However, there was no basis for findings of breach of their fiduciary duty or contributory negligence against them in favour of the Defendant (those involved in the scam). The Judge refused to reduce the damages payable to the Company by the fraudsters. The directors were duped and incompetent; fools not knaves in failing to spot that the scheme was fraudulent and bound to fail.

Director’s Duties

The Companies Act 2006 contains a general statement of directors’ fiduciary and common law duties.

  • S 171 to act within their powers
  • S 172 to promote the success of the company
  • S 173 to exercise independent judgement
  • S 174 to exercise reasonable care, skill and diligence
  • S 175 to avoid conflict of interests
  • S 176 not to accept benefits from third parties
  • S 177 to declare an interest in a proposed transaction with the company

The codified duties apply to all directors of a Company (including shadow directors and, in certain circumstances, former directors).

Director’s Potential Liability

This case decided the liabilities between the defrauded Company and the fraudsters. The award against the fraudsters was not reduced due to negligence by the gullible directors. However, it did not decide whether, or how much the directors should reimburse the Company for its losses.  

As here, where a director has broken his duty to exercise reasonable care and skill, but not his fiduciary duties, the court will consider what might have happened had it not been for the director’s breach. The court has to decide whether the Company would have suffered the losses any way. If not, the director may have to compensate the Company for all of its losses caused by his breach of duty to exercise reasonable care and skill

As a matter of public policy, the courts accept Company directors have to make judgments and take risks. Too harsh an approach to directors’ conduct would have a “chilling” effect; it would discourage people either from becoming directors, or make them too risk averse for the good of the business.

Conclusion

Directors who are in breach of duty can ask the court for relief from sanctions on the grounds that they acted honestly, reasonably and that it is fair in all circumstances of the case to relieve him of liability. A director may also be protected from liability by the company ratifiying his conduct. Alternatively, a Directors & Officers’ Insurance Policy may cover the relevant liability. Obviously, all of these are a very poor second best to remaining vigilant and following the old maxim: if it looks too good to be true, it probably is!

Although the case is being appealed, it is a timely reminder of the risks of fraud to which Companies are exposed, the duties on Directors, the consequences of breach and the need for vigilance.

Case:

Group Seven Limited v Allied Investment Corporation Limited and others [2014] EWHC 2046 (Ch).

Link:

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1509.html

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