Creditor Duties, Personal Liability and Misfeasance Trading
Creditor Duties, Personal Liability & Misfeasance Trading: Key Lessons for Company Directors in Financial Distress
The legal landscape for directors of financially distressed companies has shifted significantly in recent years. The Supreme Court’s ruling in BTI 2014 LLC v Sequana SA [2022] UKSC 25 reshaped how and when directors must consider creditor interests, confirming that a failure to do so can expose directors to personal liability. More recently, the courts have also recognised the concept of misfeasance trading, which is a claim that can arise earlier than wrongful trading and can lead to substantial compensation liabilities.
At Neves, our Commercial Law team helps directors, stakeholders, and businesses understand these duties and navigate the financial, legal and strategic decisions that arise during periods of instability. Below, we summarise the key case law and outline the practical steps directors should take to protect themselves and their companies.
Understanding the Creditor Duty After Sequana
The Supreme Court in Sequana confirmed that directors have a duty to consider the interests of creditors as part of their fiduciary duty under s.172 of the Companies Act 2006, not as a separate duty, but as a modified form of the general duty owed to the company.
When is the Creditor Duty Triggered?
The duty does not arise simply because a company faces financial pressures. Instead, it is triggered when directors know or ought to know that the company is: insolvent, bordering on insolvency, or insolvent liquidation or administration is probable.
This is a stricter threshold than earlier case law had suggested. Rejecting the idea that a mere “real but not remote” risk of insolvency is enough. Importantly, in Sequana, the directors were not liable because insolvency was not probable at the time the dividend was paid.
What Happens Once the Duty Is Engaged?
As a company moves closer to insolvency, directors must balance shareholder and creditor interests, this is a sliding scale that shifts increasingly toward creditors. Once insolvency becomes inevitable, creditor interests become paramount. Shareholders cannot ratify decisions that breach this duty.
Directors must also be aware that courts assess decisions with hindsight, often many years later, making clear documentation and reasoned decision making vital.
Misfeasance Trading: A New Avenue of Director Liability
While Sequana defined when the creditor duty applies, the BHS Group Ltd [2024] EWHC 1417 (Ch) brought the concept of misfeasance trading into sharp focus. This is now a key risk in distressed situations.
What Is Misfeasance Trading?
Misfeasance trading arises where directors:
- Breach their fiduciary duties (including the creditor duty),
- Continue trading despite financial distress, and
- Cause loss to the company or its creditors as a result
The BHS case marked the first reported instance of directors being found liable for misfeasance trading, in addition to wrongful trading.
Why It Matters More Than Wrongful Trading
Unlike wrongful trading, where liability requires proof that insolvent liquidation was unavoidable. Misfeasance trading can arise earlier, simply because the creditor duty has been triggered.
This means directors can face liability before the statutory wrongful trading threshold is crossed.
Key Features Identified by the Courts
- Misfeasance trading may succeed even where wrongful trading does not,
- The financial consequences can be severe; for example, courts have awarded more than £150 million against directors in the recent trading misfeasance case of BHS Group Ltd [2024] EWHC 1417 (Ch),
- Courts focus on “insolvency deepening” behaviour, such as refinancing on unfavourable terms or pursuing high risk strategies to “trade out of trouble”,
- Directors cannot delegate the creditor duty; all board members share responsibility.
The combined effect is clear: continuing to trade in the wrong circumstances can expose directors to personal claims for the increase in the company’s net deficiency. Directors should be aware that breaching the creditor interest duty can lead to significant personal liability, including joint and several responsibilities for the entire increase in the company’s net deficiency. Continuing to trade when insolvency is probable, or prioritising shareholders over creditors, can expose directors to claims far exceeding traditional wrongful trading liabilities.
Practical Guidance for Directors
To minimise personal exposure during financial distress, directors should:
- Monitor Solvency Continuously. Regular cash flow and balance sheet analysis are essential.
- Obtain Early Professional Advice. Legal and insolvency advice demonstrates responsible governance.
- Maintain Clear Board Records. Document the company’s financial position, discussions of creditor interests, projections, and the reasoning behind key decisions.
- Avoid High Risk Strategies. These are precisely the types of decisions courts have criticised in misfeasance cases.
- Reassess Transactions Carefully. Dividends, asset sales, refinancings, and acquisitions require heightened scrutiny when insolvency is a possibility.
The law on directors’ duties in financial distress is now clearer but also more demanding. The Supreme Court’s confirmation of the creditor duty in Sequana, coupled with the courts’ growing willingness to impose substantial personal liability through misfeasance trading, means directors must act with heightened awareness whenever their company faces financial challenges.
Directors who take informed, well documented, and proactive steps will significantly reduce their exposure and improve outcomes for the business and its stakeholders.
How We Can Help
Our team at Neves advises directors on: Creditor duties and governance during distress; Risk mitigation strategies; and director liability, including misfeasance and wrongful trading.
If your company is facing financial pressure or if you are a director concerned about potential personal liability, contact our Commercial Law team on 0330 0945 500, email info@neves.co.uk or complete our Contact Form and we will get back to you.
