The very public dispute between recently rescued fashion retailer Missguided and its suppliers raises the important issue of wrongful trading and the risk it poses to company directors.
Missguided was acquired in May by Mike Ashley’s Frasers Group in a pre-pack administration process that also saw interest from online retailer Boohoo. The former CEO of Missguided has just been rehired by the new owners.
Already under fire from consumers told they won’t get refunds for owed earlier returns, and from employees over redundancies, Missguided’s management could also face a legal challenge from suppliers, which have filed an official complaint to the Insolvency Service.
More than a dozen UK suppliers based in the UK say they are owed millions of pounds for orders, some of which were placed as late as last month. It is claimed that deliveries were demanded even on the day Missguided went into administration. Reports say two suppliers were told by Missguided that it was “business as usual” less than six weeks ago. But without knowing who at the Company made these statements it might be hasty to blame the directors. Employees are sadly sometimes the last to know and this sort of information isn’t usually shared with the employees until the appointment has been made for obvious reasons. Until the Administrator’s Proposals are published, all relevant facts won’t be known, but it is worth considering the current legal position directors and management face.
Wrongful trading occurs when directors continue to trade after knowing the business is insolvent and has little chance of recovering. It is addressed by Section 214 of the Insolvency Act 1986 and could lead to directors being held personally liable for some or all debts of the company if they take no action to address the position being faced.
Insolvent trading is different. A company accused of wrongful trading will always be insolvent, but trading while insolvent doesn’t necessarily mean directors are acting incorrectly. An insolvent company is one which (i) cannot meet its financial obligations as and when they fall due, or (ii) has liabilities outstripping its assets. The Insolvency Act of 1986 identifies two main areas which must be analysed: if the company has a problem cash flow, and if accounts are in arrears. This status in law is defined as insolvent trading.
The main point here is that just because a company is insolvent, it doesn’t mean it will be indefinitely insolvent. Short-term problems with cash flow are common, often arising from late-paying customers. In such a case, if money owed to a company exceeds its creditors, an investigation would show that there was no intent to act irresponsibly. By contrast, a company that cannot and will never be able to pay its creditors may well be found guilty of wrongful trading, should directors continue to operate as normal without taking any steps to mitigate the position.
Directors need to be able to show they took early advice while on the spectrum of insolvent trading and allegations of wrongful trading may be dismissed if ever investigated. Directors must at all times remain mindful of their fiduciary duty to creditors, as well as shareholders – and if in doubt, take advice from Insolvency Practitioners.
Written by Jo Milner, Partner at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround firm.