An analysis of public body liability in the wake of an estimated £9 million Companies House administrative blunder. By Adam Erusalimsky, Senior Associate, Commercial Litigation.

 

Bureaucracy has few admirers. Amongst them will be company shareholders, directors and employees who have an expectation that the records kept by Companies House will be accurately maintained and not incorrectly attribute the insolvency of one company to the solvency of another. Yet that is precisely what happened to Taylor & Sons Ltd, a 124-year-old Welsh family business which had prospered over five generations and which, in 2009, its last trading year, employed 250 people.

Taylor & Sons’ misfortune started when the Official Receiver filed a winding-up order of the Chancery Division of the High Court against a company, wholly unconnected to Taylor & Sons, by the name of Taylor & Son Ltd. In filing that order at Companies House, the Official Receiver omitted to file the necessary form that spells out the company number of the company to be put into liquidation. Not even a covering letter accompanied the order. Without that form, the filing breached Companies House guidance dating back to 1995 and yet, in ignorance of this guidance, the employee who processed the Order failed to reject it for non-compliance and proceeded to mistake the order for liquidation of Taylor and Son for an order for liquidation of Taylor and Sons. In the weeks that followed, word of Taylor & Sons’ apparent liquidation got out through various automated reports, sold by Companies House to lending and credit agencies. From there, Taylor & Sons’ downfall was inevitable.

The debate as to the methods of redress available to those who have been wronged by maladministration has always being fierce, but with varied outcomes. For example, the courts have seen “an authority responsible for certifying the seaworthiness of merchant ships negligently certify that a certain vessel is seaworthy… but when the ship sank with the loss of its cargo… a cargo owner had no claim for compensation against the authority”(1). Yet, in contrast, passengers successfully claimed for negligence when “an authority responsible for certifying that privately owned passenger-carrying aeroplanes are fit to fly negligently certified that a plane was airworthy. The plane crashed… passengers suffered personal injury” (2).

It is said that “traditionally claims in negligence have failed for similar reasons to those applicable to breach of statutory duty, usually because no duty of care can be established” (3). However, ‘away with tradition’ as, finally, a triumphant result for the victims of maladministration has been achieved this year, but it is a result that has stemmed from the most deplorable of circumstances.

Philip Davison Sebry v Companies House & The Registrar of Companies [2015] EWHC 115 (QB)

The claimant was the former managing director of Taylor and Sons Limited which operated as a steel fabricator. It was a well-respected and substantial business with over 3000 suppliers; trading successfully for many years and supplying military equipment during both World Wars.

The facts, taken directly from the judgment, are that on 28 January 2009 the Chancery Division of the High Court made a winding up order under the provisions of the Insolvency Act 1986 against Taylor and Son Limited, a completely unrelated company. The order, which did not include the company number, was received by Companies House on the 12 February 2009. Unfortunately, it also arrived without the appropriate form to provide to the Registrar relevant company information.

As a result, in an attempt to remedy the information gap, on 20 February 2009, Companies House conducted a name search which revealed two similar names, Taylor & Sons Limited and Taylor & Son Limited. With no further enquiries and contrary to the checks and balances put in place to avoid this very situation, the civil servant made, in the judge’s words, a “careless mistake in carrying out a simple operation”(4) and amended the register. The claimant’s company was mistakenly listed as being in liquidation when it was not.

The claimant was contacted by Companies House who advised him that the order had been received and that “the company was in liquidation”. Companies House proceeded to give the claimant instructions which were not relevant to his situation as the listing of the company as being in liquidation was not true. The claimant made protests to this effect. At this stage, the company’s solicitor stepped in and reiterated to Companies House that there had been an error and the claimant was subsequently advised by Companies House that the mistake had been rectified and the records had been corrected accordingly. The claimant then went on holiday with his wife, having no idea that the problem would re-surface while he was away.

However, whilst monitoring the situation following the error and its apparent correction, the company’s accountant and auditor discovered that, in fact, the information published on Companies House was still incorrect as at 23 February 2009. Companies House’s IT department had failed to correct the error in all the publicly available documents. The claimant’s company was therefore still showing as being in liquidation, with the result that during the period to 23 February 2009 an unknown number of people had access to the register whereby they saw first-hand the incorrect information which they took to be true. Companies House failed to correct its subscription services for several weeks.

During this time, the claimant, whilst still on holiday, received an onslaught of unpleasant phone calls from customers demanding to know why he had attempted to flee the country and leave the company and its clients in such a state. Regrettably, the mistake had been published to the world for some three weeks and there was nothing the claimant could do to restore confidence or persuade the company’s clients that Companies House had made a mistake. In the space of days, the company lost its credibility. Many jobs were cut and all their customers, including a £400,000 a month contract with Tata Steel, were lost.

Edis J held that there was no doubt in establishing that Companies House’s error caused substantial loss and the misinformation it created was toxic to the existence of the company. Evidence ranging from the chronology of events through to the financial state of the company was presented and evaluated leaving the judge certain that the chain of causation from Companies House’s blunder to the downfall of the claimant’s company was ironclad. Fundamental to his analysis was whether there was a duty of care owed to the company.

Duty of Care

Edis J looked at each of the three different tests which the law has developed to consider whether a duty of care not to cause pure economic loss existed at common law as summarised by Lord Bingham in Commissioners of Customs & Excise v. Barclays Bank plc (5):

1. Assumption of Responsibility

Applying White v Jones (6), Edis J determined that where Companies House (as Registrar) undertakes to alter the status of a company on the register which it is its statutory duty to keep, the Registrar assumes a responsibility to that company to take reasonable care to ensure that the winding up order is not registered against the wrong company. It is the Registrar’s duty to ensure the information is accurately recorded because it is foreseeable that if the Registrar records information on a company incorrectly, then the company will suffer. There is a special relationship in this case since ultimately, “the system places a degree of trust therefore in the Registrar’s staff to ensure that it does not damage companies which have no way of defending themselves against errors”(7) .

2. Caparo Industries PLC v Dickman & Others

In a courtroom classic, Edis J returned to Caparo Industries PLC v Dickman & Others (8) which established the three limb test of a) proximity, b) foreseeability and whether imposing a duty is c) fair, just and reasonable.

  1. Proximity – Edis J found that as a matter of practical justice there was no reason not to impose a duty given the proximity between claimant and defendant and certainly because the company’s ‘identity was readily discoverable’ (9).
  2. Foreseeability – Edis J held that foreseeability of harm was obvious in this case. The very fact that Companies House had taken appropriate precautions some time ago to implement procedures to minimise such catastrophic blunders demonstrated that the damage was foreseeable. The Companies House Trove Policy was introduced in 2003 and set out clear and step by step guidelines on how to deal with applications and what to accept in relation to the same. In this instance, the documents received did not contain a company number and they were also received without the prescribed and official form. The directions of the Trove Policy dictate that in such circumstances, applications cannot progress; “if they had been followed… the document would have been rejected due to the lack of the company number” (10). Unfortunately for the claimant, the individual dealing with this matter, “did not follow policy”(11) and chose to search for a number on the Companies House internal system and fill in the blanks “rather than simply rejecting it” (12).It came to light that as far as those who gave evidence on this matter knew, no incorrect identification of a company by name only had ever occurred. Edis J commented that this was “no doubt because the staff were all aware of the need to check a name with special care against the register because of the frequency with which companies with very similar names are encountered”(13). The individual who processed this application was asked why he did not follow the Trove Policy and he said that “he had been aware of it, but that he thought it was a training document and he did not need training because he had been doing the job for over 30 years.”(14) He did not appreciate that this was a policy document which he, or any other staff members, were expected to follow. Edis J commented that this whole mishap “suggests a lack of continuous training at Companies House at the material time. Clearly someone had felt that there was a risk of a mistake such as the present being made and introduced a policy to minimise that risk. Steps to implement that policy by giving clear instructions to the staff were not taken which means that the Trove Policy existed in name only and had no impact on the practice of the document examiners in the Winding Up Section.”(15)
  3. Fair, Just and Reasonable – Edis J stated that he must impose a duty of care, because at this stage after proximity and foreseeability had already been established, he could find no proper ground on which to not levy a duty of care. Whilst it is easy to accept that accidents happen and we are all capable of making mistakes, in this instance the work to avoid such accidents had already been done by virtue of the Trove Policy; someone had the foresight to design and implement a policy to reduce errors and minimise risks in this environment. As Edis J put it, “the error therefore has two components: first a systematic failure to ensure that the policies are applied and secondly an individual act of carelessness. Neither involved any exercise of judgment.”(16)

3. Incrementalism

Applying the third approach for establishing a duty of care derived from Ministry of Housing and Local Government v Sharp(17), Edis J considered that the decision was determinative, holding that the Companies House entry of false information amounted to “a positive act of the kind done in Sharp.”(18) Edis J was quick to say that there were obvious distinctions between this case and Ministry of Housing and Local Government v Sharp (19) but was conscious that “the similarity between this case and Sharp is sufficiently close so that the imposition of a duty is foreshadowed in a previously decided case which has been held to have been rightly decided at the highest level, and more than once. In such circumstances the imposition of a duty can accurately and properly be described as ‘incremental’.”(20)

Ultimately, “each of the three posited tests for the existence of a duty of care in a novel situation provides the same answer.”(21) Quite simply, Companies House “owes a duty of care when entering a winding up order 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.”(22)

The implications for companies

Edis J was careful not to extend the duty of the Registrar under the Companies Act 2006 too widely. He decided that this was a novel situation which called for a development in the law to remedy the demise of the claimant’s company. This matter was unique in that the civil servant who processed the winding-up order valued his own thirty years’ experience above the processes and policies already in place and supposedly implemented by Companies House; Edis J reported that this kind of mistake did not happen often, because it was so easy to avoid.

The value of the quantum aspect of the case (which has yet to be tried) is estimated to be in the region of £9 million, which is an extraordinary amount to pay for an overseen ‘s’; Companies House’s negligence precipitated an avalanche of consequences which has resulted in “the most high stakes game of scrabble”(23) ever played. Nevertheless, in the words of Lord Bingham, “the rule of public policy which has first claim on the loyalty of the law is that wrongs should be remedied” (24) Victims of maladministration should take comfort from this decision as it reminds public servants that breaches of their duty of care can and will be actioned through the Courts.

 


1. http://lawcommission.justice.gov.uk/docs/Remedies_Public_Bodies__Scoping.pdf and Marc Rich Co AG v Bishop Rock Marine Co [1996] AC 211
2. Perrett v Collins [1998] 2 Lloyd’s Rep. 255
3. http://www.1cor.com/1158/?form_1155.replyids=25
4. Philip Davison Sebry v (1) Companies House (2) The Registrar of Companies [2015] EWHC 115 (QB) per Edis J at para [ 17 ]
5. Commissioners of Customs & Excise v. Barclays Bank plc [2007] 1 AC 181
6. White v Jones [1995] 2 AC 207
7. Philip Davison Sebry (op. cit.) per Edis J at para 111
8. Caparo Industries PLC v Dickman & Others [1990] 2 AC 605
9. Philip Davison Sebry v (1) Companies House (2) The Registrar of Companies [2015] EWHC 115 (QB) per Edis J at para 114
10. Ibid.
11. Philip Davison Sebry (op. cit) per Edis J at para 16
12. Ibid.
13. Ibid.
14. Ibid.
15. Ibid.
16. Ibid. per Edis J at para 17
17. Ministry of Housing and Local Government v Sharp [1970] 2 QB 223
18. Philip Davison Sebry (op. cit.) per Edis J at para 116
19. Ministry of Housing and Local Government v Sharp [1970] 2 QB 223
20. Philip Davison Sebry (op. cit.) per Edis J at para 116
21. Ibid. per Edis J at para 117
22. Ibid. per Edis J at para 118
23. http://www.theguardian.com/law/shortcuts/2015/jan/28/typo-how-one-mistake-killed-a-family-business-taylor-and-sons
24. “Reforming the Law of Public Authority Negligence” at paragraph 20 http://www.barcouncil.org.uk/media/100362/lord_hoffmann_s_transcript_171109.pdf


 

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