What a wind up!
Does Companies House owe a duty of care to a company, where a winding up petition has been incorrectly registered against its name? The High Court has recently heard a case (Serby v Companies House and the Registrar of Companies) regarding a winding up order which Companies House incorrectly registered against a company which was not actually subject to any insolvency proceedings.
The court found that a duty of care at common law was owed to the company in these circumstances. The amount of damages payable by Companies House will be assessed at a later hearing, but it has been reported that the claim will be for approximately £9 million.
On the 28th of January 2009 the High Court made a winding up order against Taylor and Son Limited. The winding up order was submitted to Companies House by the Official Receiver without a company number and was incorrectly entered against Taylor and Sons Limited (the Company), which was not subject to any insolvency proceedings. The error led certain suppliers and creditors to believe, mistakenly, that the Company was in liquidation and they therefore refused to extend credit and supply goods to the Company. The result of the Companies House error was that the Company had to be put into administration and has now ceased to trade.
Although the error was picked up early by the Company, and Companies House quickly rectified the publically available Register after the mistake was discovered, irreversible damage to the Company had already been done. Once the error was in the public domain a chain reaction began and the course to administration was unstoppable. Although the Companies House main website can be rectified quickly, there are a number of subscriptions for bulk information which is sent regularly to credit reference agencies and similar information providers and it is very difficult to amend any errors in the information supplied to them. It was the passing on of the error in the information given to such services which caused the error in this case to have such a severe financial impact on the Company.
Did Companies House owe a duty of care to the Company?
Companies House is required, by the Companies Act 2006, to maintain a register of information about all limited companies registered in the United Kingdom. The information contained on the Register is frequently used by potential creditors, suppliers and customers to assess the standing of companies they are considering dealing with. Indeed, it is a key tenet of company law that, in order to enjoy limited liability status, a company must make certain information publically available. Therefore Companies House provides a very important service which oils the wheels of commerce in the UK. However, the fact that limited liability companies are required by statute to provide information to Companies House, and the fact that Companies House is required to maintain a register of such information, did not mean that a statutory duty of care arose requiring Companies House to ensure that all information entered on the Register is accurate. There was nothing in the Companies Act to justify a finding that this was the intention of Parliament.
The court instead found that a common law duty of care can arise under the normal rules of negligence. If there had been a statutory duty of care, then this would have meant that anyone suffering economic loss as result of negligence by Companies House could potentially bring a claim. By finding that a common law duty of care arose, the court was able to apply the more restrictive rules of negligence, which meant that the duty of care was only owed to the Company and not to the public at large. This is an important aspect of the case because many people other than the company directly affected will have suffered loss as a result of this kind of error by Companies House: employees have lost jobs and suppliers terminated potentially lucrative contracts on the basis of false information. The court confirmed that this category of claimant would face severe difficulties in bringing a claim for damages.
The duty of care would also only arise where there is a special relationship between Companies House and the particular company, which would occur only when the record of a company is altered in a way which will probably cause serious harm to the company. No claim for damages will arise in respect of more minor errors by Companies House.
Having found that at common law a relationship between Companies House and the Company existed which created a duty of care, it was clear from the facts that this duty was breached when the error was made. The court also agreed that it was clear (although disputed by Companies House) that the breach of duty had ultimately led to the administration of the Company.
This is a very unusual error and the judge noted that the evidence suggested it was without precedent. Companies House have indicated they are tightening internal procedures which will mean that, in future, documents such as winding up orders will be rejected if company numbers are not supplied.
It is worth noting that this case does not mean that Companies House will now be required to check the accuracy of information supplied to it by companies. In our practice (for example during due diligence) we periodically find filings which contain errors and it is the duty of companies submitting such filings to ensure they are accurate and to ensure that the correct company number appears on them.
However, where information is supplied to Companies House, it must be accurately recorded against the correct company and companies will be able to claim damages from Companies House if they suffer significant harm as a result of an error.