Beware, a typo might cost you millions!

The recent High Court case of Sebry v Companies House and another offers a scary insight into how a simple typo (in this case an erroneous 's') can quickly bring down a whole company.

Original news

Sebry v Companies House and another [2015] EWHC 115 (QB)

Mr Sebry, the managing director of a company called Taylor and Sons Ltd (the company) brought a claim against the Registrar of Companies (Registrar) for damages for negligence and breach of statutory duty. An employee of Companies House had erroneously registered Taylor and Sons Ltd as being in liquidation instead of Taylor and Son Ltd. As a result of the negative publicity this created, the company lost key contracts, supplier credit terms and cash advances from its bank, which quickly led to the company filing for its own administration.

What was the background to the case?

The company was incorporated in 1900 and operated as steel fabricators as part of a group of companies, with a staff of approximately 250. One of its largest customers was Corus (now Tata Steel).

On 28 January 2009 the High Court made a winding up order against Taylor and Son Ltd, a completely unrelated company. The order, which did not include the company number, was sent to Companies House for registration on 12 February 2009. On 20 February 2009 it was registered at Companies House, not against Taylor and Son Ltd, but against Taylor and Sons Ltd. The order should have been sent with a notice to Companies House form including the company number, but was not. The Official Receiver should have put the company number on the covering letter but did not.

The mistake was discovered when the Official Receiver telephoned Mr Sebry to tell him 'he' was in liquidation. Mr Sebry instructed the company's solicitor immediately, who soon sorted out the mistake with the Official Receiver who in turn contacted Companies House. It was quickly established they had the wrong Taylor and Son(s) Ltd.

However, during a subsequent routine check of the register of companies (the register) by the company's accountant, it was discovered (on 23 February 2009) that the company was still showing as being in liquidation at Companies House. The company solicitor contacted Companies House directly and a correction was made to the Register that afternoon.

Unfortunately however, by that time, the information had already been disseminated both by word of mouth, and via Companies House 'bulk products', ie subscription services such as Experian, Dunn & Bradstreet, Equifax, Jordans & others. There was no mechanism to automatically feed this correction to these 'bulk' customers. This led to the company's customers and suppliers to (wrongly) believe the company was in liquidation.

On 9 April 2009 the company went into administration. The claimant alleged this was as a direct result of the damage caused by the clerical error at Companies House.

What was the issue that the judge had to decide?

The matter came before Mr Justice Edis in the Queens Bench Division of the High Court. He had to decide three points:

  • whether the defendants owed the company a duty of care under statute or common law in the terms alleged by the claimant in his particulars of claim (the duty issue)
  • whether, if so, the defendants breached any such duty. It was conceded that if there was any such duty, it was breached so this matter did not need to be decided
  • whether, if so, the defendants' breach of duty caused the company to enter administration (the causation issue)

What did the judge decide?

The causation issue

On the matter of causation, the judge concluded that the claimant proved that the reason the company went into administration in April 2009 was due to the error made at Companies House. He found no evidence of any other precipitating factor.

The duty issue

The judge was not satisfied there was a cause of action for damages for breach of statutory duty against the Registrar in relation to his functions under the Companies Act 2006 (CA 2006). The reason being that CA 2006 is a statute which regulates the keeping of the register and imposes duties on the Registrar for that purpose. The register publishes information which is available to the whole world because it is available on the internet.

The full arguments are set out in some detail with reference to relevant case law in the full judgment. In essence, the judge favoured the approach that the duty of care in such instance falls under common law, rather than statutory duty. This was mainly based on the 'floodgates' argument and that the potential scope for claims that a statutory duty could leave the Registrar open to would, in theory, be infinite.

In favour of this stance, the judge stated that whereas the common law of negligence has control mechanisms designed to restrict the class of persons who can claim damages for economic loss, the imposition of a statutory duty—which gives rise to a claim for damages at the suit of anyone who suffers economic loss by reason of any act or omission which has a breach of the statutory duties imposed—would create a very wide duty indeed. The judge saw nothing in CA 2006 to suggest that this was the intention of Parliament.

However, the judge did find that where the Registrar undertakes to alter the status of a company on the register which it is his duty to keep, he assumes a responsibility to that company to take reasonable care to ensure that the winding up order is not registered against the wrong company.

This special relationship between the Registrar and the company arises because it is foreseeable that if a company is wrongly said on the register to be in liquidation it could suffer serious harm.

He stated in his judgment:

'[..] my finding on the causation issue shows that in this case that harm amounted to the destruction of a company which had traded for over 100 years and which owned a valuable business. The nature of the exercise also supports the finding of such a relationship. The company is not consulted before its liquidation appears and has no opportunity to protest that the entry, if made, will be a mistake. Effectively, 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. When such an exercise is performed in private and behind closed doors, those doing it have truly assumed responsibility for it: indeed no-one else is in any way involved in it. The responsibility for it is entirely placed on the Registrar and his staff. At the time of each entry, it is not the case that a duty is owed to every company on the Register. The duty only arises when the record of a company is altered in a way which will probably cause serious harm if it is done carelessly.'

What should practitioners acting for either side take away from this judgment?

This is a very salutary tale indeed. While damages have not yet been assessed (a claim in the region of £8m has been mooted), a very long established company went into administration and many people lost their jobs. All this for what essentially started out as a typing error.

Clearly, the Registrar, and the Official Receiver's office will have a lot of learning points to take away from this case. They had the correct checking procedures in place, but they admit they routinely failed to follow them and this was the reason this error was able to happen. It seems fairly clear that such procedures need to be followed very strictly to avoid the risk of such an error happening again.

This learning point can be taken away by all of us however. When filing documents in court, particularly in the heat of the moment when racing against the clock with a million and one instructions on your desk, it is essential to check and double check company names and numbers so that the wrong company is not advertised as being in administration or liquidation. It takes only one small error, one wrong notice, for word of mouth to do a huge amount of damage, and while registers or court files can be rectified, as can be seen here, it is much more difficult to go back and stop the supply chain gossip from going into overdrive. Unfortunately, as can be seen here, it can have devastating effects in a very short period of time on the livelihoods of staff and the knock on effect to suppliers and creditors alike.

UPDATE: An application for permission to appeal to the Court of Appeal has been made in this case, with the hearing of that application listed for 20 January 2016.

Further Reading

If you are a LexisPSL Subscribers can see Insolvency searches; Companies for further information:

Not a LexisPSL subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Relevant Articles
Area of Interest