Friday, February 6, 2015

The Liability of the Registrar of Companies for Negligent Entries

It was widely reported last week that Companies House in the UK had been ordered to pay damages of £8.8 million for making a spelling mistake. The case, of course rather more complex than that, is Sebry v Companies House and raised an important question of law: is the Registrar of Companies liable for loss caused by negligent entries made in the course of discharging his statutory obligations? One consequence of the increased availability of such information in electronic form is that it is difficult to correct a mistake: if, as it often is, the information is disseminated (online, to subscribers, etc) within minutes of the making of the statement, a subsequent retraction is often too late to undo the damage. Yet, does it follow that the Registrar is automatically liable for any loss caused by someone relying on the negligent statement?

Philip Sebry was the Managing Director of a company called Taylor & Sons (note, plural) which, at the relevant time, had been in business for more a hundred years. In 2008 the Company was facing some difficulties because of the recession but had taken steps to address this. On 28 January 2009 the Chancery Division made a winding-up order against a company called Taylor & Son in Manchester. This order was received by Companies House on 12 February 2009 identifying the company by name (correctly) but not by number. A policy called the Trove Policy had been instituted in 2006 which required Document Examiners at Companies House to reject any document that did not provide the company number; but in practice this was not followed and Examiners simply looked up the company number on the CHIPS system. On 20 February, the Examiner, Philip Davies, wrongly entered the winding up order against Taylor & Sons. The Company discovered this on 23 Feb (Mr Sebry was away on holiday) and immediately called Companies House; the entry was removed the same day but corrections could not be made to certain ‘bulk products’ containing notifications which had been sent to customers. Within three weeks of this mistake Corus, Taylor’s biggest customer, terminated the relationship; its suppliers also demanded that they be paid all dues and in advance for any further supplies, instead of the 30-day credit policy which Taylor previously had (in practice 90). Banks refused to lend because of these rumours and the company was eventually placed in liquidation. In short—and Edis J rejects any suggestion to the contrary—a hundred-year old company became insolvent in three weeks because of a mistake made by the Registrar.

Edis J begins by observing, correctly, that this was actually not a misrepresentation case: there was, it is true, a misrepresentation by the Registrar but the claimant did not rely on it. It was relied on by third persons (suppliers, banks etc) to the claimant’s detriment. The case was distinct from Hedley Byrne and Candler v Crane, where the loss was a result of the claimant’s reliance on the misrepresentation, and closer to White v Jones. The question was therefore whether it was foreseeable that loss would be caused (which it plainly was) and whether the claimant was able to satisfy the requirements of ‘proximity’ and ‘just, fair and reasonable’. Applying those ‘tests’, Edis J held that the Registrar was liable to the Company but would not have been liable to one of the third parties which had suffered loss by relying on the statement: for example, a supplier who prematurely terminates a contract with the Company thinking it is insolvent cannot recover his losses from the Registrar. One reason Edis J gives for this distinction is that the ‘Company had no way of protecting itself against harm resulting from the promulgation of a false statement that it was in liquidation’ ([91]). Alternatively, it can be said that the Registrar ‘assumes responsibility’ to a company to take reasonable care to ensure that a winding-up order is not registered against the wrong company. As Edis J put it:

[T]hose users of the Register who did rely on the statement are not in the same position as the Company, who did not.  Some of those users will have suffered economic loss by doing so in that they cancelled profitable hire contracts (for example) when they did not need to, and, had they known the truth, they would not have done so.  If any of them were to make a claim, they would face formidable difficulties of the kind which defeated the claim in Reeman.  Similarly, individuals whose livelihood depended on the Company may also have suffered financial loss because of its failure…It appears to me that where the Registrar undertakes to alter the status of a company on the Register which it is his duty to keep, in particular by recording a winding up order against it, he does assume a responsibility to that company (but not to anyone else) to take reasonable care to ensure that the winding up order is not registered against the wrong company.  This does not impose a duty to verify information supplied by a third party such as an Insolvency Practitioner, but only to ensure that the information is accurately recorded on the Register.  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 will suffer serious harm.  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.

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