Largest-ever award for wrongful trading

This landmark judgment, handed down on 11 June, came some eight years after BHS collapsed into administration on 25 April 2016 with a £571m pensions shortfall, 13 months after its acquisition from Sir Philip Green’s Taveta Group by Retail Acquisitions Limited (RAL), a company controlled by Dominic Chappell, a former bankrupt with no retail experience.

In a judgment running to 533 pages, Mr Justice Leech upheld the joint liquidators’ claims, granting the largest-ever award for wrongful trading and the first award for misfeasant trading in the UK, against two former directors of BHS.  

The joint liquidators issued proceedings in December 2020 against three former directors of the group companies: Chappell, Lennart Henningson and Dominic Chandler, for wrongful trading, trading misfeasance and individual misfeasance claims under the Insolvency Act 1986. The judgment is binding only on Henningson and Chandler, with the claims against Chappell to be determined at a later date due to his ill-health.

A director will be liable for wrongful trading if, at some time before the commencement of the winding up of the company, they knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation (the knowledge condition), unless, from that date, the director took every step to minimise the potential loss to creditors (s.214 of the act).  

The joint liquidators alleged the knowledge condition was satisfied by six ‘knowledge dates’ and Leech J conducted a painstaking analysis of the evidence (including minutes, handwritten notes and text messages) in relation to each. In assessing constructive knowledge, the court applied a ‘notional director’ test, which would: be applied to each individual director; ‘examine the substance of what they actually did’; be modified subject to the size of the company; and consider not only the material available, but material to which the director ‘could with reasonable diligence have access’, including ‘sufficient financial information to monitor the company’s solvency’.

S.214 will be engaged when insolvent liquidation/administration was inevitable, with the critical question being whether there was ‘light at the end of the tunnel’. Directors are not liable merely because a company is insolvent, but rather where directors have ‘no rational basis’ for continuing to trade and fail to take steps to minimise the loss to creditors.

Directors cannot hide behind delegation or professional advice: it remains their duty to supervise the discharge of delegated functions. While, in general, a director who obtains professional advice ‘has gone a long way towards performing his duties with reasonable care’, in practice, the weight which the court will attach to any advice will depend upon the scope of the engagement, including information provided, assumptions, advice given and the extent of the directors’ reliance on it.

The court found that the knowledge condition was satisfied on the latest alleged ‘knowledge date’, when the directors knew the group was loss-making, that there was no prospect of obtaining finance, and no plan to deal with the pension deficit. On this basis, the companies should have gone into administration in September 2015, rather than April 2016.

The court has discretion under s.214 regarding contributions by directors, with the starting point, and maximum, being the increase in the net deficiency (IND) of the assets generated by continuing to trade between the date the knowledge condition is satisfied and the date of insolvency. Here the IND was £45m, with the court holding Henningson and Chandler severally liable for 15%: £6.5m each. The court declined to reduce liability on the basis that the group’s D&O insurance would not cover the full claims against them.

S.212 of the act provides for recovery by a liquidator of property or compensation from a director where the director has breached their duties to the company. Unlike s.214, this does not create a new cause of action but rather permits a liquidator to enforce an existing cause of action which the company has against a director.

The joint liquidators claimed that the directors had breached numerous duties under the Companies Act 2006, including: s.171 (duty to act within powers); s.172 (duty to promote the success of the company, modified where there is a real risk that insolvency might arise to include a duty to have regard to the interests of creditors); and s.176 (duty not to accept benefits).  Interestingly, the court held that there will be a breach of s.172 where the directors undertake ‘insolvency-deepening activity’, even where insolvent liquidation is not inevitable and there is no breach of s.214.

The court held that Henningson and Chandler had failed to consider the interests of the companies’ creditors in breach of the modified duty before entering into certain loan agreements, and that had they complied with their duties the companies would not have continued to trade and would have entered administration in June 2015. The quantum of this claim is yet to be determined but could be as much as £133.5m.

The joint liquidators also brought ‘individual misfeasance’ claims in respect of specific transactions, including for secret commissions; sales at an undervalue; and third-party payments. While not all of these claims succeeded, the court held Henningson and Chandler liable in aggregate for an additional £5.6m.

This judgment represents a significant victory for liquidators. It will serve as a cautionary tale for directors, highlighting not only the importance of exercising independent judgement but also of providing any professional advisers with full context when obtaining advice.

Clare Hennessey is special counsel at Jenner & Block. Partners Lizzie Shimmin and Jason Yardley also contributed to this article