BHS Group’s wrongful trading award and what it could mean for you

Introduction

The recent Judgment in the BHS Claim is significant in many ways. We set out the key findings below and what it means for directors.

Background

• Dominic Chappell led the purchase of companies within the British Home Stores Group (“the Companies”) from Sir Philip Green for £1 in March 2015.
• Within a year of purchase, the chain collapsed with the loss of 11,000 jobs and a £571m pension scheme deficit. On 25 April 2016 all four companies went into administration. One company went into creditors’ voluntary liquidation on 2 December 2016 which saw the Joint Liquidators (“JLs”) appointed, and the remaining companies followed suit. This collapse created many losers including its employees and the 20,000 members of its pension scheme. A parliamentary select committee investigation later concluded that “many of the closest to the decisions that led to the collapse of BHS have walked greatly enriched despite the company’s failure.”
• The JLs were appointed to readdress that balance with a view to making a substantial recovery for the estate, including the Pension Protection Fund, and issued proceedings against 3 directors, Mr Chappell, Mr Chandler, and Mr Henningson, under section 212 and 214 of the Insolvency Act 1986.
• A fourth director had also been named as a respondent to the Application, Mr Smith (a non-executive director), but he settled before trial.

The claim

• A claim was issued against the directors under three categories of claims:
• Wrongful trading;
• Misfeasance trading; and
• Individual misfeasance

• The JLs claim against Mr Chappell was severed following a successful application for an adjournment by him, meaning that his claim will be determined in due course. The hearing therefore proceeded against Mr Henningson and Mr Chandler (“the Directors”).
• The novel claim for ‘trading misfeasance’ relates to Mr Henningson and Mr Chandler breaching a number of their statutory duties in continuing to trade. Such duties included a failure to act within their powers, to promote the success of the Companies (including the interests of creditors), and to exercise independent judgment (pursuant to sections 171(1)(b), 172 and 174 Companies Act 2006).

The court decision

1. Wrongful Trading

• Mr Henningson and Mr Chandler each contribute on a several basis £6.5m to the Companies’ assets for Wrongful Trading after concluding that the ‘Knowledge Condition’ (being when they knew or ought to have concluded that there was no reasonable prospect that the Companies would avoid going into insolvent liquidation or entering insolvent administration) was 8 September 2015.
• The starting point for assessing liability of a director for wrongful trading is the increase in the net deficiency in the assets generated by continuing to trade from the date on which the ‘Knowledge Condition’ is satisfied until the date on which the company goes into insolvent administration or liquidation.
• The Court agreed that the Directors should have differing levels of liability to reflect their involvement / culpability.

Misfeasant trading

• Had the Directors complied with their duties on or before 26 June 2015 the Companies would have not continued to trade but gone into insolvent administration immediately. Therefore, by not placing them into administration in June 2015, the Directors breached (and continued to breach) their duties.
• This is despite the fact that the Companies were not cash flow insolvent at this date and insolvent administration / liquidation was not inevitable at this date. Further (a) insolvent administration / liquidation was merely probable in June 2015, (b) wrongful trading did not commence until September 2015, and (c) the Directors took professional legal and accounting advice (from some of the most well-regarded legal and accountancy firms), none of which advised that insolvent administration / liquidation was inevitable.
• The quantum of this liability will be determined in due course and could be up to £133.5m (representing the increase in net deficiency between the relevant dates).

The individual misfeasance claims

• Various arrangements and property transactions were found to have breached the statutory duties (including the duty to not accept benefits from third parties and duty to account), in an aggregate amount of £5.6m.

Other important issues decided

• Of the 8 misfeasant transactions claimed by the JLs, 5 failed as they did not prove that the breaches of duty caused the loss suffered. The Court accepted that had Mr Henningson protested or refused to authorise transactions, the dominant director and majority shareholder (Mr Chappell) would have simply actioned the transactions thereby breaking the chain of causation.
• The Court formed the view that Mr Chappell “is primarily liable” for the losses and is therefore likely to find himself on the hook for a significant sum in comparison to Mr Henningson and Mr Chandler.
• A hearing has been listed to consider consequential matters to deal with loss for the Trading Misfeasance Claim and whether Mr Henningson and Mr Chandler are entitled to set off or claim a contribution for any of the sums ordered against them.
• Following circulation of the judgment in draft, Mr Chandler’s solicitors provided the Court with a certificate of insurance for directors’ all risk cover up to £20m, including defence costs. Whilst the Judge recognised that this would be insufficient to cover the amount the Directors had to pay, he agreed with the JLs’ position that to exercise his discretion to reduce the amount for which the Court would declare them to be liable for would “send the wrong message to risk-taking directors that they could escape liability if they did not obtain adequate cover to indemnify themselves against wrongful trading”.

Comments from the team at Francis Wilks & Jones

• This decision is one of a few that have emerged since the Supreme Court’s judgment in Sequana . Sequana set out a sliding scale dealing with directors’ knowledge and to whom they owed duties, and when.
• In that case, the Creditor Duty (a duty imposed on directors to consider the interests of creditors) is triggered when the directors knew or ought to have known that a company entering into insolvent liquidation or administration was probable.
• Whilst this remains probable, directors have a significant duty to promote the success of the company for the benefit of the members, with a lesser, but increasing, duty to also have regard to creditors’ interests which continues the deeper into insolvency the company goes until eventually, the interests of creditors are paramount.
• In Sequana the Court also said that directors must not “materially harm” creditors’ interests which protects against “insolvency-deepening activity”. The judge in Re BHS Group Ltd recognised that passage from Sequana in the present case as a good example of “insolvency-deepening activity”. This led to the judge in Re BHS Group Ltd finding that the Directors failed to consider the interest of creditors before entering into various transactions.
• The judge in Re BHS group Ltd was reluctant to attach much weight to the Directors’ reliance on the advice provided by professionals. This highlights the limitations that directors can only place limited reliance on professionals and a lack of experience to avoid liability. This shares similarities with the case of Hunt v Singh  (which also followed Sequana) where it was held that directors could not rely on professional advice described as “robust” as a defence.
• The judgment is a reminder to give causation thought in “nonfeasance” claims where the allegation is that a passive director permitted a transaction.
• The application of the law is fact specific which unsurprisingly leaves a number of questions unanswered, including how does this decision impact non-executive directors like Mr Smith?

Let us help you

Our team at FWJ regularly advises directors and insolvency practitioners on questions of wrongful trading, misfeasance and other claims under the Companies Acts and Insolvency Act. If you have any questions at all – please call our team today for a free consultation.

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