This landmark judgment, handed down on June 11, came some eight years after BHS collapsed with a pension deficit of £571 million on April 25, 2016, thirteen months after the takeover of 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 533-page judgment, Mr Justice Leech upheld the joint administrators’ claims, awarding the largest ever wrongful trading award and the first wrongful trading award in Britain to two former directors of BHS.
The joint administrators commenced proceedings in December 2020 against three former directors of the group companies: Chappell, Lennart Henningson and Dominic Chandler, for unlawful trading, commercial offenses and individual offenses 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 is liable for unlawful conduct if he knew or should have known at any time before the commencement of the liquidation of the company that there was no reasonable prospect that the company would avoid bankruptcy (the knowledge condition), unless the director from that date has taken all steps to minimize the potential loss to creditors (Article 214 of the Act).
The joint trustees alleged that the knowledge condition was met by six ‘dates of knowledge’ and Leech J conducted a careful analysis of the evidence (including minutes, handwritten notes and text messages) in relation to each. In assessing constructive knowledge, the court applied a ‘fictitious director’ test, which would: be applied to each individual director; ‘examine the content of what they actually did’; be adjusted depending on the size of the company; and taking into account not only the material available, but also material to which the director ‘could have access with reasonable care’, including ‘sufficient financial information to monitor the solvency of the company’.
S.214 will be triggered where an insolvent liquidation/administration was unavoidable, the critical question being whether there was ‘light at the end of the tunnel’. Directors are not liable simply because a company is insolvent, but rather when directors have ‘no rational basis’ for continuing in business and fail to take steps to minimize loss to creditors.
Directors cannot hide behind delegation or professional advice: it remains their duty to monitor the performance of delegated functions. While a director who seeks professional advice has generally ‘come a long way towards a reasonably careful performance of his duties’, the weight that the judge will attach to advice will in practice depend on the scope of the assignment , including information assumptions provided, advice provided and the extent to which the directors rely on it.
The court found that the knowledge condition was met on the last so-called knowledge date, when the directors knew that the group was making a loss, that there was no prospect of obtaining financing and no plan existed to address the pension deficit. Based on this, the companies should have gone bankrupt in September 2015, instead of April 2016.
The court has discretionary power under Article 214 in relation to director contributions, the starting point and maximum being the increase in the net deficit (IND) of the assets generated by continuing trading between the date on which the knowledge condition has been met and the date of insolvency. Here the IND amounted to £45 million, with the court holding Henningson and Chandler jointly and severally liable for 15%: £6.5 million each. The court refused to reduce liability on the grounds that the group’s D&O insurance would not cover the full claims against them.
S.212 of the Act provides for the recovery by a liquidator of property or compensation of a director where the director has breached his duties to the company. Unlike s.214, this does not create a new remedy, but rather allows a liquidator to enforce an existing remedy the company has against a director.
The joint liquidators alleged 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 could arise, with a duty to have regard to the interests of creditors); and s.176 (duty not to accept benefits). Interestingly, the court found that there will be a breach of section 172 where the directors undertake ‘insolvency deepening activities’, even if an insolvent liquidation is not unavoidable and there is no breach of section 214.
The court found that Henningson and Chandler had failed to take into account the interests of the companies’ creditors before entering into certain loan agreements, in breach of the amended law, and that if they had complied with their duties the companies would not have continued to trade, and placed them into administration in June 2015. The size of this claim has yet to be determined, but could be as much as £133.5 million.
The joint liquidators have also made ‘individual wrongdoing’ claims in relation to specific transactions, including for secret commissions; sell at an undervalue; and third party payments. Although not all of these claims were successful, the court found Henningson and Chandler liable for a further £5.6 million in total.
This judgment represents an important victory for the trustees. It will serve as a cautionary tale for directors, highlighting not only the importance of exercising independent judgment, but also of providing professional advisors with full context when obtaining advice.
Clare Hennessey is a special advisor at Jenner & Block. Partners Lizzie Shimmin and Jason Yardley also contributed to this article