Wrongful trading – BHS directors ordered to pay £18m

Two directors have been ordered to pay at least £18m in damages, having been found liable for both wrongful trading and breaching their corporate duties.

The case Wright v Chappell [2024] EWHC 1417 (Ch) is a stark reminder of the potential liability and risks that shadow the role of a director.

Background to Wright v Chappell [2024] EWHC 1417 (Ch)

As stated in the judgment of Mr Justice Leech, “the BHS Group was once a very successful company, with operating profits of £99 million, £104 million and £89 million in the financial years 2003, 2004 and 2005. However, between 2009 and 2014 BHSL had made losses every year and by the date of sale it had a cumulative operating loss of £442 million.”

This resulted in the BHS Group being sold by Sir Phillip Green to Dominic Chappell in March 2015 for £1 followed by the Group collapsing into administration in April 2016 with outstanding debts in excess of £1bn. It stands as one of the largest insolvencies in British retail history and resulted in some 11,000 people losing their livelihoods.

On 2nd December 2016, British Homes Stores Group Limited went into creditor’s voluntary liquidation and Anthony Wright and Geoffrey Rowley of FRP Advisory Trading Limited were appointed as joint liquidators (the “Liquidators”). Other members of the BHS Group soon followed.

On 11th December 2020, the Liquidators commenced court proceedings against the former directors, (1) Dominic Chappell, (2) Lennart Hennington and (3) Dominic Chandler (together the “Respondents”) under sections 212 and 214 of the Insolvency Act 1986 (the “IA 1986”). The judgment is against Hennington and Chandler (“the Directors”).

The central allegation made by the Liquidators was that the Directors  continued to allow the BHS Group to trade, when they knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation.

By doing so, the Directors were alleged to be liable for wrongful trading. It was further alleged that even if the Directors were not liable for wrongful trading, they had failed to properly consider the interests of creditors and had they done so, they would have immediately filed for administration. Various breaches of statutory and fiduciary duties were also alleged.

The claim was heard by Mr Justice Leech in the High Court, who handed down his detailed 1160 paragraph judgment on 11th June 2024 (the “Judgment”).

Proceedings were also issued against a fourth director, Keith Smith, however, he settled the matter privately and therefore he is not liable under this Judgment. The First Respondent, Dominic Chappell, did not participate in the trial and is not bound by the Judgment.

Proceedings against him are due to be heard separately.

The proceedings

The claim had three main categories:

1. Wrongful trading
2. Trading misfeasance
3. Individual misfeasance claims

What is wrongful trading?

Wrongful trading is a statutory offence under sections 214 and 246ZB of the Insolvency Act 1986. Once a director knows (or should have known) that there is not a reasonable prospect of a company avoiding liquidation or administration, they have a duty to minimise potential losses to the company’s creditors.

The Liquidators alleged that the Directors knew, or ought to have known from the date of the acquisition (March 2015), or from the date of their appointment as directors, that there was no reasonable prospect of avoiding insolvent liquidation.

The Liquidators specifically claimed that if the Directors had resolved to put the companies into administration on 17th April 2015, there would have been £140.1 million (£70.1 million taking into account pension scheme deficit adjustments) more in assets to meet the creditor’s needs.

It was found that directors did not have sufficient knowledge from the date of acquisition (March 2015). However, it was deemed that they had sufficient knowledge from 8th September 2015, and therefore should have entered into administration at this date (as opposed to 7 months later in April 2016).

The directors were ordered to personally contribute £6.5m towards the companies’ assets.

What is misfeasance?

Misfeasance includes the misapplication or retention of assets of the company; being accountable for money or other property of the company; breaching duties; or otherwise, being “guilty of misfeasance”.  It is therefore a broad definition which incorporates the statutory duties prescribed by the Companies Act 2006 (the “CA 2006”).

Trading misfeasance

One of the key duties considered for trading misfeasance was s.172 of the CA  2006, which is the duty to promote the success of the company. This includes acting in the interests of the creditors of the company.

It was alleged that if the Directors had complied with this duty at the outset of their knowledge, the companies would not have continued to trade for so long following the acquisition, which would have left significantly more assets to meet the creditor’s needs.

The Court also considered s.173 of the CA 2006, which is the duty to exercise independent judgment. The Court found several occasions whereby Mr Henningson failed to exercise his independent judgment, including concerning a Swiss Rock payment of £521,975.

The appropriate figure of damages which needs to be paid by the Directors for the trading misfeasance element is yet to be declared. A consequential hearing will take place for submissions on the appropriate measure of loss.

Individual misfeasance

S.176 of the Companies Act 2006 imposes a duty not to accept a benefit from a third party conferred by reason of being a director, or for doing (or not doing) something as a director. Mr Henningson was found to have accepted £300,000 of which he failed to account for, to any of the Companies.

Mr Henningson was therefore ordered to pay this sum to the Liquidators. A number of other payments were also considered including Mr Henningson being held liable for £521,975 in respect of a Swiss Rock payment, £1,500,000 in respect of an arrangement fee, and £1,671,236.70 in respect of a property purchase. Mr Chandler was also considered liable for the latter.

The Court’s findings

Mr Justice Leech upheld the Liquidator’s claims of wrongful trading and misfeasance against the Directors of the BHS group.

The court also considered that for one of the directors (Mr Chandler) the substantial sums ordered may be “potentially ruinous for him”. Mr Chandler submitted a witness statement dated 10 November 2023, that he had personal assets of £467,458.

However, it was deemed not appropriate to take such matters into account, as this would “send a green light to risk-taking or, even, dishonest directors if the Court reduces the amount of compensation… on the basis of ability to pay”.

This case is a stark reminder of the duties directors owe to a company and its creditors and the personal liabilities that a director can be exposed to if they fail to comply with their statutory duties.

How can Morr & Co help?

If you require assistance and advice with a commercial dispute or have any questions about this article, please call our Dispute Resolution team on 01737 854500 or email info@morrlaw.com and a member of our expert team will get back to you.

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