1. Introduction

Directors of companies registered in England and Wales have been served a stark reminder that they need to take their duties seriously when trading in the “zone of insolvency”. On 11 June 2024, the High Court in England handed down both the longest (at 533 pages) and the largest (possibly up to £133.5 million) judgment against certain directors of what was one of the most prominent department store chains in England.

2. Background

British Home Stores (BHS) was a retail company that was once the cornerstone of the British high street. It sold homeware, clothing and furniture and, at its height, had over 11,000 employees. Whilst enjoying profitability for a number of years, things took a turn for the worse, and from 2009 BHS began to incur financial losses.

This article looks into the case brought against certain of the directors of BHS for a breach of their director duties and the key takeaways that the case provides for a director of a company. These duties apply to investor nominated directors who are treat-ed the same under English law.

The BHS Group was originally owned by the Taveta group of companies, which was itself associated with Sir Philip Green, and owned the entire share capital of Arcadia and well-known retailers including Arcadia, Topman, Topshop, Burton and Miss Selfridge.

On 11 March 2015, Taveta sold the entire issued share capital of BHS to Retail Acquisitions Limited for £1. On the same day as the sale, Dominic Chappell and Lennart Henningson were appointed as directors of the Group, with Dominic Chandler being appointed as a director shortly after.

Following their appointment, the directors devised a turnaround plan to secure further funding for the BHS Group which included the sale of various properties including a flagship store in Oxford Street, London and entering into new financing arrangements. As part of the restructuring, a compromise with landlord creditors was proposed using a CVA (Company Voluntary Arrangement) mechanism which is tried and trusted under English law and which ultimately received overwhelm-ing support of 95% of creditors (75% being the required number). However, just a month later, various companies in the BHS Group filed for administration with liquidators being subsequently appointed.

The collapse of the BHS Group was one of the most high-profile corporate insolvencies in recent times. The Group’s demise led to reported debts of around £1.3 billion, including a pension deficit of nearly £600 million. It also led to the closure of 164 stores nationwide, sparking significant job losses. As a further mark of the significance of the collapse of the Group, a parliamentary inquiry was launched in 2016, looking into the failures that culminated in the sale of the company encumbered with a large pension fund deficit to an “unsuitable” buyer.

Proceedings were brought against the former directors of the Group by the Joint Liquidators. The section below will explore the content of the proceedings and the court’s ruling on the case.

3. Proceedings

On 11 December 2020, the Joint Liquidators of the BHS Group commenced proceedings against the former directors under section 212 and section 214 of the Insolvency Act 1986 (IA 1986).

The Joint Liquidators brought three categories of claims against the directors, namely:

• Wrongful Trading;

• Trading Misfeasance; and

• Individual Misfeasance in relation to individual assets or funds of the BHS Group.

The Joint Liquidators alleged that from the date of the acquisition and their appointment, Chappell, Henningson and Chandler either knew, or ought to have known, that there was no reasonable prospect of the BHS Group avoiding insolvent liquidation. This allegation formed the basis of the wrongful trading claim under section 214 of IA 1986. It also formed the factual basis of the trading misfeasance claim.

The Joint Liquidators further alleged that even if the directors were not liable for wrongful trading, they had failed to consider the interests of the creditors. Had they done so, the directors would have immediately filed for administration.

4. Judgment

Eight years after the BHS Group’s fall into administration and following a 25 day trial, the High Court delivered a 533-page judgment ruling in favour of the Joint Liquidators. The court found that two of the directors of the Group, Henningson and Chandler, were liable for wrongful trading and misfeasance.

The judge held that:

• the directors knew, or ought to have known the company was beyond rescue when it was purchased in 2015 and that there was no reasonable prospect of avoiding insolvent liquidation or administration.

• by September 2015, the two directors should have concluded that there was no reasonable prospect of avoiding liquidation or administration. Whilst a turnaround plan was devised, the two directors should have accepted that it was not likely to create any surplus.

• the directors had acted in breach of their directors’ duties and failed to promote the success of each company. Had they done so, the Group would not have continued to trade but would have gone into insolvent administration immediately.

As a result of the court’s judgment, the former directors of the BHS Group were ordered to pay at least £10.4 million and £8.1 million by way of recompense to the Joint Liquidators. The sums involved in this case (which could increase at a later hearing) make the claim one of the most successful of its kind to date.

In addition to wrongful trading, the two directors were also found liable for trading misfeasance. A further hearing has been scheduled by the courts to determine the appropriate loss for the claim. The judge indicated that an even larger award, potentially as high as £133.5 million could be awarded in recognition of the former directors’ breach of their fiduciary duties in failing to place the Group into an insolvency process.

5. Importance

The ruling was significant for a number of reasons. Firstly, it was the largest award ever given for a wrongful trading claim in the English courts. It was also the first time that a misfeasance trading claim had been successfully recognised, making it an important development in the insolvency space.

There were also a number of important points highlighted in the judgment, which are detailed below.

5.1 Knowledge condition

When determining the knowledge condition of section 214 of the IA 1986 and what information a director ought to have known, the court could consider any material that the director could, with reasonable diligence, gain access to. This includes financial information to monitor a company’s condition prior to insolvency. It is no defence to not ask difficult questions because you do not want to know the answers.

5.2 Professional advice

The case shows that merely seeking professional advice from professional advisors in the zone of insolvency will not be adequate for a director to defend a wrongful trading claim. Directors must turn their own minds to the issues in order to properly discharge their duties. Furthermore, the weight that the courts will give to professional advice given to directors will depend on several factors including:

• the knowledge that the professional advisors were given (which should be full and accurate);

• the scope of engagement that was agreed upon;

• the advice that the professional advisor gave; and

• the extent that the directors relied upon this advice.

5.3 Board minutes and correspondence

The judge commented that some of the board minutes used as evidence in the case were formulaic and did not record any genuine discussion between the board members and the risk of insolvency. There is a need to demonstrate active consideration of the various duties to creditors in board meetings.

The courts also conducted an extensive analysis of correspondence between the directors, including looking through meeting notes, text messages and emails when considering the claims brought against the directors of the Group.

5.4 Discharging duties

Finally, the judgment shows that even if a director delegates their management functions to other directors or employees, they must still monitor decisions that are made by the delegated persons. This is because a director could still be in breach of their duties for actions taken by others to whom they have delegated management functions.

6. Key takeaways

The judgment is an indicator of the variety of risks and duties that confront the director of a distressed company as they try to steer a company away from insolvency.

Below are some key takeaways from the case:

• directors should actively consider whether a particular transaction is likely to promote the success of the company, including taking into account creditors’ interests in the zone of insolvency;

• directors should not expect to rely on the advice given by professional advisors in a claim brought against them, they must turn their own minds to the issue to sufficiently discharge their duties. It is the directors who have direct knowledge of state of affairs of the company, not its advisors;

• when arriving at a decision in a claim brought against the directors of a company, the courts may conduct an extensive examination of correspondence between directors, including looking through text messages and emails; and

• if management functions are delegated by directors to others, they must monitor decisions made by the delegated person as they could be in breach of their duties for a failure to do so.