
Harry Bithell recently published an article providing some insights from Re BHS Group Limited in ThoughtLeaders4 Disputes magazine, Year In Review: 2024 On International Disputes. You can download the full version of the magazine here.
The judgment in Re BHS Group Limited [2024] EWHC 1417 (Ch) is an important case for understanding the responsibilities owed by directors to companies during times of financial distress. This extensive 533-page ruling is the culmination of the protracted saga that followed the demise of BHS, a once-prominent UK retailer, which entered administration and subsequently liquidation shortly after the defendants were appointed as directors. The case will be of particular interest to insolvency practitioners, directors and those advising directors of companies facing financial difficulties.
Background
Following their appointment on 11 March 2015, the defendant directors, entered into a number of transactions that the Liquidators argued contributed to the collapse of the company. The Liquidators argued that entering those transactions worsened the company’s financial position and that the former directors should have instead placed the company in administration. This article focuses on the wrongful and misfeasant trading claims brought by the Liquidators against the former directors.
In his judgment, the Judge held that Mr Chappell and Mr Henningson were jointly and severally liable to pay equitable compensation in the sum of £110,230,000.
Wrongful Trading
Wrongful Trading is a statutory cause of action under section 214 Insolvency Act 1986. The Liquidators had to establish that the former directors “knew or ought to have concluded” that there was no reasonable prospect of avoiding insolvent liquidation or administration. The Judge said that this so-called ‘Knowledge Condition’ could be satisfied by proving actual knowledge or by showing that the former directors should have concluded that was the case. The Judge also noted that if directors appreciate the company is insolvent but reach the conclusion, they can trade out of insolvency there must be a rational basis for that conclusion.
The Liquidators identified six possible dates starting on 17 April 2015 (a little over a month after their appointment) and ending on 8 September 2015 where the directors knew or should have known that the companies could not avoid insolvent liquidation.
In his judgment, dismissing all but one date, Mr Justice Leech found that by 8 September 2015 the former directors ought to have known that insolvent liquidation or administration was inevitable. The Judge recognised the reality that for directors the decision to put a company into liquidation is a difficult one and that the court should be slow to encourage directors to take that step at the first sign of trouble. This re-statement of the reality in which directors of distressed companies may find themselves is to be welcomed.
One of the most important considerations in the context of the Wrongful Trading claims was the impact of professional advice. It was argued that where directors have relied on the advice of reputable professionals, they will prima facie have fulfilled their duties. Although the Judge accepted this as a general proposition, he said that the weight attached to such professional advice will vary depending on a number of factors.
In the instant case, based on the retainers with the professional advisors, the Judge held that the question of avoiding insolvent liquidation or administration was not one the professional advisors should have been expected to express an opinion and that was a matter for the individual judgment of the former directors. The Judge accepted that carefully considering and following legal advice may provide an evidential basis for dismissing a wrongful trading claim but was not satisfied the former directors did so in this case.
The judgment emphasises the importance that directors not only seek professional advice and give those charged with advising them proper instructions accompanied by any realistic assumptions but that the advice given is considered and followed.
Misfeasance
Section 212 Insolvency Act 1986 provides a procedure for the recovery of property or compensation by a liquidator against an officer of a company. Unlike section 214, however, section 212 does not provide a new cause of action to liquidators instead allowing them to enforce an existing cause of action which the company claims to have against the director.
The Judge considered in some detail the scope of the duties owed by directors but it is the consideration of the duty under section 172(3) Companies Act 2006 that has created the most interest. The scope of that duty was recently considered by in Sequana where the Supreme Court rejected that there was a separate and free-standing duty to creditors, but the majority held that directors must have regard to the interests of creditors where the company was bordering on insolvency or where insolvency or liquidation was probable.
The Judge found that by 17 June 2015, the third knowledge date for the Wrongful Trading Claim, the modified duty to consider the interests of creditors as set out in Sequana had arisen.
This is an important part of the judgment as the Judge had, at an earlier stage in the judgment, found that at this point the companies were not cash flow insolvent and insolvent administration, or liquidation was not inevitable. Despite that, the Judge found that had the former directors considered the interests of the companies’ creditors they would have concluded that it was in the interests of existing creditors to place the companies into administration immediately. The Judge said that the entry into a loan agreement known as ‘ACE II’ on 25 June 2015 was a ‘good example’ of what Lord Hodge and Lady Arden referred to in Sequana as an ‘insolvency-deepening activity’.
The question of whether Sequana creates a wider wrongful trading liability remains open but it is clear that a director should consider whether there is a reasonable prospect of avoiding liquidation and also consider whether their proposed actions are in the interests of creditors. In any event, this overlap emphasises the importance that directors know and understand the scope of their duties. Further, it underscores the need for directors to specifically consider their personal obligations at an early stage.
Conclusion
The judgment in Re BHS serves as a crucial reminder of the significant responsibilities that directors bear, particularly during periods of financial distress. It underscores the importance, particularly in light of the Supreme Court’s judgment in Sequana, of considering those responsibilities and personal obligations at an early stage and the need to take (and follow) professional advice from experienced lawyers, insolvency practitioners and accountants to ensure that the duties owed by directors are not breached.
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Disclaimer
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.