The High Court has held two former directors of the BHS group liable to its liquidators for £18m arising from wrongful trading and misfeasance. The case serves as a reminder of the importance of directors meeting their duties and taking particular care in insolvency scenarios. Interestingly from an insurance perspective, the court did not take into account the level of available D&O insurance cover when imposing liability. This suggests that directors would be well advised to consider their D&O insurance arrangements and ensure that the level of cover is sufficient to protect the risks associated with their role.
Proceedings following collapse of BHS Group
The High Court examined the events surrounding BHS’s acquisition by Retail Acquisitions Limited including the failed attempts to restructure and refinance the business, which led to its collapse in 2016.
Proceedings were brought by the liquidators against former directors, Lennart Henningson and Dominic Chandler (the Directors). The case against a third director, Dominic Chappell, did not form part of the judgment and will be heard at a later date. The case was complex with a hugely detailed factual analysis into the events surrounding the insolvency. On 11 June 2024 Mr Justice Leech handed down his 533 page judgment. In summary, the liquidators alleged:
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Wrongful trading: that from the date of their appointment as directors, the Directors knew or ought to have known that there was no prospect of avoiding liquidation but continued to trade; and
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Misfeasance: that the Directors acted in breach of their duties under sections 171 to 177 of the Companies Act 2006 by continuing to trade when it was not in BHS or its creditors' best interests. The liquidators argued that the directors should have entered an insolvency process in order to comply with their “creditor duty”; that is the requirement for a director to consider the interests of a company’s creditors when exercising their usual duty to promote the success of a company under section 172(1), in certain circumstances where continued solvent trading is in doubt.
The Court upheld the liquidators' claims. It found that if the Directors had complied with their duties to promote the success of the companies, they would have placed the group into insolvent administration immediately on their appointment. The Directors were personally liable for BHS's losses.
Comment
This is an important case which offers a number of relevant points of interest to directors and officers and D&O insurers.
- Wrongful trading claims under section 214 of the Insolvency Act 1986 must pass a high threshold - establishing the directors have no rational basis for continuing to trade and, following BTI v Sequana, insolvency is an inevitability. "Knowledge" is applied to each director based on their individual involvement and not the board as a whole. Such claims tend to be document heavy with difficulties establishing causation and loss, and accordingly it is rare that wrongful trading claims reach trial. This successful liquidator claim serves as a reminder to directors to ensure that they scrutinise board decisions and consider the impact on shareholders and, when in an insolvency scenario, creditors. Professional advice from accountants may be relevant but this does not necessarily shield directors from liability.
- This is the first time that the court has upheld a 'trading' misfeasance claim, which suggests liquidators will seek to advance that argument in future cases. How such future claims will interact with claims for wrongful trading is not entirely clear.
- The court made some interesting comments in respect of D&O insurance.
- The court was informed that the Directors held D&O insurance with an overall limit of £20m. During the proceedings, Mr Chandler's solicitor had suggested that only £1m was likely to remain available following trial.
- The judge had not been provided with a copy of the insurance policy and was not prepared to accept that defence costs would erode the policy limit (as opposed to a separate costs limit).
- The judge, in any event, declined to take the D&O policy into account in reducing the Directors' personal contribution to the claim. The judge stated that: "even if they do not have adequate cover to do so, I decline to exercise my discretion to reduce the amount for which I declare them to be liable for this reason." In the judge's view, reducing liability because there is insufficient insurance cover would send the wrong message that risk-taking directors could escape (or reduce) liability if they did not obtain adequate cover to indemnify themselves against wrongful trading.
- Since the different director roles and their individual culpability are relevant in these claims, each director is likely to need separate legal representation, increasing defence costs and erosion of the D&O insurance policy.
- The judge's comments suggest that directors, with advice from insurance brokers, would be well advised to consider D&O insurance arrangements and ensure that the level of cover is sufficient to protect the risks associated with their role.
