Former directors of BHS ordered to pay at least ￡18 million after being found liable for wrongful trading

Two former directors of UK retail chain BHS have been found liable for wrongful trading and breach of corporate duties in a landmark judgment handed down by the High Court on 11 June 2024. The decision contains some important guidance for directors.

Former directors, Dominic Chandler and Lennart Henningson, were found liable in a wrongful trading and misfeasance lawsuit brought by the liquidators, FRP Advisory, and ordered to pay at least ￡18m in what marks the largest court award for wrongful trading since its introduction under the Insolvency Act 1986. A final decision on overall quantum is due following a further hearing later this month.

The sum of ￡18m includes an order for the payment of ￡5m for breach of corporate duties. Mr Chandler and Mr Henningson were found liable for breach of fiduciary duties by continuing to trade, rather than putting BHS into an insolvency process, thus failing to promote the success of the company in not considering the interests of its creditors. This claim for ‘misfeasance trading’ is the first of its kind to be successfully recognised in the UK.

In a huge 542-page judgment, Mr Justice Leech found that Messrs Chandler and Henningson had breached their duties as directors. If they had complied with them, BHS would have ceased trading immediately at the point at which there was no reasonable prospect it could avoid insolvent administration or liquidation.

This case highlights several important factors for directors to consider in the management of their own companies:?

The Court attached little weight to the professional legal and accounting advice received by BHS and the fact that none of those professionals advised that insolvent administration / liquidation was inevitable.

• It is vital that directors stay abreast of their company’s financial situation, and not seek to rely solely on professional advice. In circumstances where there is no reasonable prospect that insolvent administration or liquidation can be avoided, and the business continues to trade, ultimately it is the directors who are responsible.?

The Court agreed that liability should be several due to differing levels of culpability between the directors, meaning that each director was liable only for their own specified obligations and not for the obligations of other directors (as would have been the case on a joint and several basis).

• In instances where other directors are not adhering to their fiduciary duties, particularly with regard to the financial health of the company, it is vital that compliant directors make it clear to non-compliant directors that they are in breach of their duties to the company, and record this in writing.??

Lack of knowledge is not a defence.

• For claims of wrongful trading, the Court will assess whether the directors knew or ought to have known that there was no reasonable prospect the company would avoid going into insolvent administration or liquidation. In instances where the financial health of a company is such that insolvency is unavoidable, a director cannot use as a defence the fact that they were unaware of the company’s financial position. It is critical that directors of a company pay close attention to its financial health and, where necessary, investigate suitable means of insolvency to avoid being in breach of their duties.

The key question is whether there was “no reasonable prospect of the company avoiding insolvent administration or liquidation”.

• A director is not liable simply for permitting a company to continue trading at a time when they know that the company is insolvent, either on a balance sheet or cash flow basis. When considering a case of wrongful trading, the Court will consider whether, at the relevant time, the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent administration or liquidation.

Trading out of insolvency

• Whenever a company is in financial trouble, it is important that the directors weigh up the options very carefully. If the directors appreciate the company is insolvent but reach the conclusion that they can trade out of insolvency, there must be a rational basis for that conclusion (i.e., not an unfounded belief that something will change the company’s fortunes in the future). As above, the question the Court will consider is whether there is no reasonable prospect of avoiding insolvent administration or liquidation.

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