High Court hands down judgment against directors following the collapse of BHS

June 24, 2024

Authors
Giles Maynard-Connor KC
Joel Finnan

Case Details

• Court: Chancery Division, Insolvency & Companies List
• Judge: Mr Justice Leech
• Judgment: click here

The Joint Liquidators’ case was that from the date of the BHS Group’s acquisition, and their respective appointments as directors, the various respondents knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation.  This formed the basis of the Joint Liquidators’ claim in wrongful trading, and the factual basis for the trading misfeasance claim.  The final head of claim involved allegations of individual misfeasance concerning individual assets or funds of the various companies that are not considered here.

(1)  Wrongful Trading

To succeed in the wrongful trading claim, the Joints Liquidators had to demonstrate (1) that the Companies had gone into insolvent liquidation, (2) that R2 and R3 were directors when (3) was satisfied, and (3) that at some time before the commencement of the winding up, R2 or R3 ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration’ (‘the Knowledge Condition’).  For clarity, the case against R1 had been severed pre-trial, and R4 had settled.

In respect of (3), the Joint Liquidators had identified six ‘Knowledge Dates’ described as KD1 – KD6.  The Knowledge Condition could be satisfied by proving actual knowledge (the subjective conclusion that the Companies had no real prospect of avoiding insolvent liquidation/administration), or by showing that one or both of the directors in question should have concluded  as such following an objective evaluation of the facts or information known or provided to them at each Knowledge Date.

In determining the issue, the Judge gave consideration to the ‘Notional Director’ test (see §466), as well as highlighting the ‘very high’ bar that must be overcome in meeting the Knowledge Condition: demonstrating that the directors in question knew or ought to have known that insolvent liquidation or administration was inevitable (see §473).  The impact of BTI 2014 LLC v Sequana [2024] AC 211 on s. 214(2)(b) was considered.

Whilst the first five dates were ultimately dismissed, the Judge upheld the Knowledge Condition as at date KD6.  Defences of delegation, professional advice, and the statutory defence in s. 214(3) were considered but rejected.  The Court considered causation, but was somewhat limited by the severance of the claim against R1.  It therefore considered the counter-factual: what would have happened if the directors on trial had complied with their duties at the date in question?  In this case, the answer was to place the Companies into administration.

The Court was exercising a statutory discretion in determining what contributions were to be made to the assets of the Company.  It was open to the Court to take into account all relevant circumstances.  The starting point and upper limit was some £45.5 m, which represented the increase in net deficiency (‘IND’) between the date on which the Knowledge Condition was satisfied and the date the Companies filed for administration.  The Court then embarked on a consideration of credit, whether to fix liability jointly or severally, and the culpability of each director in fixing their respective contributions.

(2)  Trading Misfeasance

Whilst the claim in wrongful trading succeeded only as at KD6, the Court looked further back using this alternate head of claim.

At §953 onwards, the Court explored the entry into a transaction named ACE II (amongst other matters), which was held to have been very disadvantageous to the BHS Group.  Breaches were found under s. 171(1)(b), 172, and 174 of the Companies Act 2006.

Whilst the wrongful trading claim was limited to KD6, being the date on which the directors in question knew or should have known of inevitable insolvency, the modified Sequana duty or Creditor Duty arose earlier at KD3 (17 June 2015).  This concept enabled the Court to penalise ‘insolvency-deepening’ activity otherwise than by virtue of wrongful trading proper.  Whilst quantum is yet to be determined, the Judge’s remarks at §1112 are interesting: had the directors complied with their duties, the Companies would not have continued to trade, but would have ceased trading at an earlier stage.  A further and larger award is therefore on the table, though the Judge has fairly declined to resolve the measure of equitable compensation pending further submissions.

(3)  Comments

This is undoubtedly a significant decision in this area.

Practitioners are likely to remain rightly cautious of the high bars that exist in establishing liability for wrongful trading. But the gloss of penalising similar types of conduct through the lens of the interests of a company’s creditors may prove a more efficient route to the desired outcome for office-holders.  Further updates will be available in due course when the Court has determined quantum in respect of liability; whether on the basis of IND or otherwise.