BHS directors liable for trading misfeasance in the sum of more than £110m (Wright and others v Chappell and others; Re BHS Group Limited)

Dispute Resolution analysis: In a judgment which brings to a conclusion the trial of the former BHS directors, the Court has held the directors joint and severally liable for the increase in net deficiency of the company arising out of breaches of duty which caused the company to continue trading.

Wright and others v Chappell and others; Re BHS Group Limited [2024] EWHC 2166 (Ch)

What are the practical implications of this case?

Although there is perhaps a risk that this judgment will be subject to an appeal in due course, for now it provides and useful and possibly the first authority on the quantification of equitable compensation payable when a company director is found to have breached the modified Sequana duty (BTI 2014 LLC v Sequana SA [2022] UKSC 25). It gives rise to the possibility of very large awards indeed for equitable compensation by confirming that where the breaches of duty cause the company to continue trading, the starting point is that the misfeasant directors will be held jointly and severally liable for the increase in the net deficiency of the company, provided their breaches are an effective cause of the increase. A possible point of relevance on any appeal was the suggestion that this tends to blur the lines between misfeasance claims under section 212 and wrongful trading claims under section 214 of the Insolvency Act 1986. Quantifying misfeasance claims in this way potentially diminishes the scope for what are notoriously difficult claims under section 214. In this judgment, however, Mr Justice Leech did not consider these concerns to be well-founded.

What was the background?

The Defendants were directors of four companies within the British Home Stores Group between March 2015 and December 2016 when they entered liquidation. The Joint Liquidators brought claims against them which focused on their conduct as directors in the 12 month period prior to the commencement of the winding up. Claims were brought for misfeasance under section 212 of the Insolvency Act 1986 and wrongful trading under section 214. Following a long trial at the end of 2023, judgment was given on 11 June 2024. In that judgment, all issues of liability, causation and quantum were addressed save for one. The Defendants were held liable for breach of what was described as the modified Sequana duty. The quantum of equitable compensation payable in respect of that breach was adjourned off for a further hearing which took place on 24 and 25 June 2024. Due to a settlement reached with one Defendant and the non-appearance of another, the June 2024 hearing was argued between submissions on the part of the Joint Liquidators and submissions on the part of one Defendant, Mr Henningson. The breach itself was causing the company to enter into a finance agreement for an improper purpose, namely obtaining arrangement fees and secret commissions at a time when the Defendants ought to have known that it was more probable than not that the company would enter insolvent administration as a result of a failure to obtain a sustainable working capital facility. But for those breaches, the Court held that the company would not have continued to trade and would have entered administration. The Joint Liquidators, accordingly, argued that the proper measure of equitable compensation payable in respect of this misfeasance was a sum equal to the increase in net deficiency of the company. They argued that the Defendants should be jointly and severally liable in respect of this sum. Mr Henningson argued that for him to be held liable to compensate the company in this sum, he must have caused this loss.

What did the court decide?

The Court noted that when the modified creditor duty was outlined by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25, it offered no guidance as to how the equitable compensation payable as a result of the breach was to be calculated. Analysing earlier authorities on the measure of compensation, the Court here held that in circumstances where breaches of duty caused a company to continue to trade, the starting point would be that the measure of equitable compensation would be equivalent to the increase in the net deficiency of the company. However, the burden lay with the Joint Liquidators to prove that the breaches themselves had been the effective cause of the increase in net deficiency. In this case, the Court held that one part of the increase in net deficiency was not attributable to the breaches. This was an increased shortfall in the company’s pension scheme which the Court noted was inherently volatile. Otherwise, however, the breaches were the effective cause of the net deficiency and the equitable compensation was quantified in the sum of £110,230,000. Mr Henningson and Mr Chappell were held to be jointly and severally liable to pay this sum. Counsel for Mr Henningson conceded that joint and several liability is the usual approach to the award of compensation against defaulting trustees and the Court rejected their submission that the Court should order liability to be only several pursuant to section 212(3)(b). The Court also rejected a submission on Mr Henningson’s behalf that this measure of compensation would dissuade office holders from pursuing claims under section 214 and would seek to shoe-horn claims instead under section 212.

Article by Phillip Patterson, first published by LexisNexis here.