Kirkland Alert

English Court Imposes >£18 Million Personal Liability on Former Directors of BHS for Breach of Directors’ Duties and Wrongful Trading

At a Glance

The English Court issued its 533 page judgment in the claim brought by the liquidators of British Home Stores, the major UK retailer, against two of its former directors.

Upholding the liquidators’ claims, the Court granted the largest-ever UK wrongful trading award and the first-ever award for “misfeasant trading”. 

The Court examined in great detail the events and decisions surrounding BHS’ acquisition by Retail Acquisitions Ltd (RAL), the subsequent attempts to restructure and refinance the business and the ultimate failure to secure adequate funding, leading to BHS’ collapse. Unusually, the case against the principal director/shareholder, Dominic Chappell, was “severed” from that against other directors and remains to be determined. 

The Court held the two directors liable for: 

  • Wrongful trading, for £6.5 million each, toward a £45 million increase in net deficiency in the companies’ assets between the date on which (a) the directors knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation or administration (September 2015) and (b) the companies actually filed for administration (April 2016, c.7 months later); 
  • “Misfeasant trading” – a novel claim for breach of statutory duties in continuing to trade, including failing to have sufficient regard to creditors’ interests (when, if directors had complied with their duties, the companies would have entered administration in June 2015, c.10 months earlier);
    • The quantum of this liability will be determined in due course, but could be up to £133.5 million (again, representing the increase in net deficiency between the relevant dates); and
  • Various specific “individual misfeasance” transactions which breached various statutory directors’ duties, in an aggregate amount of £5.6 million.

This case is a rare example of insolvency practitioners successfully holding directors liable for “insolvency-deepening activity” — in this case, against the backdrop of a shareholder “[using] its ownership… to extract as much cash as possible over the short period of its ownership”. 

This case vividly illustrates that the Court:

  • Will conduct an extensive analysis of directors’ correspondence, including emails, board minutes, handwritten notes of meetings and text messages – some of which may make for uncomfortable reading;
  • May find that taking and relying upon legal advice is not sufficient to protect directors: it is the duty of the directors themselves, and not advisors, to decide whether there is a reasonable prospect of avoiding insolvent liquidation; and
  • May give less weight to minutes prepared in advance by lawyers to approve a particular transaction (and in contrast, may prefer to rely on minutes that are clearly intended to be contemporaneous record). 

The judgment underlines the critical importance of directors actively considering whether particular transactions are likely to promote the success of each company to which they are appointed, including taking account of creditors’ interests in the “zone of insolvency”. 

It is possible that the judgment may be appealed.

Read our detailed Alert.

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