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Insolvency, Company lawTuesday 11 June 2024

Judgment handed down in Re BHS Group Ltd

The much-anticipated BHS judgment is here.

For those without the time to digest all 533 pages immediately, we have summarised the key points below:

    1. The Court dismissed the Joint Liquidators’ primary case on wrongful trading, namely that the directors knew or ought to have known that insolvent administration/liquidation was inevitable within just 1 month of their appointment; and dismissed the claim in respect of 4 further dates of knowledge. It is good news for directors that the Court took into account the reality on the ground for the BHS directors during a challenging period.
    2. The Court accepted that by 8 September 2015 (the very last of the alternative dates of knowledge pleaded by the JLs) the directors ought to have known that insolvent administration/liquidation was inevitable. In doing so, the Court attached little weight to the top tier professional legal and accounting advice received by the BHS Group and the fact that none of those professionals advised insolvent administration/liquidation inevitable. Throughout the relevant period, the BHS Group instructed and worked closely with some of the most well-regarded and experienced legal and accountancy firms in the UK. The Companies sought and received advice on cash flow, wrongful trading, directors’ duties and in relation to certain transactions. The judgment therefore raises very serious questions of wider importance about the utility of (very expensive) professional advice if directors are unable to rely on it in precisely the circumstances of this claim.
    3. The Court did however agree with the arguments made on behalf of the directors that liability should be several due to differing levels of involvement/culpability. Mr Henningson was found liable for 15% of the IND after September 2015 – which meant that he was ordered to pay £6.5m in respect of the wrongful trading claim (as opposed to circa £160m claimed by the JLs).
    4. The Court dismissed 5 of the 8 misfeasant transactions claimed by the JLs because they failed to persuade the Court that any breaches of duty were causative of the loss suffered. Mr Henningson did not ‘cause’ the transactions in any real sense and, where it was alleged that he ‘permitted’ the transactions (i.e. a failure to act), the Court had to consider what would have happened if Mr Henningson complied with his duties. The Court accepted that, had Mr Henningson protested or refused to authorise the transactions, the dominant director and majority shareholder (Mr Chappell) would simply have engineered his removal and the transactions would have taken place in any event. This aspect of the judgment is therefore an important reminder to give causation real thought in “nonfeasance” claims where the allegation is effectively that a passive director permitted a transaction.
    5. Perhaps the most surprising aspect of the judgment is the Court’s acceptance of the Joint Liquidators’ novel claim for “misfeasant trading” from June 2015 in circumstances where it also held that Companies were not cash flow insolvent at this date and insolvent administration/liquidation was not inevitable at this date. Confusingly, the Court found that, had the directors complied with their CA 2006 duties, they would have put the Companies into administration/liquidation in June 2015 (despite finding that insolvent administration/liquidation was merely probable in June 2015 and that wrongful trading did not commence until September 2015).
    6. The judgment also currently leaves open the critical question as to the appropriate level of compensation for this claim of misfeasant trading. It is suggested here that the directors cannot sensibly be held responsible for the entire increase in the net deficiency in circumstances where they are found to have breached their duty in respect of individual transactions only (one would assume the loss would be the discrete loss caused as a result of entering into those transactions) and the Court has found that insolvent liquidation/administration at that time was not inevitable. Loss based on the entire increase in the net deficiency would allow liquidators to shoe-horn wrongful trading into a misfeasance claim and by-pass the stringent knowledge test i.e. that liability only follows where a director knew or ought to have known that insolvent administration/liquidation was “inevitable” (not “probable”).

Lexa Hillard KC and Rachael Earle acted for Mr Henningson.

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