Magnum Opus on Wrongful Trading and Misfeasance in Relation to the BHS Group

Introduction

In November and December 2023, a trial took place in the Business and Property Courts of England and Wales, Insolvency and Companies List before Mr Justice Leech (“the Judge”) in relation to wrongful trading and misfeasance claims against directors of the BHS Group (“the BHS Case”). The Judge gave judgment on 11 June 2024 (the “Judgment”). The reference is [2024] EWHC 1417 (Ch). The Judgment is very long (no criticism of the Judge intended given the length of the trial and the number of issues raised), hence the phrase “magnum opus” in the title of this article, running to 1160 paragraphs spread over 533 pages. In the Judgment, the Judge carries out an extensive review of the law in relation to wrongful trading and misfeasance. It is obviously impossible in an article to report on everything the Judge said in such a lengthy judgment but  so that Digest readers can get the thrust of what the Judge said without having to read the whole of the Judgment (or even just the long section on the law), a summary of the law regarding wrongful trading and misfeasance claims as per the Judge is set out in this article. For those who cannot wait to know the results of each of the various claims made they are set out towards the end of the article.

Background

On 11 March 2015 the entire issued share capital of the holding company to the British Homes Group was sold to Retail Acquisitions Ltd and on the same date Mr Dominic Chappell and Mr Lennart Henningson were appointed directors of each of the four companies in the group. On various dates in March and April 2015 Mr Dominic Chandler was also appointed as a director to each of the four companies. In April 2016 the board resolved to put the companies into administration and each of the companies subsequently went into creditors’ voluntary liquidation.

The joint liquidators (the “Liquidators”) brought proceedings against the three directors for wrongful trading under s. 214 of the Insolvency Act 1986 (“IA 86”) and for misfeasance under s.212 of IA86. The trial and judgment concern Mr Henningson and Mr Chandler (the “Participating Directors”). The trial against Mr Chappell was postponed. However, judgment was entered against him at a hearing on 25 June 2024.

Wrongful Trading

The Basics: Judgment, [461]-[466]

The current wrongful trading provision, which came into force on 29 December 1986, is set out in s.214 of IA 1986. To satisfy it a liquidator has to establish three things: (1) the company has gone into insolvent liquidation, (2) the respondent to an application was a director of the company when the third condition is satisfied and (3) the director “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”).

As regards the Knowledge Condition, the Judge said that the director in question must either have had actual knowledge (i.e. they actually concluded that the company had no real prospect of avoiding insolvent liquidation or insolvent administration) or should have concluded that this was the case after an objective evaluation of the facts which they knew or the information which was provided to them by the relevant knowledge date (“the Knowledge Date”). In deciding the latter, the Court is required to apply the standard of the reasonably diligent person having both the general knowledge, skill and experience of the director in question (so, of the so-called “Notional Director”).

Undisputed Propositions: Judgment, [466](1)-(11)

Next, the Judge recorded a number of propositions which were not in dispute in the BHS Case.

1. The Notional Director test is to be applied to each individual director and not the board of directors as a whole: Re Continental Assurance plc [2007] 2 BCLC 287 at 385-386.
2. The Court’s enquiry into the functions performed by each director will go beyond consideration of their title and will examine the substance of what they actually do or did: Re Langreen Ltd (in liquidation), unreported, 21 October 2011 at [92].
3. The standard to be expected of each Notional Director will also depend on the size and sophistication of the company: In Re Produce Marketing Consortium Ltd [1990] BCC 569 at 594G-595A.
4. In determining what a director ought to have known, the Court is not limited to consideration of the material available to the director during the relevant period. The Court’s consideration may extend to material to which the director could with reasonable diligence have had access: Re Produce Marketing Consortium Ltd [1990] BCC 569 at 595D-E.
5. A director is supposed to obtain sufficient financial information to monitor a company’s solvency: Re Nine Miles Down UK Ltd [2010] BCC 674 at [15].
6. A director is not liable simply for permitting a company to trade at a time when they know that the company is insolvent either on a balance sheet test or a cashflow test: Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 at [28]. The question is whether they knew or ought to conclude that there was no reasonable prospect of avoiding insolvent liquidation.
7. The principle that directors may properly take the view that the company should continue to trade at a loss has been accepted many times: see, e.g. Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch).
8. The decision to put a company into liquidation is a difficult one and the Court should be slow to encourage directors to put a company into liquidation or administration at the first sign of trouble: Re Continental Assurance plc [2007] 2 BCLC 287.
9. For this reason, if no other, the Court should be very careful to avoid hindsight in scrutinising directors’ decisions: Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 at [41] and [47]
10. If directors appreciate that the company is insolvent but reach the conclusion that they can trade out of insolvency, there must be a rational basis for that conclusion: Re Kudos Business Solutions Ltd [2012] 2 BCLC 65. There must be something more than blind optimism or micawberism (i.e. the unfounded and naïve belief that something will turn up in the future to conquer financial adversity): Roberts v Frohlich [2011] 2 BCLC 625 at [112].

No Reasonable Prospect of Avoiding Insolvent Liquidation/Administration: Judgment,  [469]-[473]

The Judge in the BHS Case was required to decide how the Court should interpret and apply the Knowledge Condition. He held that the Court must apply the statutory test and not substitute its own form of words. However, he said that in the light of the Supreme Court’s decision in BT1 2014 LLC v Sequana [2024] AC 211, the bar is a “very high one” and a liquidator has “to demonstrate that” the director in question “knew or ought to have known that an insolvent liquidation or administration” was inevitable. He added five further points.

First, he said that s.214(3) is framed in negative terms and, in his view, this was no accident. He added that where a company is cashflow or balance sheet insolvent, the usual question for the Court is whether the directors honestly and reasonably believed that there was a prospect that they could trade out of insolvency and, given time, avoid liquidation or administration altogether.

Second, he said that the critical question, therefore, is whether there was “light at the end of the tunnel” and that, as the authorities emphasised, directors are not liable for wrongful trading because the company was insolvent but only if they either knew or ought to have known that insolvent liquidation or administration could not be avoided and was now inevitable.

Third, he said that, nevertheless, the Court must be satisfied that the prospect of trading out of insolvency and avoiding liquidation or administration was more than fanciful and was a reasonable one. The authorities emphasise that a directors’ belief that they could trade out of insolvency must have been a rational one and blind optimism or Micawberism is not sufficient to defeat liability.

Fourth, he said that s.214 must be applied as a whole. The effect of the section is to impose on directors a duty to take every step with a view to minimising the loss to the company’s creditors: BT1 2014 LLC v Sequana [2024] AC 211 at [231].

Fifth, he said that it is important to approach the formulations in Sequana in this context. The Supreme Court were comparing and contrasting a director’s modified duty to promote the success of the company with s.214 and considering in general terms when s.214 was engaged. It is engaged, the Judge said, when directors have no rational basis for continuing to trade and they are only liable for continuing to trade if at that point they fail to take steps to minimise the loss to creditors.

The Knowledge Date: [474]-[477]

The Judge then turned to consider whether the Court could properly find that the directors in a case were guilty of wrongful trading if the Knowledge Date was months or even years before the onset of insolvency. It was  submitted on behalf of the Participating Directors that (a) the Court had to be satisfied that at each Knowledge Date the directors knew or ought to have known that the companies could not avoid insolvent liquidation or administration either by a specified date or within a short period of time; and that, (b) it was not enough to find that they must have known the companies would go into liquidation or administration at some vague point in the future. The Judge refused to accept this as a point of law because, he said, s.214 does not impose a time limit or limitation period. Instead, he said that each case depended on its own facts and that it would create real difficulty if the Court laid down a time limit or bracket, even as a rule of thumb (by reference to what David Richards LJ (as he then was) said in the Court of Appeal in Sequana about it often being difficult to pinpoint the precise moment at which a company becomes insolvent [2019] Bus LR 2178 at [218]-[219]).

The Notional Director: Judgment, [478]-[479]

Next the Judge considered whether s.214(4)(a) imposed a minimum objective standard and not a subjective one. He held that a minimum objective standard was imposed.

Delegation by Directors: Judgment, [480]-[482]

The Judge then looked at the question of delegation by directors. He said that it is trite law that the duties and responsibilities of a director are personal and that a director cannot delegate them to a fellow director or a non-board employee.  The board of directors may delegate management functions to each other or to employees who were not directors: Re City Equitable Fire Insurance Co Ltd [1925] Ch 40 at 426-427, but  even if directors delegated a number of functions to individual directors or employees, it remained their duty to monitor and supervise the discharge of those functions: Re Barings plc (No 5) [1999] 1 BCLC 433 at 489; Re Continental Assurance plc [2007] 2 BCLC 287 at 399; Brumder v Motornet Service & Repairs Ltd [2013] 1 WLR 2783 at [55]. See also Madoff Securities International Ltd (in liquidation) v Raven [2014] Lloyds Rep F.C. 95 at [191]-[194]. Even where a director’s responsibilities are limited to particular areas of expertise, the Judge said that it is not open to that director to leave decisions which were required to be made by the board to their fellow directors: Re Landhurst Leasing plc [1999] 1 BCLC 286 at 346e-h.

Professional Advice: Judgment, [483]-[486]

In relation to professional advice, the Judge accepted that, where directors relied on the advice of reputable professionals, then they will prima facie have fulfilled their duties: Green v Walkling [2008] BCC 256 at [34]-[38]; Burnden Holdings (UK) Ltd v Fielding [2019] EWHC 1566 (Ch) at [158]; Pro4Sport Ltd (in liquidation) v Adams [2016] 1 BCLC 257 at [45]-[46]; Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch) at [176]. The Judge said that the weight to be attached to professional advice would depend on the scope of the engagement, the instructions to the adviser, the knowledge they had or assumptions they were asked to make, the advice they gave (or did not give) and the extent to which the directors relied on the advice (or not). Where a professional adviser did not advise the board that they should put the company into administration, the weight to be attributed to the absence of that advice depended on a detailed assessment of the facts.

The s.214(3) Defence: Judgment, [487]-[490]

As regards the s.214(3) defence, the Judge said that the burden to demonstrate that a director took every step with a view to minimising potential loss to a company’s creditors as they ought to have taken was on a director: Re Idessa (UK) Ltd (in liquidation) [2012] BCC 315 at [113]; Brooks v Armstrong [2016] BCC 661 at [5]-[7] (a case successfully appealed on a different point). Section 214(3) imposed a high hurdle to overcome. It was not enough for directors to prove that they continued trading with the intention of reducing the net deficit of the company. They must show that it was designed to minimise the risk of loss to individual creditors: Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch) at [243]-[246]. What “every step” will be must depend on the facts and, a director may be able to rely on s.214(3) even if  they do not take insolvency advice or consider whether to put the company into insolvency proceedings (although if they do not take advice or consider insolvency proceedings it will be more difficult for them to demonstrate that they properly considered whether continuing to trade would reduce the deficiency and what the risks were to individual creditors).

Causation: Judgment, [492]-[498]

Turning to causation, the Judge recorded that it was common ground that it is necessary for a liquidator to prove causation in the sense that there must be a causal connection between the relevant wrongful conduct and the losses suffered by the company: Re Continental Assurance plc [2007] 2 BCLC 287 at [378]; Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch) at [241]-[242]; Re Chandler v Wright [2022] EWHC 2205 (Ch)  at [22](4). In this respect, however, the Judge said that it was not necessary to prove that this conduct was the sole cause of the losses suffered: Briscoe v Milner [2002] 1 BCLC 368 at [262]-[264].

Court’s Discretion: Judgment, [510]-[518]

Section 214(1) confers a discretion on the Court to declare that a director is liable to make such contribution (if any) to the company’s assets as it considers proper. The discretion, the Judge indicated, is not a wide one but enables the court to adjust the remedy to the circumstances of the particular case: Commissioners for HM Revenue & Customs v Holland [2010] 1 WLR 2793 at [124]. See also Liquidator of West Mercia Safetyware Ltd v Dodd [1988] BCLC 250 at 253c-e.

Quantum: Judgment, [511]-[512]

The Judge said that it was common ground that the maximum amount which the Court could declare directors liable to contribute was the increase in net deficiency in the assets of the company. The Judge also recorded that this was treated as the starting point in Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch) at [241] and Brooks v Armstrong [2016] BCC 661at [63]-[74].

Misfeasance

The Basics: Judgment [519]-[520]

1. 212 IA 1986 provides a procedure for recovery of property or compensation by a liquidator against, among others, an officer of a company. S.212 does not create a new cause of action or new substantive rights. However, it permits a liquidator to enforce an existing cause of action which a company has against a director.

In particular, s.212 IA 1986 enables a liquidator to bring claims against directors for breach of their duties under the Companies Act 2006 (“CA 2006”). So a liquidator can use it to bring claims against directors for breach of their duty (1) to act within their powers (s.171 CA 2006), (2) to promote the success of the company (s.172 CA 2006), (3) to exercise independent judgment (s.173 CA 2006), (4) to exercise reasonable care, skill and diligence (s.174 CA 2006) (5) to avoid conflicts of interest (s. 175 CA 2006).(6) not to accept benefits from third parties (s. 176 CA 2006) and (7) in relation to proposed transactions or arrangements (s. 177 CA 2006). The Judge addressed each of these to the extent he considered necessary for the purpose of the BHS Case.

The Liquidators in the BHS Case alleged that the directors had breached their duties under ss. 171 to 177 CA 2006.

Duty to Act within Powers: Judgment, [521]-[532]

1. 171 provides that “A director of a company must – (a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred”

The Judge accepted that a director who enters into a transaction knowing that it has not been authorised by the board acts in breach of s.171(a) (assuming the transaction is not ratified).

The Judge declined to accept that the failure to call a meeting or to minute a meeting properly was a breach of s.171(a).

As regards s.171(b) the Judge held that the test was objective in the sense that it its unnecessary to demonstrate that a director knew or believed that they were acting for a collateral or improper purpose. However, the Judge also said that the test was subjective in the sense that the Court is required to examine the purpose or motive for which the power exercised and decide whether it was a proper purpose.

In addition to the above, the Judge said that he saw no reason why a director should not be held to have committed a breach of s.171(b) if they  act for the purpose of benefitting a third party at the expense of the company even though the director receives no personal benefit and acts out of friendship or to please a third party out of a mistaken case of loyalty.

Duty to Promote the Success of the Company: Judgment, [533]-[546]

S.172 CA 2006 provides for a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so, having regard, among other things, to six matters specified in section 172(1)(a) to (f). .

The Judge said that the test was subjective: Re Regentcrest plc v Cohen [2001] 2 BCLC 80 at [80]. He also said there were exceptions to the rule that it was a subjective test. It is well established that the Court should  apply an objective test where the director did not consider whether their act or omission was in the interests of the company: Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74E-F; Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598 at [138]; Re HLC Environmental Projects Ltd [2014] BCC 337 at [92](b). Equally, where a very material interest, such as that of a large creditor (in a company of doubtful solvency, where creditors’ interests must be taken into account) is unreasonably overlooked and not taken into account, the objective test should be applied: HLC Environmental Projects Ltd at [92](c). The Judge then referred to BT1 2014 LLC v Sequana [2024] AC 211 and what the various members of the Supreme Court (Lord Reed, Lord Hodge, Lord Briggs, Lady Arden and Lord Kitchin) had said about the duty of directors in certain circumstances to have regard to the interests of creditors.

Duty to Exercise Independent Judgment; Judgment, [547]-[548]

S.173 CA 2006 provides that a director of a company must exercise independent judgment.

The Judge said that a director may not defer to the wishes of a shareholder, another director or another personality without bringing their own independent judgment to bear on the issue: Bishopsgate Management Ltd v Maxwell Ltd (No 2) [1993] BCC 120; Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62; Lonhro Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 at 643E-G.

Duty to Exercise Reasonable Care, Skill and Diligence: Judgment, [549]-[551]

S.174 CA 2006 provides that a director must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director has.

The Judge said that directors are under a duty to inform themselves about the company’s affairs on appointment: Sequana at [90], per Lord Reed. He also said that the Court must be satisfied that the individual decision which is the subject matter of the claim went beyond an error of commercial judgment and was one which no reasonable director would have reached applying the Notional Director standard: Optaglio Lt v Tethal [2015] EWCA Civ 1002 at [23]; Sharp v Blank [2020] EWHC 1870 at [627].

Duty to Avoid Conflicts of Interest: Judgment, [552]-[553]

Ss.175 to 177 codify the no conflicts rule for fiduciaries as it applies to directors. Whether a director’s direct or indirect interest conflicts (or may conflict) with the interest of the company is to be ascertained by asking whether a reasonable man, looking at the relevant facts, would think that there was a real, sensible possibility of conflict: Breitenfeld UK Ltd v Harrison [2015] EWHC 399 at [60](e) and (f). Conflicts of interest are identified not by shoe-horning the facts of a given case into various pre-determined categories of relationship but by application of the general principle: Breitenfeld at [67].

Duty Not to Accept Benefits from Third Parties: Judgment, [554]-[564]

S.176 CA 2006 codifies the element of the conflict rule which prohibits a fiduciary from exploiting his or her engagement for personal benefits (including the acceptance of secret commissions or bribes) without full disclosure of all material circumstances.

The Judge said that law was particularly stringent in relation to claims against an agent who has received a bribe or secret commission: FHR European Ventures LLP v Cedar Capital Partners LLC [2014] AC 250 at [42]. The stringency, he said, is reflected by the fact that an agent who accepts a bribe will hold it on trust for his or her principal even when there is no specific transaction in view: Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119; Fiona Trust & Holding Corp v Privalov [2010] EWHC 3199 at [73]. It is also unnecessary for the principal to prove the secret commission was paid or received dishonestly or that either party realised that it was unlawful or wrong to give or take a secret commission: Re a Debtor (No 229 of 1927) [1927] 2 Ch 367 at 376.

In addition, the Judge said that it is not a defence for the agent or fiduciary to prove that the secret commission was received by a connected or associated company: Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256; Shell International Trading & Shipping Co Ltd v Tikhonov [2010] EWHC 1399; Shetty v Al Rushaid Petroleum Investment Co [2013] EWHC 1152 (Ch). He also said that it may be appropriate to draw the inference that the agent knew that the conduct was unlawful or wrong from the use of an offshore company and attempts by the agent to distance themselves from the bribe or secret commission.

Causation: Judgment, [492]-[498]

In deciding whether a breach of duty by directors causes loss, the Judge said that the Court must consider what would have happened if the directors had complied with the relevant duties and ask the counter-factual question whether the company would have suffered loss: Lexi Holdings plc v Luqman (No 2) [2008] 2 BCLC 725. In answer to that question the Court must assume that the directors would have complied with all their duties in the relevant counter-factual situation: Lexi Holdings plc v Luqman (No 2) [2009] 2 BCLC 1, CA.

For the purpose of the misfeasance claims the Judge said that he had to apply Lexi Holdings (No 2) and ask himself whether the company in question would have continued trading and suffered the other losses if the directors had not committed any breaches of duty which he may have found against them. He said that this was particularly important in relation to the Trading Misfeasance Claim (described below) where it was alleged that if the directors had complied with their duties the relevant companies would have gone into administration or insolvent liquidation at an earlier date.

Ratification: Judgment, [565]-[567]

In relation to ratification, the Judge said that shareholders cannot authorise or ratify a breach of duty once the modified duty to act in good faith in the interests of creditors arises: Sequana at [91], per Lord Reed.

The Decision on the Wrongful Trading Claim

There was no dispute that the four BHS companies involved in the BHS Case had gone into insolvent liquidation or that the Participating Directors were both directors on each of the alleged Knowledge Dates. The central issue was whether these directors had the requisite knowledge as to the companies’ financial positions on any of the Knowledge Dates.

The Liquidators’ case was brought by reference to six alleged Knowledge Dates: 17 April 2015, 6 May 2015, 26 June 2015, 13 July 2015, 26 August 2015 and 8 September 2015.  The Judge dismissed the wrongful trading claim in relation to the first five dates and held that it was not until 8 September 2015 that the Participating Directors ought to have concluded that insolvency was inevitable. The Participating Directors were held to be liable for the increase in the net deficiency in companies’ financial position from that date and the Judge ordered each of them to contribute, on a several basis, £6.5 million to the assets of the companies. This compares with the Liquidators’ claim for wrongful trading of well in excess of £100 million.

The directors had taken professional advice. The Judge decided that the question whether the companies had a reasonable prospect of avoiding insolvent liquidation or administration was not one on which the advisers could or should have been expected to express an opinion; it was a question for the directors. The advisers could not have been expected to do more than identify the legal issues to be considered by the directors and the severity of the financial problems.

The Decision on section 172 CA 2006: “The Trading Misfeasance Claim”

The Liquidators argued that had the directors complied with their duty to take into account the interests of creditors they would have concluded that the companies should not have continued trading after specified dates, which were the same as the Knowledge Dates. This breach of duty claim is referred to in the Judgment as “the Trading Misfeasance Claim”.

The Judge, having dismissed the Liquidators’ wrongful trading claim based on the Knowledge Date of 17 June 2015 on the grounds that “there was some light at the end of the tunnel” and the directors were entitled to rely on an assessment that the turnaround plan could be achieved, decided that the Participating Directors’ duty to consider the interests of creditors existed at that date and the companies should have ceased to trade.

The Judge dismissed the trading misfeasance claim in relation to 17 April 2015, 6 May 2015, 13 July 2015 and 26 August 2015. The Judge, having dismissed the Liquidators’ wrongful trading claim based on the Knowledge Date of 17 June 2015, decided that the directors’ duty to consider the interests of creditors arose by that date and that the directors had breached this duty. The Judge held that if the Participating Directors had complied with their duties on or before 26 June 2015 and on or before 8 September 2015 the companies would not have continued to trade but would have gone into insolvent administration immediately.

The Judge did not make any findings in relation to the appropriate measure of damage and said that he would give the parties the opportunity to make further submissions on that issue. The hearing on this issue took place on 24 June 2024.

The Decisions on the Other Breach of Duty Claims

Of the eight transactions challenged by the Liquidators on the grounds that other statutory directors’ duties had been breached, the Judge found in favour of the Liquidators on three of them.

The Judge held that one of the Participating Directors was liable for other individual breach of duty claims for £300,000, £521,976, £1,500,000 and £1,671,236.70.

The Judge held that the other one of the Participating Directors was liable for £1,671,236.70.

Directors’ Insurance Cover

The Participating Directors had insurance cover. It was limited to £20 million. The judgment, together with interest and costs (and defence costs), will be more than that. Notwithstanding this, the Judge refused to reduce the Participating Directors’ liability. The Judge said that it had been submitted to him that “that to do so would be to send the wrong message to risk-taking directors that they could escape liability if they did not obtain adequate cover to indemnify themselves against wrongful trading”. The Judge agreed with that submission.

Consequentials Hearing

The Judge held a consequentials hearing on 24 June 2024 on equitable compensation in respect of the “Trading Misfeasance Claim” and whether the directors are jointly and severally liable under s.172(3) CA 2006 to pay equitable compensation equal to the increase in net deficit from 26 June 2015. The Judge reserved judgment. The Digest will report further on this when the result is known. At the same hearing, on 25 June 2024, judgment was entered against Dominic Chappell for about £50 million.

Comment

The Judge’s judgment in the BHS Case, which came some eight years after BHS collapsed with debts of more than £1 billion and with the loss of some 11,000 jobs, is an important one for all directors and  for those who practice restructuring and insolvency law and/or company law (whether advising directors or insolvency practitioners). Not only is there  a substantial award against the directors  – it has been said to be the largest ever wrongful trading award – which should be a warning to all directors and those advising them, but it also contains valuable guidance as to what directors can and cannot do to avoid breach of duty claims as well as a wrongful trading claim in circumstances where a company is required to take the interests of its creditors into account. The Judgment also raises serious issues on the extent to which directors can protect themselves by reliance on professional advice.

Perhaps the most intriguing aspect of this judgment, however, is the Judge’s decision that the Liquidators have a claim for breach of section 172 on the grounds that there was a breach of duty to take into account the interest of creditors from 16 June 2015 (a date the Judge decided the Knowledge Condition for a wrongful trading claim was not satisfied, having decided it was not satisfied until September 2015).  From the analysis in the BHS Case, a liquidator may be able to make the date from which a director is liable earlier with a trading misfeasance claim than is possible with a wrongful trading claim with a potentially significant increase in the amount of a directors’ liability.

Some may say that this is wrong, unfair or artificial and that the only potential liability in this regard should be as Parliament set it, namely for wrongful trading under s.214, in circumstances where the provisions of the statute are satisfied. But for that we shall have to wait and see if there is an appeal, and if so what the Court of Appeal say, or whether other judges at first instance follow it. In the meantime, directors should be aware that all liquidators, and those who advise them, will have noticed this judgment and the potential additional recoveries it may afford to insolvent estates.

Furthermore, those advising directors might like to suggest to their client directors that they increase their insurance cover to protect against the sort of liabilities that arose for the Participating Directors in the BHS Case (and doubtless, in the case of many other companies, potentially much greater liabilities).

Ryan Perkins from South Square appeared for the successful Liquidators.