The recent decision in Wright v Chappell [2024] EWHC 1417 (Ch) followed the high-profile collapse of the well-known British high street retailer BHS and the one year of trading leading up to it. The claim was brought by the liquidators against the former directors, involving allegations of wrongful trading, misfeasance trading and individual misfeasance. Leech J’s 533-page judgment, later supplemented by a judgment on the quantum of the misfeasance claim ([2024] EWHC 2166 (Ch)), is notable for awarding the highest amount of wrongful trading compensation in an English court to date, as well as being the first decision where it was found that the directors had engaged in “insolvency-deepening” activities.

What happened

In early 2015, BHS and its subsidiaries (the companies) were already trading at a loss and had amassed a significant pension deficit. In March 2015, Retail Group Acquisitions Ltd (RAL), a company established by a Mr Chappell, acquired the companies for £1. Over the next year, the newly appointed directors engaged in a strategy that Leech J described as “selling off the crown jewels to keep trading” even though there was little to no hope of achieving the target business plan. Despite attempts to raise finance by entering into various facility agreements, in April 2016, the companies went into creditors’ voluntary liquidation.

Wrongful trading

Liability for wrongful trading under section 214 of the Insolvency Act 1986 (IA 1986) could be established only once the directors knew or ought to have concluded that there was no prospect of avoiding the companies going into liquidation. The bar for knowledge was a high one and required demonstrating that the directors had no rational basis for continuing to trade, that they knew there was no “light at the end of the tunnel”. However, this did not mean that they needed to know liquidation would be unavoidable within a short period of time or be able to predict precisely when they would have to put the companies into liquidation.

Leech J concluded that, by September 2015, when a third loan facility had been entered to refinance prior borrowing, the directors knew or ought to have concluded that the companies had no real prosect of avoiding insolvent liquidation or administration. The judge was satisfied that, had the directors not engaged in the wrongful conduct, the companies would not have continued to trade past that point and would have gone into administration.

The misfeasance trading claim was based on several alleged breaches of directors’ duties, for which the liquidators sought compensation orders under section 212 of the IA 1986.

The quantum of the wrongful trading claim was £45 million, being the increase in net deficiency (IND) between September 2015 and April 2016. In the exercise of its discretion, the High Court held that it was not appropriate to hold the directors jointly and severally liable, considering the difference in their involvement and culpability. The judge fixed the individual contributions to reflect this.

Mr Chappell was liable for 50% of the amount because he was primarily liable for the IND, he had:

• purchased the companies for £1 without a sustainable working capital facility or any prospect of obtaining one;
• promised not to put the companies into administration for three years (the judge found that this was to enable the seller to distance themselves from the pension deficit and to prevent a moral hazard investigation);
• used the year as an opportunity to plunder the companies; and
• managed to continue trading only by adopting “an insolvency deepening, degenerative strategy of expensive loans”.

The other directors, who had turned a blind eye to Mr Chappell’s misappropriation of assets, were ordered to contribute 10% to 15% of the quantum.

Misfeasance trading

The misfeasance trading claim was based on several alleged breaches of directors’ duties, for which the liquidators sought compensation orders under section 212 of the IA 1986.

An interesting aspect of this case is the recognition that the directors could be in breach of their modified section 172 of the Companies Act 2006 (CA 2006) duty to promote the interests of creditors (the section 172 duty), even though insolvency liquidation was not inevitable, and there was no liability under section 214 of the IA 1986.

This marks the first time a court recognises that a director engaged in “insolvency-deepening” activity, a concept discussed by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25. Leech J found that the directors’ decision to enter a financing agreement in June 2015 amounted to an insolvency-deepening activity. At the time of entering the agreement, the directors knew that without the facility, the companies would not be able to pay the June quarter rent. While there was still a light at the end of the tunnel on that date, and therefore no liability under section 214 of the IA 1986, the modified duty to consider the interests of the creditors had kicked in.

The judge commented that, if the directors had considered whether the facility was in the interests of the creditors and decided in good faith that it was, he would not have found the directors in breach of their section 172 duty at that point. However, that was not the case. If the directors had considered the interests of the creditors, the judge found that they would have decided to put the companies into administration immediately. The facility, along with a subsequent one entered in September 2015, represented “two last desperate throws of the dice”, but the unsecured creditors were “taking all the risk”.

In a supplemental judgment, [2024] EWHC 2166 (Ch), Leech J calculated the quantum of liability in respect of the misfeasance trading claim at more than £110 million.

The liquidators also brought several claims in respect of individual breaches of directors’ duties. Mr Henningson, one of the directors, had received an undisclosed benefit of a £300,000 commission for introducing a lender to the companies, in breach of section 176 of the CA 2006. Other instances of turning a blind eye to Mr Chappell’s breaches, or failing to exercise independent judgment as required by section 173 CA 2006, were also held to constitute examples of individual misfeasance.

Other points to note

The relevance of professional advice

The judge considered whether the fact that the directors had relied on professional advice would not mean that they had not breached their duties. However, the weight which a court would place on advice would depend on the terms of engagement, instructions given to the adviser, any assumptions underlying the advice and the extent to which the advice was relied on. The simple fact that the directors had sought legal advice was not in itself a defence to liability.

Impecunious directors

In respect of one of the directors, Mr Chandler, the judge accepted that he had not received substantial rewards from being a director, and that an award of compensation would potentially be ruinous for him. However, the judge ordered that he should make a contribution of £6.5 million. Not ordering compensation would have sent a green light to risk-taking, or even dishonest, directors who could prove that they had no insurance or personal assets to meet a claim.

Dishonesty and section 1157 relief

The judge dismissed two of the directors’ applications for relief under section 1157 of the Companies Act 2006, which gives the court a discretion to relieve directors from liability if satisfied that they acted “honestly and reasonably”. The conduct of the two directors was therefore relevant to the analysis:

• the fact that Mr Henningson had not been frank with the court meant that the judge was not satisfied that he had acted honestly or reasonably in relation to the breaches, and was one of the reasons for refusing relief. Generally, Leech J found that Mr Henningson has consistently put the interests of RAL and Mr Chappell above those of the companies, and that he had turned a blind eye to, or approved, wrongful conduct; and
• although Mr Chandler had not been dishonest, his conduct in aiding and acquiescing in others’ dishonesty had come “close to the line”, which was one of the reasons for refusing relief.