Court makes substantial "wrongful trading" award against former BHS directors

In a case brought by the liquidators, the High Court found two former directors liable for wrongful trading; that is, continuing to trade when they knew or should have known that there was no reasonable prospect of avoiding insolvency (section 214 of the Insolvency Act 1986).

The Court also found that the former directors had breached duties under the Companies Act 2006, including the duty to act within their powers and for a proper purpose (section 171), the duty to promote the success of the company (section 172), and the duty to exercise reasonable care, skill and diligence (section 174).

The former directors in question, Lennart Henningson and Dominic Chandler, were ordered to pay substantial sums by way of recompense: £10.4m and £8.1m respectively. The Court declined to limit the award by reference to the former directors' insurance cover or ability to pay, saying that doing so would send "the wrong message" to risk-takers.

The Court did not determine the liability of another, high-profile, former director, Dominic Chappell. The liquidators' claims against him are to be considered separately.

Cases about wrongful trading are relatively unusual. The Court's judgment will therefore be studied carefully. This will take time: it runs to more than 500 pages. But, for distressed companies with underfunded DB schemes, two points are apparent:

• It is vital that directors obtain information and advice about the pension deficit, and about the implications of expected developments such as a dilution of the employer covenant or a fresh valuation. Messrs Henningson and Chandler failed to "inform themselves fully" about such matters. That amounted to a breach of their duties under section 174.
• If there is not already a "rational plan" to deal with the deficit, the directors should, as a priority, work with other stakeholders to put a plan in place. The Court recognised that this might take time but, for Messrs Henningson and Chandler, the judge effectively drew the line at 8 September 2015, some six months after they took office. By that stage they had had the opportunity to engage with the trustees and The Pensions Regulator, yet no "rational plan" was in place. In the circumstances the former directors were fixed with knowledge for wrongful trading purposes. They should have known that BHS would not be able to afford to pay future pension contributions, and accordingly that there was, for the company, "no light at the end of the tunnel".