Former directors of BHS liable to pay £110 million for misfeasance

The High Court has ordered two former directors of British Home Stores ("BHS") to pay equitable compensation of £110 million in respect of misfeasance claims brought by the former retailer's joint liquidators: Wright v Chappell [2024] EWHC 2166 (Ch).

This ruling marks the first recorded decision concerning quantum for breach of the so-called "creditor duty" (referred to in this case as "misfeasance trading") since the Supreme Court's 2022 decision in BTI v Sequana (see here).  

Background

In June 2024, the High Court (Mr Justice Leech) delivered a 533-page judgment ruling in favour of BHS's joint liquidators in claims brought against former directors for wrongful trading (under section 214 of the Companies Act 2006) and misfeasance (under section 212 of the Insolvency Act 1986). See our previous update here.

In that judgment, two of the former directors, Lennart Henningson and Dominic Chandler, were ordered to contribute substantial sums to BHS's assets to compensate for wrongful trading: £10.4 million and £8.1 million respectively. They were also found liable for misfeasance. However, the issue of quantum in relation to that aspect of the claim was reserved to allow for further submissions on the appropriate measure of equitable compensation.

Shortly before a hearing of those submissions later in June, Mr Chandler reached a settlement with the joint liquidators, agreeing to pay £4.23 million in respect of all claims against him. He therefore played no further part in the proceedings.

At the hearing, Leech J gave an ex tempore (ie oral) judgment in which he held that a third former director, Dominic Chappell, was also liable for both wrongful trading and misfeasance. Although Mr Chappell had also played no part in that hearing, the judge found he had "no real prospect of defending any claims against him" and ordered him to pay £21.5 million in respect of wrongful trading.

In his latest judgment, Leech J addressed the quantum of equitable compensation for which Mr Henningson and Mr Chappell were liable in relation to the misfeasance claims.

The issues

In the original June judgment, the directors had been found liable for misfeasance on two out of six "Knowledge Dates" identified by the joint liquidators. These were 26 June 2015 ("KD3") and 8 September 2015 ("KD6"), being dates on which the directors authorised BHS group companies to enter into new finance arrangements. On both of these dates, it was said that the directors had breached their statutory duties under sections 171, 172(3) (the so-called "creditor duty") and 174 of the Companies Act 2006. The judge held that, had the directors complied with those duties, the companies would not have continued to trade and would have gone into administration sooner than they did (on 25 April 2016).

At the subsequent quantum hearings, the joint liquidators submitted that the directors should be ordered to pay an amount equal to the increase in net deficiency of the companies' assets (or "IND") which resulted from the companies continuing to trade after they should have been put into administration.

There were essentially four main issues before the court:

1. What is the appropriate measure of compensation in a misfeasance claim of this nature?
2. What is the correct test for causation?
3. What is the total IND?
4. Where two or more directors have caused the same loss in breach of their fiduciary duties, is their liability several or joint and several?

Measure of compensation

Leech J explained that, given the amount at stake and the fact that it involved a developing area of the law, he had reserved for further hearing the quantum of equitable compensation recoverable for the breaches of what he described as the modified "Sequana duty" (or, as referred to above, the so-called "creditor duty" under section 172(3) of the Companies Act). As he later noted, although he had also made findings that Mr Henningson had committed breaches of his duty of care under section 174 of the Companies Act – for which presumably the remedy of equitable compensation would have been unavailable – his "principal findings" concerned the breaches of fiduciary duties under sections 171 and 172 (albeit the latter appears to have been the predominant focus of the judgment).

Leech J accepted the joint liquidators' argument that the correct starting point for the assessment of equitable compensation for misfeasance under section 212 is the total IND of the relevant company's assets where the company continues to trade as a result of individual breaches of duty. He rejected Mr Henningson's argument that compensation is limited as a matter of law to the loss suffered by the company arising out of a single transaction or single venture.   

The judge acknowledged that, in the case of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, the measure of compensation had been limited to a single transaction. There, the director had been ordered to repay £4,000 which he had improperly used to reduce the amount which he owed under a personal guarantee. He also noted Re Simmons Box (Diamonds) Ltd [2002] BCC 82, where the question had been whether a director was liable for the loss of a specific asset belonging to the company. However, in the judge's view, both of these decisions were distinguishable. In both cases, the relevant companies went into an insolvency process very shortly after the transaction in question. They were not cases where the purpose of the transaction had been to enable the company to continue to trade. Where that is the purpose, Leech J said, compensation is not necessarily so limited.

Causation

In the judge's view, it was not sufficient for the joint liquidators to establish "but for" causation. For the directors to be liable, this required more than showing that, without the directors' breaches of duty, the companies would not have continued to trade and, as a consequence, the IND would not have increased. The joint liquidators had to prove that those breaches were an effective cause of the losses suffered by the company by continuing to trade (albeit not the sole or only effective cause).

Illustrating this point, the judge cited the case of Re Continental Assurance Co of London Ltd (No 4) [2007 BCLC 287. There, it was said that the company's books and records had been so inadequate that it had been impossible at any particular time to ascertain whether or not it was solvent. The failure to keep proper accounts constituted a breach of duty by the company's directors and that breach was said to have exposed the company to the risk of suffering losses of the type alleged by its liquidators. Yet, according to Park J in that case, that breach was no more than the occasion for the losses the company suffered by continuing to trade. The company would have ceased trading had proper accounts been prepared. But the losses themselves were unrelated to this breach of duty.

In the present case, Leech J was satisfied that the directors' breaches of duty were the effective cause of the total IND and, in particular, the reduction in the companies' property assets. They were not just an occasion for those losses. Had Mr Henningson complied with his duties, the judge said, the companies would not have entered into the relevant financing arrangements but would instead have gone into administration. Mr Chappell's strategy, he said, had been to sell off the companies' "crown jewels" in order to continue trading even though there was little or no chance of achieving their target business plan (and Mr Henningson ought also to have known this).

The one exception concerned a £19 million increase in the companies' pension deficit.  The judge found that the directors' breaches had not been an effective cause of this increase. The pension deficit was extremely volatile, and its fluctuations were unrelated to those breaches. Accordingly, the judge held that this amount should be excluded from the equitable compensation awarded. 

Calculation of the total IND

The parties had agreed that the total IND between KD3 and 25 April 2016 (when the company went into administration) was £133.5 million. They also agreed that the IND was £45.5 million between KD6 and 25 April 2016 (although all of this amount was included within the first calculation from KD3 and was therefore not separately recoverable).

After adjusting for the £19 million increase in the pension deficit unrelated to the breaches and also crediting the £4.23 million paid by Mr Chandler to settle the claims against him, it was held that the total equitable compensation payable by Mr Henningson and Mr Chappell was £110 million.

Joint and several liability

Mr Henningson submitted that, under section 212(3)(b), the court has the power to apportion liability between individual directors in the same way that Leech J had done previously in the context of his judgment on wrongful trading.

The judge doubted whether his discretion was sufficiently broad to enable him to impose liability on a several, rather than joint and several, basis. In any event, the judge confirmed he would not have exercised his discretion in the manner sought. In this context, Leech J noted that section 212 is primarily designed to enable a liquidator to short cut the process of issuing separate proceedings for breach of directors' duties and to obtain a summary remedy in clear and obvious cases. Indeed, there was no reason, in the judge's view, why the joint liquidators could not alternatively have commenced separate proceedings against Mr Henningson to recover equitable compensation for breaches of sections 171 and 172 of the Companies Act. In those circumstances, the judge noted, there would have been no discretion to apportion liability. As such, the joint liquidators should not be denied full compensation in this case simply because they opted to bring their case under section 212.

Although the judge acknowledged he had previously exercised his discretion to apportion liability in respect of the wrongful trading claims, he explained this was because he was following Re Continental and was adopting a practice which has received judicial recognition.

Accordingly, Mr Henningson and Mr Chappell were ordered to pay the sum of £110 million on a joint and several basis.