This landmark judgment, handed down on 11 June, got here some eight years after BHS collapsed into administration on 25 April 2016 with a £571m pensions shortfall, 13 months after its acquisition from Sir Philip Inexperienced’s Taveta Group by Retail Acquisitions Restricted (RAL), an organization managed by Dominic Chappell, a former bankrupt with no retail expertise.
In a judgment working to 533 pages, Mr Justice Leech upheld the joint liquidators’ claims, granting the largest-ever award for wrongful buying and selling and the primary award for misfeasant buying and selling within the UK, towards two former administrators of BHS.
The joint liquidators issued proceedings in December 2020 towards three former administrators of the group firms: Chappell, Lennart Henningson and Dominic Chandler, for wrongful buying and selling, buying and selling misfeasance and particular person misfeasance claims underneath the Insolvency Act 1986. The judgment is binding solely on Henningson and Chandler, with the claims towards Chappell to be decided at a later date attributable to his ill-health.
A director shall be responsible for wrongful buying and selling if, at a while earlier than the graduation of the winding up of the corporate, they knew or should have identified that there was no cheap prospect that the corporate would keep away from going into bancrupt liquidation (the data situation), except, from that date, the director took each step to minimise the potential loss to collectors (s.214 of the act).
The joint liquidators alleged the data situation was happy by six ‘data dates’ and Leech J performed a painstaking evaluation of the proof (together with minutes, handwritten notes and textual content messages) in relation to every. In assessing constructive data, the courtroom utilized a ‘notional director’ take a look at, which might: be utilized to every particular person director; ‘look at the substance of what they really did’; be modified topic to the scale of the corporate; and think about not solely the fabric obtainable, however materials to which the director ‘might with cheap diligence have entry’, together with ‘enough monetary data to observe the corporate’s solvency’.
S.214 shall be engaged when bancrupt liquidation/administration was inevitable, with the essential query being whether or not there was ‘gentle on the finish of the tunnel’. Administrators usually are not liable merely as a result of an organization is bancrupt, however somewhat the place administrators have ‘no rational foundation’ for persevering with to commerce and fail to take steps to minimise the loss to collectors.
Administrators can’t disguise behind delegation or skilled recommendation: it stays their obligation to oversee the discharge of delegated capabilities. Whereas, usually, a director who obtains skilled recommendation ‘has gone a good distance in direction of performing his duties with cheap care’, in apply, the burden which the courtroom will connect to any recommendation will depend on the scope of the engagement, together with data offered, assumptions, recommendation given and the extent of the administrators’ reliance on it.
The courtroom discovered that the data situation was happy on the newest alleged ‘data date’, when the administrators knew the group was loss-making, that there was no prospect of acquiring finance, and no plan to cope with the pension deficit. On this foundation, the businesses ought to have gone into administration in September 2015, somewhat than April 2016.
The courtroom has discretion underneath s.214 concerning contributions by administrators, with the start line, and most, being the rise within the web deficiency (IND) of the property generated by persevering with to commerce between the date the data situation is happy and the date of insolvency. Right here the IND was £45m, with the courtroom holding Henningson and Chandler severally responsible for 15%: £6.5m every. The courtroom declined to scale back legal responsibility on the premise that the group’s D&O insurance coverage wouldn’t cowl the complete claims towards them.
S.212 of the act gives for restoration by a liquidator of property or compensation from a director the place the director has breached their duties to the corporate. Not like s.214, this doesn’t create a brand new reason for motion however somewhat permits a liquidator to implement an present reason for motion which the corporate has towards a director.
The joint liquidators claimed that the administrators had breached quite a few duties underneath the Corporations Act 2006, together with: s.171 (obligation to behave inside powers); s.172 (obligation to advertise the success of the corporate, modified the place there’s a actual danger that insolvency may come up to incorporate an obligation to have regard to the pursuits of collectors); and s.176 (obligation to not settle for advantages). Apparently, the courtroom held that there shall be a breach of s.172 the place the administrators undertake ‘insolvency-deepening exercise’, even the place bancrupt liquidation just isn’t inevitable and there’s no breach of s.214.
The courtroom held that Henningson and Chandler had failed to think about the pursuits of the businesses’ collectors in breach of the modified obligation earlier than getting into into sure mortgage agreements, and that had they complied with their duties the businesses wouldn’t have continued to commerce and would have entered administration in June 2015. The quantum of this declare is but to be decided however might be as a lot as £133.5m.
The joint liquidators additionally introduced ‘particular person misfeasance’ claims in respect of particular transactions, together with for secret commissions; gross sales at an undervalue; and third-party funds. Whereas not all of those claims succeeded, the courtroom held Henningson and Chandler liable in mixture for an extra £5.6m.
This judgment represents a major victory for liquidators. It should function a cautionary story for administrators, highlighting not solely the significance of exercising unbiased judgement but additionally of offering any skilled advisers with full context when acquiring recommendation.
Clare Hennessey is particular counsel at Jenner & Block. Companions Lizzie Shimmin and Jason Yardley additionally contributed to this text
