Wrongful Trading: Largest ever personal liability imposed upon directors since the Insolvency Act 1

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BDO’s Expert Witness team prepared and delivered expert testimony in the trial brought by the Liquidators of BHS Group Limited and subsidiaries (‘the Group’) against three of the Group’s former directors: Dominic Chappell, Dominic Chandler and Lennart Henningson.

Why were we instructed

BDO’s insolvency expert witness team has been involved in all of the leading insolvency disputes in the UK in the last 8 years. Our specialist team has broad and deep experience in presenting complex financial information to explain companies’ journey down the “financial distress curve” that is consistently referred to in judgments. Most of the cases on which we are instructed have settled in favour of the party which instructed us, shortly following meetings of independent experts. We act for both claimants and defendants.

Background

BHS was sold by Sir Phillip Green’s Arcadia Group (‘Arcadia’) to a company controlled by some of the defendant directors for nominal consideration, with a dowry from Arcadia of c. £39 million and substantial property assets. The Group, which ran around 250 homeware and clothing stores, was making losses of c. £70 million per year and had significant defined benefit pension liabilities. Following the sale, the defendants pursued a strategy of funding trading losses by borrowing against the Group’s property assets whilst implementing a turnaround plan. The plan failed and, as a result, administrators were appointed just over a year later, following which Liquidators from FRP were appointed.

Case key points

The Liquidators were advised by Jones Day.
A claim for misfeasance and wrongful trading against the former Directors was brought.
Trial took place at end of 2023, with judgment in June 2024;
Dominic Chappell was severed from these proceedings and will be tried separately;
Henningson and Chandler were collectively ordered to pay £18m in relation to wrongful trading and individual misfeasance actions, with judgment on the amount of their liability for ‘misfeasant trading’ to follow.
Largest UK wrongful trading award
First time ‘misfeasant trading’ has been considered by the courts, introducing a new avenue to seek recoveries from directors who have failed to satisfy their duties.
A rare example of directors being liable for ‘insolvency-deepening activity’.

Our involvement

Mark Shaw of BDO (and our Managing Partner Elect) was instructed by Jones Day as an Expert Witness for the Liquidators.
Mark was supported by an expert cross-stream team consisting of Business Restructuring colleagues Tim Thornton, Amy Wallace, Scott Bebbington and Shane Crooks and Caryn Deeley from our Forensics and Valuations Services team.
It reflects the valuable input of the entire team that our evidence was referenced 57 times in the judgment.

Expert Witness evidence

The oral and written Expert Witness evidence determined the increased net deficiencies in the Group’s assets at various dates and helped demonstrate the Liquidators’ case that:

the Turnaround Plan prepared by the directors was not viable;
the directors’ borrowing strategy was degenerative and would not bridge the Group to a turnaround; and, on that basis; and
during the 13-month period from acquisition to appointment of administrators, the directors knew or ought to have concluded (at different points) that the Group (i) was insolvent or bordering on insolvency, or an insolvent administration or liquidation was probable and (ii) had no reasonable prospect of avoiding insolvent administration or liquidation. They failed to minimise losses to creditors at the relevant times.

Judgment and its impact

The judgment, handed down on Tuesday 11 June 2024, included numerous references to our evidence, describing it as “reasonable, fair-minded and independent”.

This successful action for wrongful trading (the largest ever award for such a claim) is acutely important as the burden for liability (“no reasonable prospect”) is particularly high. Additionally, the extent to which the directors could rely on advice from, and reports by, professional advisers in mitigating their actions was a significant area of focus.

The case is also significant in that it:

demonstrates the approach a court is likely to take when determining director liability where the directors have acquired failing companies in so called ‘dowry deals’, and for private equity in divesting assets with onerous liabilities on their balance sheets in such deals; and
affirms the importance of directors actively considering whether transactions are likely to promote each relevant company’s success, and the need to consider the interests of creditors in the ‘zone of insolvency’.

The judgment also makes clear thar the courts will scrutinise both the extent to which clients rely on professional advice and the scope and any limitations of that advice.

Key messages

BDO has significant experience of acting as Expert Witness in litigation, with the experience and expertise to deliver real value.
Matters have covered a full range of sectors, situations and jurisdictions, including Technology & Media, Consumer markets, Real Estate & Construction, Shipping, Natural Resources, Manufacturing and Financial services
Types of dispute include breach of contract claims, sale agreement disputes, shareholder disputes, contentious valuations, and competition disputes.
Jurisdictions covered: UK, USA, Dubai, Singapore, Netherlands, Hong Kong, Paris, Canada, Greece, Sweden, including UK Courts (Civil and Criminal), International Chamber of Commerce, London Chamber of International Arbitration, UK Competition appeal Tribunal, UN Commission on International Trade Law, Dubai International Arbitration Centre, Singapore International Arbitration Centre, World Intellectual Property Organisation.
Dedicated team of 10+ senior team members focus on Expert Witness matters, include Matthew McDevitt and Caryn Deeley who have led these assignments for over 10 years.

10+ BDO partners & directors have acted as expert witnesses, including:

Gervase MacGregor (80+ oral testimonies), Sat Plaha (50+ Oral testimonies), Nick Andrews (20+ oral testimonies).
Newer partners with experience as expert witnesses include Rosie Barnes, Tom Robinson and Richard Cameron Williams . Dan Taylor has also recently joined the team leading the Professional Negligence service line and has acted as expert in financial services matters.

Since delivering judgment on Wrongful Trading, Leech J handed down judgment in relation to quantum of damages also citing our team's evidence

For more information, please contact Tim Thornton, Amy Wallace or Scott Bebbington.