BHS Decision: To Trade or Not to Trade?

That Is Now the Question for Directors of Distressed Companies Following the Recent High Court Ruling of British Home Stores.

Two former directors of British Home Stores (“BHS”) have been found personally liable for wrongful trading and ‘misfeasance trading’ in a decision made by the English High Court which will undoubtedly cause directors of distressed companies considerable discomfort whilst trading in the zone of insolvency. The case highlights the importance of directors seeking independent legal advice and ensuring that each director takes personal responsibility for ensuring compliance with its statutory and fiduciary duties.

Background and Timeline

1990s: BHS, under the ownership of Arcadia and Sir Philip Green, was a highly successful retailer and stalwart of the UK high streets.

Early 2010s: As consumer tastes evolved, BHS lost its competitive edge and by 2015, had accumulated losses of £442 million. In the seven months prior to the collapse of the company BHS had received £72 million by way of shareholder support.

March 2015: BHS was acquired for £1 by Retail Acquisitions Limited (“RAL”), an entity ultimately controlled by Mr Dominic Chappell. Legal and financial due diligence prior to the sale identified that £120m of working capital was required to fund the business and trade credit insurance had been withdrawn, with little prospect of it being restored in the short-term given the financial status of the group.

June 2015: RAL entered into certain financing arrangements and approximately £50 million of new money was made available to RAL. The financing was on onerous terms, described by a senior employee as a ‘wonga loan’ and did not adequately address the financial needs of the company.

September 2015: The court held that the companies in the BHS group were cash flow insolvent.

March 2016: RAL proposed a company voluntary arrangement (“CVA”) to restructure its leasehold liabilities. The CVA was approved by creditors, but as a condition to the CVA becoming effective, the company was required to raise certain additional finance for the group.

April 2016: Despite having an offer of finance, the company was unable to complete this financing as a prior ranking secured creditor (owned/controlled by Sir Philip Green), was unwilling to subordinate its security in favour of the new lender. The BHS companies filed for administration.

Personal liability claim for directors in excess of £18 million

The Joint Liquidator of the BHS companies commenced certain proceedings against the former directors of BHS for wrongful trading and misfeasance. In June 2024, the court held two of the former directors liable in respect of both claims, imposing record liability of over £18 million in respect of the wrongful trading claim alone. The court held that the directors knew or ought to have known that there was no reasonable prospect of the companies avoiding an insolvent liquidation or administration from September 2015. This pre-dates the CVA which was approved by the company’s creditors.

The directors were found liable for a novel claim described as ‘misfeasance trading’, which relates to a series of breaches by the directors of their statutory duties¹, including, failure to promote the success of the company, to avoid conflicts of interest, to exercise independent judgment, to exercise reasonable care and not to accept benefits. The court found that because of these breaches, the directors should be held personally liable for certain losses of the companies from June 2015 (i.e. prior to the date from which the directors were held liable for wrongful trading and at a time when the companies were cash flow solvent). The quantum of liability in respect of the misfeasance trading claim has not yet been determined.

Time to file?

The decision in BHS is arguably highly fact specific. The business was under capitalized with inexperienced management from day one of the acquisition. However, the case serves as a useful reminder as to the duties of directors in the zone of insolvency and the real risk of personal liability if directors fail to discharge such duties and act in the best interests of creditors and other stakeholders. The court emphasized that honest, rational directors acting in good faith with the benefit of professional advice have nothing to fear. There is now a real concern that because of the BHS decision, even honest and well-advised directors will not be prepared to incur the risk of personal liability. Consequently, we are likely to see more companies file for insolvency to the potential detriment of creditors, employees and other stakeholders. Sponsors and private credit funds may also be increasingly reluctant to take board appointments and may prefer to appoint independent directors, particularly in the event of financial distress.