In the retail sector, directors hold significant responsibilities and are subject to stringent legal duties. Recent high-profile cases have highlighted the severe consequences of failing to meet these obligations.
This article explores the duties of directors in retail businesses, potential repercussions of non-compliance and steps every director should take when the company enters ‘the twilight zone’.
Legal Duties of Directors
Directors are under an array of duties imposed by common law, equity (fiduciary duties), statute and potentially under contract. Key amongst all of these are the concurrent overriding duty to act in a way they believe will promote the success of the company, with a duty to exercise the care, skill, and diligence of a reasonably diligent person with their knowledge and experience.
Case Study: BHS and Retail Acquisition Limited (RAL)
The collapse of BHS and the subsequent legal actions against its directors serve as a stark reminder of the importance of these duties.
In March 2015, BHS was sold by Sir Philip Green’s Taveta Group to Retail Acquisition Limited (RAL), a special purpose vehicle fronted by Dominic Chappell, a former bankrupt with no retail experience for £1. At the time of purchase,BHS had an operating loss of £442 million and a pension deficit exceeding £200 million. Just over a year later, RAL collapsed into administration.
In June 2024, Mr. Justice Leech delivered a landmark judgment that ran to 533 pages, meticulously examining the demise of BHS and the duties of its directors from the date of acquisition onwards. This exhaustive study resulted in a wrongful trading award against directors Lennart Henningson and Dominic Chandler for £6.5m each. Claims against Dominic Chappell and the quantum of the misfeasance (breach of duty) claims were deferred due to his ill-health until August 2024 when an award of £150m was made against Chappell and Henningson (Chandler having settled the claim before that date).
Wrongful Trading
Under section 214 of the Insolvency Act 1986, an administrator or liquidator can seek a court order requiring directors to contribute to the company’s assets if:
1. No Reasonable Prospect: The director concluded, or ought to have concluded, that there was no reasonable prospect of the company avoiding an insolvency liquidation or administration.
2. Increased Deficit: There is an increased deficit to the loss suffered by the creditors of the company.
However, the court will not make an order for contribution if the directors took every step with a view to minimising losses to creditors that they should have taken.
A critical aspect of constructing a wrongful trading claim is establishing the ‘date of knowledge’ – the point at which the director concluded or should have concluded that liquidation or administration was inevitable. This is a highly fact-specific task requiring detailed analysis of the directors’ state of knowledge and the information available to them. The bar for establishing inevitable insolvency is notably high.
In the case of BHS, it was evident from the date of Retail Acquisition Limited’s (RAL) purchase that significant restructuring was required to turn around operating losses and repay accumulated debt. The Defendants sought to argue that (1) they were pursuing a turnaround plan, (2) they had sought extensive legal and professional accountancy advice and (3) a company voluntary arrangement was proposed and approved in March 2016; and as such they were availed of a defence, despite the acknowledgement that under their stewardship the net deficiency to creditors had increased by £133m. Effectively they had tried but failed to turnaround the business.
In rejecting the defence, the Court was not persuaded that there was a credible turnaround plan, as the use of BHS property portfolio by sale and leaseback arrangement or security to fund expensive short-term funding was ultimately a degenerative strategy, failing to provide sufficient working capital to cover continuing losses and crucially time to execute a plan.
The second limb of the defence, namely that they had relied on legal and accounting professional advice, was rejected as it was clear that the advisors were not properly appraised of all the facts, or their advice was not properly considered or relied upon by the Board. The fact that a CVA was proposed and approved was also viewed as irrelevant as it contained misleading statements and relied on unrealistic assumptions provided to the CVA supervisors by the Directors.
Misfeasant Trading
The liability of each director was assessed based on their knowledge, skill, experience, and differing levels of involvement and culpability. Henningson and Chandler were each found to be 15% liable for the increased deficiency from September 2015 to the date of administration.
The wrongful trading element of the judgement is interesting but uncontroversial. What is more noteworthy is the finding by Leech J that had the directors complied with their fiduciary duties, then BHS would not have continued to trade past 26 June 2015 (some 10 weeks earlier than the date affixed as the ‘date of knowledge’ when insolvent liquidation or administration was ‘inevitable’).
This date is relevant as on that day a highly expensive debt refinance occurred, which meant that whilst BHS was not cash flow insolvent and insolvency was not inevitable, the directors should at that date have had due and proper regard to the interests of creditors. Their failure to do so when insolvency was ‘imminent’ or where the business was engaged in ‘insolvency-deepening activity’ founded the successful claim in trading misfeasance.
Despite the extreme and unusual facts of the BHS case, the Judgment on this point should not be viewed as an outlier but as a development of the reasoning behind the creditor duty established in the Supreme Court judgement in BTI 2014 LLC v Sequana SA [2022] UKSC 25. Sequana itself looked at the codified statutory director’s duty to promote the success of the company and the enlightened shareholder principal that runs behind this, requiring the interests of various stakeholders (including creditors) to be considered by the directors in its decision making (the so-called ‘modified duty’ to the company’).
In Sequana each Law Lord grappled with when the balance would be weighed in creditors’ favour, and gave examples including entering into a high risk speculative transaction which may/probably would jeopardise the company’s asset base and ability to meet creditor claims, whether a ‘last role of the dice’ was made when shareholders were already out of the money on any insolvency event, or where the company was engaged in ‘insolvency deepening activity.’ What was clear however is where the balance tips the directors should consider, and if appropriate to the facts of the case, give priority to the interest of the creditors in their decision making.
In BHS Leech J saw ‘direct application’ of the Sequana distinction between s.214 and misfeasance; and found that from June 2015 the directors were engaged in ‘insolvency deepening activity’, the shareholders were ‘out of the money’ and conducting a ‘degenerative strategy’ which was causative of additional loss to creditors. As a result, he stated had the directors ‘considered the interests of the BHS Group’s existing creditors to be paramount or had they put them before the interest of RAL, then I have no doubt that they ought to have concluded that it was in the interests of creditors to put [BHS Group] into administration immediately.’
To some, BHS with its extreme and unusual facts is proof of the maxim that hard cases make bad law. That the facts were so extreme meant that the lacuna in s.214 was exposed which in turn justifies the novel finding of ‘misfeasant trading’. This would see BHS as an outlier, easily distinguished on its facts.
There is however a more compelling interpretation and that is that BHS stands as a further development in the policing of director conduct and the development of enlightened shareholder value, where the interests of stakeholders must be taken into account when promoting the success of the company. Added to this is the concept of a tipping point where the interests of the stakeholder prevail and failure to have due and proper regard to such which in turn is causative of loss (to the company) and will result in personal liability.
If you want to find out more about the key trends shaping the retail industry, download the EDGE of retail 2025 report now.
Want to hear more from us? 
