‘Misfeasance trading’: yet another label for directors to worry about

In Re BHS Group Ltd [2024] EWHC 1417 (Ch), the High Court issued a lengthy judgment on claims brought by joint liquidators of four companies in the BHS Group against two former directors. The factual chronology alone spans 175 pages, but the key points are summarised below for convenience.

Factual summary

On 11 March 2015, Retail Acquisitions Limited (RAL) acquired 100% of the issued share capital of BHS Group Limited (BHSGL), the parent company of the BHS group, for a nominal consideration of £1. In the years leading up to the transaction, BHS had consistently operated at a loss and depended on ongoing financial backing from its former owners.

BHS Limited (BHSL), the group’s main trading entity, acted as the sponsoring employer for two defined benefit pension schemes. Due diligence undertaken by advisers to RAL during the acquisition process revealed the severe financial difficulties facing these schemes, identifying an estimated funding shortfall of approximately £300 million (soon to be reassessed at a forthcoming triennial valuation) as well as a buy-out deficit exceeding £500 million. 

Faced with continued trading losses and RAL’s limited capacity to inject capital, the newly installed management sought to mitigate the funding pressures by disposing of certain property assets and raising short-term, high-cost borrowing secured against others. Towards the end of 2015, BHS considered whether a property-based company voluntary arrangement (CVA) could offer a viable solution. Although creditors approved the CVA on 23 March 2016, attempts to secure replacement asset-based lending were unsuccessful, and all four group companies relevant to these proceedings entered administration approximately one month later.

The Respondents and Their Roles

The liquidators commenced proceedings against three former directors of the BHS group: Dominic Chappell, Lennart Henningson and Dominic Chandler. Chappell did not engage with the litigation, and the claims against him were severed. The court entered judgment against him ex tempore, making declarations that mirrored the substantive conclusions reached elsewhere in the case.

The remaining respondents, Chandler and Henningson, assumed their appointments shortly after RAL’s acquisition of the group but brought sharply contrasting experience to their roles. Chandler, appointed as Group General Counsel, had practised as a criminal barrister and had little exposure to corporate finance, restructuring or insolvency matters. Henningson, by contrast, was a corporate finance specialist with extensive experience in distressed situations and business turnarounds. These differences proved critical when assessing both the standard of conduct expected of each director and their respective culpability.

Structure of the Claims

The liquidators advanced three categories of claim: wrongful trading, trading misfeasance, and a number of discrete individual misfeasance allegations. Although wrongful trading attracted considerable attention, the most significant development in the judgment lay in the court’s treatment of trading misfeasance, which expanded the scope of breach of duty liability in the context of continued trading in the vicinity of insolvency.

Wrongful Trading (in Brief)

The wrongful trading claim was brought under section 214 of the Insolvency Act 1986. Liability depended on whether, before the onset of formal insolvency, the directors knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent administration or liquidation. If that threshold was crossed, the directors would be liable unless they could show that they took every step they ought to have taken to minimise losses to creditors.

The court identified a single date, 8 September 2015, on which this statutory knowledge requirement was satisfied. Although the liquidators had advanced multiple alternative dates, the judge concluded that earlier points did not meet the demanding wrongful trading test. Contributions were ordered against Chandler and Henningson, but these represented only a small proportion of the overall losses suffered.

Trading misfeasance 

The trading misfeasance claims were pursued under section 212 of the Insolvency Act 1986, which enables a liquidator to recover compensation or property from a director who has misapplied company assets or committed misfeasance or a breach of fiduciary or statutory duty.

The duties relied upon were those codified in the Companies Act 2006, including the duties to act within powers and for proper purposes, to exercise reasonable care, skill and diligence, and significantly, to promote the success of the company under section 172. Additional duties, such as avoiding conflicts of interest and exercising independent judgment, formed part of the broader legal backdrop.

Following the Supreme Court’s decision in Sequana, the section 172 duty is modified in circumstances where a company is insolvent, bordering on insolvency, or where insolvent administration or liquidation is probable. In those situations, directors must consider the interests of creditors alongside those of shareholders. The weight to be given to creditors’ interests increases as the company’s financial position deteriorates, until, once insolvency becomes inevitable, those interests become paramount.

Continuing trading and trading misfeasance

While the liquidators succeeded in a number of claims relating to specific transactions, the most striking aspect of the case was the court’s acceptance of a broader argument: that the very decision to continue trading could itself constitute misfeasance.

The court held that, had the directors properly complied with their duties (particularly the duty to give appropriate weight to creditors’ interests) they would have placed the companies into administration at an earlier stage rather than sanctioning further trading supported by expensive, short-term borrowing. This marked the first occasion on which liquidators had successfully argued that continued trading, in and of itself, amounted to actionable misfeasance.

Crucially, the trading misfeasance claim succeeded at an earlier point than the wrongful trading claim. At that stage, most of the companies were not yet insolvent on either a cash flow or balance sheet basis, and insolvent administration or liquidation, while more likely than not, was not inevitable. Despite this, the court concluded that the directors had failed to give proper consideration to creditors’ interests when approving a loan on onerous terms and continuing to trade. Those interests should, at a minimum, have outweighed the interests of the sole shareholder.

The judge found that the financing decision exposed the group to further loss by accelerating asset depletion, leaving it without a sustainable working capital solution. Had the directors approached the matter correctly, they ought to have concluded that immediate administration was in the creditors’ best interests.

“The last roll of the dice”

The court characterised the directors’ conduct as insolvency-deepening activity, adopting the Supreme Court’s description in Sequana of a “last desperate throw of the dice”. Although the wrongful trading threshold had not yet been crossed, the directors were already operating in the zone of insolvency, where continued risk-taking at creditors’ expense could not be justified.

The failure lay not merely in poor outcomes, but in the decision-making process itself: the absence of a proper assessment of creditor interests, the prioritisation of shareholder objectives, and the approval of funding arrangements that were objectively damaging to the company’s financial position.

Defences and relief from liability

Both Chandler and Henningson sought relief under section 1157 of the Companies Act 2006, which permits the court to excuse directors from liability if they acted honestly and reasonably and ought fairly to be excused in all the circumstances.

The burden of proof lay on the directors, and neither satisfied it. Henningson’s application was rejected outright, with the court finding that he had misled the court and repeatedly subordinated the interests of creditors and employees to those of RAL and Chappell. Chandler was treated more sympathetically: the judge accepted that he acted honestly and with good intentions. However, this was insufficient. His lack of commercial experience, poor judgment at critical junctures and failure to exercise appropriate care meant that relief was not available.

Emerging uncertainty

Unlike the wrongful trading claim, the court did not immediately determine quantum in respect of trading misfeasance. Compensation would take the form of equitable relief, and the liquidators argued that it should mirror the increase in the net deficiency of assets (approximately £133.5 million) during the relevant period.

Given the novelty of the argument and the magnitude of the sums involved, the judge allowed time for detailed submissions. The judgment therefore leaves open an important question: whether breach of duty claims may, in practice, provide liquidators with a route to recover losses comparable to those available under wrongful trading, but at an earlier stage and with a lower threshold.

The decision has potentially far-reaching consequences. It suggests that directors may be required to cease trading earlier than previously understood, not because insolvency is inevitable, but because continued trading no longer serves creditors’ interests. The case underscores the need for directors to be fully informed, to formulate and regularly reassess an objectively justifiable rescue plan, and to document their reasoning carefully.

Professional advice remains important, but it is no substitute for directors’ own judgment. Delegation does not absolve responsibility, and experience matters: directors are judged by reference to what they ought to know and do, not by their personal limitations. Finally, the court’s refusal to limit liability by reference to insurance cover reinforces the personal exposure directors face when navigating the zone of insolvency.

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