Directors involved in BHS collapse must pay £18.3m in compensation

The High Court has ruled that two directors of collapsed retailer BHS must pay £18,364,448 in compensation to creditors to stop corporate risk-taking

Lennart Henningson, Dominic Chandler and former CEO Dominic Chappell, were directors of BHS Group and its subsidiaries, and were charged with claims of wrongful trading, trading misfeasance and individual misfeasance in a case brought by the joint liquidators from FRP Advisory.

Chappell was the first respondent but did not take part in the trial after being granted a six-month adjournment. As a result, a further trial will follow and this ruling is not binding on Chappell.

Henningson and Chandler were each ordered to pay £6.5m for wrongful trading as a contribution to the companies’ creditors.

Judge Justice Leech said: ‘I consider that in the exercise of my discretion it is proper to order Mr Henningson and Mr Chandler each to contribute on a several basis £6.5 million to the companies’ assets and I will make a declaration to that effect.’

While the Judge acknowledged that Chandler did not have the means to pay such a penalty and it would be ‘potentially ruinous for him’, he stressed: ‘It will send a green light to risk-taking or, even, dishonest directors if the Court reduces the amount of compensation for which Mr Chandler is liable on the basis of his ability to pay.

‘Creditors will receive no compensation if risk-taking directors will be able to escape liability if they can prove that they have no insurance and no personal assets to meet a claim for wrongful trading.’

On the individual misfeasance claims, Henningson was ordered to pay £3,693,212 related to various payments and arrangements fees, and Chandler £1,671,236 related to a property transaction involving the BHS store in Darlington.

Following the circulation of this judgment in draft, Olephant Solicitors, representing Chandler, gave the Court a copy of a certificate of insurance for directors’ all risk cover up to £20m for the period from 11 March 2015 to 10 March 2016 issued to Retail Acquisitions Ltd, rather than British Homes Stores Group Ltd. By letter dated 4 June 2015 Olephant stated that the £20 million limit for cover included defence costs.

‘But in any event, I make it clear that the decision which I reached remains unchanged even though I have now seen the policy and its limit,’ Judge concluded.

As a refresher, BHS was sold to Chappell’s company, Retail Acquisitions Ltd (RAL) by Sir Philip Green’s Taveta Group, owners of Top Shop and TopMan for £1 in March 2015.

Just over a year later, in April 2016 the retailer collapsed with total debts of £1.3bn including a pension deficit of £571m resulting in the loss of 11,500 jobs and the closure of 164 stores.

The claim at the High Court was brought by joint liquidators from FRP Advisory related to four companies in the former BHS Group: holding company British Home Stores Group, British Home Stores, a subsidiary and the group’s principal operating company, and subsidiaries Davenbush and Lowland Homes.

The joint liquidators claimed that from the date of the acquisition of the business and their appointment, the three directors, Chappell, Henningson and Chandler ‘either knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation’.

The judgment stated that ‘if the directors had resolved to put the companies into administration on 17 April 2015 there would have been £140.1m (or £70.1 million if the pension deficit was excluded) more in assets or cash to meet the claims of creditors’.

The lengthy 533-page High Court ruling goes into great detail about how the pre-sale negotiations were undertaken with various buyers in the frame, as well as details about the fallout from the collapse of the business, various parliamentary hearings, Chappell’s tax evasion conviction and the involvement of various audit firms including Deloitte and KPMG in the structuring of a pension settlement.

Sweden-based Henningson did not attend the trial due to ill health as he was undergoing chemotherapy but made various written submissions.

During the course of 2015, RAL was struggling for cashflow and on 17 June 2015 Chappell and Henningson agreed terms in principle for ACE II funding totalling £35m from an equity investor known as ‘Black Jack’ Jack Dellal whose property investment company Allied Commercial Exporters Ltd (ACE).

Judge, Mr Justice Leech said: ‘I find that one of their purposes in doing so was to obtain the arrangement fee of £2m to enable Mr Chappell to discharge the mortgage over Longbridge and acquire the property. I also find that one of Mr Henningson’s own purposes was to keep Mr Dellal’s goodwill and to induce or persuade him to make the payment of £300,000.

‘Although Mr Dellal had agreed to pay Mr Henningson £300,000 on 26 May 2015, he had still not made the payment by mid June.

‘However, it is important not to lose sight of the fact that ACE II was arranged at the last minute and urgently required to pay the June quarter’s rents. I am satisfied, therefore, that it was also one of the purposes of both Mr Henningson and Mr Chappell in agreeing to ACE II to arrange short term finance for the BHS Group to pay the June quarter’s rents and generate some breathing space to enable BHSGL to arrange a sustainable working capital facility.’

The ACE II loan negotiated by Henningson was described as ‘wonga loan’ because of the very high cost of the loan, with transcripts from an Insolvency Service interview with xx Hitchcock stating ‘the APR on it was just stupid. I mean it was just crazy. How in God's name can a good corporate finance professional come in and get that. That is just nonsense. That ACE loan, the big ACE loan at the beginning, was farcical’.

The Judge said: ‘I hold that Mr Henningson agreed the terms of ACE II for both proper and improper purposes.’

Chandler’s evidence was that both he and Mr Topp were ‘very angry and challenged Mr Chappell when they discovered that only £17m of new money was available from ACE II’.

The Judge noted that Chandler ‘did not suggest that Mr Henningson reacted in the same way and Ms Hilliard did not put this to Mr Chandler. Indeed, she did not cross-examine Mr Chandler at all about Mr Henningson.

‘If Mr Henningson had been an honest man and unaware of the arrangement fee before the BHSGL board meeting on 1 July 2015, he could have been expected to react in the same way as Mr Topp and Mr Chandler.’

Judge, Mr Justice Leech said: ‘I attribute little or no weight to Mr Henningson’s witness statements both because he lied about the secret commission of £300,000 but also because he gave very selective evidence on a number of key issues. This is one of those issues.

‘The only evidence which Mr Henningson chose to give about the arrangement fee of £2 million was that he did not recall attending a board meeting to approve the payment to RAL or seeing the minutes of such a meeting.’

The huge cashflow risks were highlighted by detailed evidence.

The Judge stated: ‘I have found that on 23 June 2015 both Mr Chandler and Mr Henningson knew that BHSGL was cashflow insolvent and that if it did not enter into ACE II it would be unable to pay the June quarter’s rents of £27.5 million or cover rent cheques for £12 million that day.

‘I have also found that they knew that in return for a short term loan which produced £17 million of new money, ACE II increased the net asset deficiency by £5.9 million, that it did not enable the BHS Group to implement the July 2015 Turnaround Plan and that they had no reason to think that the position would be any better by the next quarter day.

‘Despite these findings, I have held that insolvent administration was not inevitable on 26 June 2015 because there was some light at the end of tunnel.

‘In particular, I have held that Mr Henningson and Mr Chandler were entitled to rely on Mr Topp’s assessment that the July 2015 Turnaround Plan could be achieved and that there was a real and more than fanciful chance that BHSGL might obtain a sustainable working capital facility.

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