Anthony John Wright & Ors v Dominic Joseph Andrew Chappell and Ors (Re BHS Group Ltd)

Equitable compensation for breach of directors’ duties is assessed by reference to loss caused by the breach. Where breaches cause an insolvent company to continue trading, the starting point may be the increase in net deficiency, and recovery is not confined as a matter of law to loss from a single transaction.

The liquidator must nevertheless prove that the breaches were an effective cause of the loss, rather than merely the occasion for it. Losses unrelated to the breach, such as pension-deficit movements caused by market factors, are excluded. The losses must also fall within the scope of the duty. Directors jointly responsible for the same breaches are ordinarily jointly and severally liable under Insolvency Act 1986, section 212.

The judgment concerned the reserved issue of equitable compensation arising from breaches of directors’ duties by Lennart Henningson and Dominic Chappell in relation to BHS Group companies in liquidation. The principal judgment, [2024] EWHC 1417 (Ch), had determined liability, causation and quantum except for the measure of compensation for breaches connected with the creditor duty and related misfeasance claims.

The companies had continued trading after entering into the ACE II and Grovepoint facilities. The liquidators sought compensation by reference to the increase in net deficiency between relevant knowledge dates and the companies’ insolvency. The issues were whether the “but for” test sufficed, whether compensation was limited to individual transactions, whether the losses fell within the scope of the duties, and whether liability was joint and several.

1. Measure of compensation. The court held that equitable compensation requires loss caused by the breach. Common-law remoteness does not apply, but causation and the scope of the duty remain essential. The authorities on unauthorised payments did not establish an identical measure for every breach of fiduciary duty.
2. Trading losses and net deficiency. For misfeasance under section 212, the starting point may be the increase in net deficiency where the company continued trading because of the breaches. Compensation is not legally confined to a single transaction or venture. The liquidators had to show more than that the breaches enabled continued trading: the breaches had to be an effective cause, though not the sole effective cause, of the losses.
3. The court adopted the reasoning in Galoo and Continental Assurance that a breach which merely leaves a company exposed to trading losses does not cause those losses. Applying scope-of-duty principles, losses unrelated to the risk against which the duty protected creditors were irrecoverable. The increase in the pension deficit was excluded for the earlier period because it resulted from market movements and actuarial valuation changes.
4. The breaches were within the scope of the creditor duty. The directors knew or ought to have known that continued trading and the borrowing arrangements exposed creditors, rather than the shareholder, to a significant risk of loss. The breaches were an effective, and principally the sole, cause of the property and trading losses and the relevant increase in liabilities.
5. Liability and disposal. The directors’ liability was joint and several. Section 212(3)(b) did not justify apportionment where the companies were entitled to full equitable compensation. The primary award was £110,230,000, calculated by reference to total net deficiency less the pension-deficit increase and settlement credits. Alternative awards were stated if the primary measure was wrong.

The judgment was a reserved determination following the principal judgment in the same proceedings, [2024] EWHC 1417 (Ch), which had determined liability, causation and most issues of quantum. This judgment decided the outstanding measure of equitable compensation and consequential liability issues.