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For insolvency practitioners, understanding the intricacies of wrongful trading is crucial. This legal provision aims to contribute to responsible corporate governance and mitigate the adverse impacts of insolvency.

The case of Wright v Chappel [2024] EWHC (Ch) following the collapse of UK retailer British Homes Stores (BHS) in 2016 remains one of the most high-profile corporate insolvencies of recent times regarding wrongful trading.

Annecto Legal helps insolvency practitioners and distressed businesses in finding the right litigation support, funding and insurance for their insolvency cases and asset recovery. Moreover, we help insolvency recovery teams to secure the best result for creditors in insolvency litigation.

Wright v Chappel: The case of BHS stores

BHS, a major UK retailer, went into administration in April 2016, leading to the closure of stores, significant job losses and losses to the company. The company had been sold by Sir Philip Green’s Arcadia Group to Retail Acquisitions Ltd, led by Dominic Chappell, for £1 in 2015. At the time of its collapse, BHS had a substantial pension deficit, impacting thousands of employees and retirees.

Wright v. Chappell centres on the actions of Dominic Chappell and other directors in the period leading up to the insolvency. The primary allegations involved:

Mismanagement and negligence: Chappell and his team were accused of failing to adequately address the financial problems facing BHS, including the massive pension deficit.

Wrongful trading: The case explored whether the directors continued to trade while knowing, or should have known, that the company could not avoid insolvent liquidation. Section 214 of the Insolvency Act 1986 required the date prior to the entry into liquidation.

Breach of fiduciary duties: The directors were scrutinised for potential breaches of their duties to act in the best interests of the company and the company’s creditors.

The legal proceedings aimed to determine the extent of the directors’ responsibilities and whether their actions constituted fraudulent trading. The insolvency practitioners argued that Chappell and his associates failed to take necessary measures to minimise potential losses to creditors once the insolvency of BHS became foreseeable.

In the ruling, the court found that Chappell and his co-directors had indeed failed in their duties, contributing to the financial collapse of BHS. They were found personally liable and guilty of wrongful trading and breach of fiduciary duties, with significant financial penalties imposed.

The case of Wright v. Chappell highlights the critical need for directors to act diligently and in the best interests of their company, especially in times of financial distress. The outcome reinforced the legal and ethical obligations of directors to manage their companies responsibly and protect the interests of creditors.

For insolvency practitioners, this case highlights the complexities of navigating corporate failures and the critical role of thorough investigation and legal action in holding directors of a company accountable when wrongful trading occurs.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following funding methods:

• After-the-event (ATE) legal insurance– ATE insurance is generally used to protect from adverse costs risk & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.
• Third party litigation funding– In some cases, third party litigation funders may be willing to provide funding for an insolvency dispute claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.
• Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger disputes.

Working with a broker can be an effective way to understand the options and evaluate the best course of action, as well as providing the insolvency with a written record of the process undertaken. Having a written record of the process undertaken is a sensible way to ensure professional obligations are met.

How can Annecto Legal assist?

Annecto Legal regularly assists licensed insolvency practitioners and liquidators who are involved in the administration of or liquidation of a company, as well as trustees in bankruptcy. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

We ensure you meet your professional obligations in a cost-effective manner and provide written reports to place on file. This is in addition to seeking to get the best deal for you and creditors when a company is insolvent.

If you are in the process of pursuing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal.