The recent BHS judgment has significant implications for directors and D&O (Directors’ and Officers’) insurers of distressed sponsors of defined benefit (DB) pension schemes. We now have a precedent for the proposition that scheme volatility should be included in the calculation of quantum for wrongful trading claims.

As the market absorbs the 533-page judgment, which addresses the Liquidators’ claims for wrongful trading and misfeasance, no doubt some interesting commentary will emerge from an insolvency perspective. However, there is a point in relation to the treatment of the DB pension scheme deficits that would be easy to miss.

To my knowledge, this is the first wrongful trading case to involve DB schemes and the question arises as to whether and to what extent fluctuations in the scheme deficits should be included in the calculation of the ‘increase in net deficiency’ (IND) over the relevant period, which forms the basis for quantification of wrongful trading claims. Having discussed the considerations in the market, two main schools of thought emerge. One is that the court should use its discretion to exclude scheme deficit fluctuations on the basis that they are extrinsic to trading. The other is that the volatility should be included because, by continuing to trade while insolvent, the directors are exposing creditors to unsupported risk. My sense is that excluding deficit volatility is generally preferred, not least because it’s not something directors think about on a day-to-day basis or are able to keep under constant review as a matter of practicality. Of course, the direction of volatility is unpredictable and can go either way due to market fluctuations in asset values and buy-out annuity pricing, so including the fluctuations in the IND calculation can reduce or inflate the number, depending on the circumstances.

The judgment sets out at paragraphs 12 to 14 the IND between certain ‘knowledge dates’ and 25 April 2016, the date of the administration filing. It is clear that the calculations provided in paragraph 13 include pension volatility, because in paragraph 14 certain IND numbers are provided with the pension effects stripped out. For example, the IND from 8 September 2015 is calculated at £45.5m, but with the pension volatility stripped out it is £76.5m, showing an improvement in the buy-out funding position in this case. Significantly, per paragraph 1140, it is the £45.5m that is used as the starting point for assessing quantum.

The question was not argued before the court in this case, seemingly because, unusually, the IND calculations had been agreed by the parties. However, we are left with a sole wrongful trading precedent that includes scheme volatility in the reckoning. Given the potential scale of scheme volatility, which can dwarf D&O policy limits, this is likely to be of concern, both to directors of distressed DB employers and to their D&O insurers.