BHS decision a warning to company directors on insolvency liability

In a recent decision, the High Court ordered two former directors of BHS (British Home Stores) to pay at least £18m to creditors for their role in the collapse of the former high street giant. 

Notably, the Court suggested that directors are unable to absolve themselves of liability for having failed to comply with their duties on the basis of having sought professional advice — with responsibility ultimately falling on their shoulders.

The Court upheld the claims of BHS’ liquidators, resulting in two former directors being found liable for wrongful trading and making the first ever award for ‘misfeasant trading’ by virtue of the directors having breached their statutory duties in continuing to trade before the company eventually entered administration in April 2016.

The decision emphasises the fact that director’s duties remain their duties — and that regardless of the content of advice received (or not, as the case might be), they may still be found liable.

Here, insolvency and restructuring specialist Oliver Legge explores the case and the impact of the judgment.

Two claims against the directors

The Court considered two claims brought against the directors by the liquidators of the company:

1. Wrongful trading

A director may be personally liable to make such a contribution to the company’s assets as the court thinks proper, if — at some point before the commencement of the winding up of the company — the director “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”, unless the director proves that they took every possible step with a view to minimising the potential loss to the company’s creditors. 

In considering whether the directors were liable in this claim, the Court thoroughly considered the professional advice that the directors had received and whether the fact that they hadn’t been advised by their professional advisors that there was no reasonable prospect of the company avoiding insolvent liquidation or administration could provide a basis for the dismissal of the wrongful trading claim.

2. Misfeasant trading

A claim of misfeasance may be brought against a director or officer of a company (as in this case) for the breach of their statutory or fiduciary duties to the company (among other reasons) as detailed in section 212 of the Insolvency Act 1986.

Professional advice and liability for wrongful trading 

For a finding of wrongful trading under section 214 of the Insolvency Act 1986 to be made against a director, it’s required that at some point before the commencement of the winding up of the company the director knew (or ought to have concluded) that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration.

It was accepted by the Court that by September 2015 the directors ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration. 

Applying the recent decision of the Supreme Court in BTI v Sequana, the Judge (at [473]) held that in order to find the directors liable for wrongful trading, the liquidators of the company were required to satisfy the high bar that the directors “knew or ought to have known that insolvent liquidation was inevitable”. Adopting Lord Briggs’ expression, the Judge was clear that this was a question of whether there was “light at the end of the tunnel”. 

BHS had engaged numerous professional advisors to give financial advice as well as advice on transactions, wrongful trading and directors’ duties. The Court found that despite having sought advice at substantial expense, the directors couldn’t use this fact as a shield from liability for having breached their duties.

It was submitted that where directors relied on the advice of reputable professionals, they will prima facie have fulfilled their duties. The Judge accepted these submissions as general propositions, yet qualified them (at [485]) by stating that the weight attached by the Court to professional advice depends on (among other factors) the scope of the advisor’s engagement, the advice they did (or didn’t) give and the extent to which directors relied (or didn’t rely) on their advice. Notably, where an advisor didn’t advise that a company or group should be placed into administration or liquidation, the weight attributed to this absence depends on a detailed assessment of the facts.

In relation to the advice tendered by the professional advisors engaged by the company in this instance, the Court variously found (at [905–912]) that the directors didn’t carefully consider and follow the legal advice they received — nor was much weight attached to the fact that certain advisors didn’t advise that it was inevitable that insolvent liquidation or administration was on the horizon. This led to the conclusion that the question of whether there was a reasonable prospect of avoiding insolvent liquidation or administration wasn’t one on which the professional advisors could (or should) have been expected to express an opinion and that it was instead a question of individual judgement for the directors. 

Impact of the Judgment

It’s clear from the judgment that merely engaging professional advisors is insufficient for directors to avoid liability. 

However, the judgment does seem to suggest that that where professional advisors have been engaged on terms that include the provision of advice concerning the likelihood of insolvent liquidation or administration — and where this advice has been given and relied on — this may still provide an evidential basis for dismissing a wrongful trading claim.

Despite this, it’s also clear from this case that where it’s obvious a company is cash flow insolvent, it’s unnecessary for advisors to “spell out the obvious” [911] to directors. This shouldn’t come as a surprise. Section 214(4) of the Insolvency Act 1986 makes it clear that the facts a director ought to know or ascertain (or the conclusions they ought to reach) are those that a ‘reasonably diligent person’ would have ascertained, reached or taken, taking into account both the general knowledge, skill and experience of the individual director and that which may be reasonably expected of a person carrying out the role of that director.

A warning to directors

This case should act as a warning for directors who — despite their own knowledge and expertise — may seek to rely on the provision of professional advice as a shield for the avoidance of liability once a company enters insolvent liquidation or insolvent administration.

Directors should ensure that professional advisors are engaged to specifically advise on whether there was a reasonable prospect of avoiding insolvent liquidation — and that proper weight and consideration is given to any advice they may receive. 

In this case, one advisor emphasised the fact that it was the duty of the directors themselves to decide whether there was a reasonable prospect of avoiding insolvent liquidation [905] — and despite raising “all the right questions”, the advisor’s advice was never tabled or discussed at a board meeting of the company. 

The Court took the view that the memo produced by the advisor hadn’t been properly considered because it “did not cross [the director’s] mind that the Companies had no reasonable prospect of avoiding insolvent liquidation or administration”.

It’s important to remember that the judgment may yet be appealed.