In a landmark decision bringing conclusion to the trial of the former directors of British Home Stores Group, the court has held the former directors joint and severally liable for breaches of their statutory duties which caused the company to wrongfully continue trading. Here we examine three key points of the court’s decision.
The former directors were directors of four companies owned by the British Home Stores Group (BHS) between 2015 and 2016. In December 2016, the group of companies entered liquidation. The liquidators brought claims against the former directors, emanating from their conduct in the 12 months prior to the liquidation. The claims focused upon duties imposed upon the directors under the Insolvency Act 1986 as follows:
- Misfeasance under Section 212
- Wrongful trading under Section 214
Building on the Supreme Court’s findings in Sequana, the court found that the former directors were liable for breach of the “modified” duty, that being; causing the company to enter into a finance agreement for an improper purpose, essentially that had the former directors not caused the company to enter into the finance agreement, it would not have continued to trade.
What three key points can directors take away from this judgement?
Professional advice does not prevent liability for wrongful trading
From the point of acquisition of the group up to the point of its administration, the former directors had obtained professional advice from a number of advisers including lawyers, and accountants. The former directors sought to argue that they had obtained professional advice on the exercising of and subsequently discharge of their duties, and where they had relied on advice, they had prima facie fulfilled those duties.
Whilst the court acknowledged that expert advice had allowed the former directors to go “a long way toward performing duties with reasonable care”, the court would give weight to the advice based upon a number of factors such as the instructions given, scope of engagement and the extent to which the former directors had relied upon that advice.
Ultimately, the act of taking advice does not prevent liability for wrongful trading. Careful consideration should be given at board level as to the advice to independently consider the advice, which takes us to the point below.
Delegation of duties
Board decisions are a matter for directors. Board decisions are not a matter for professional advisers to make, or any third-party that may be instructed to aid in the arriving at those decisions. Whilst directors can delegate certain duties, delegation must be considered carefully to ensure compliance with legislation. Directors must always ensure that delegated duties are monitored, as ultimately, liability rests with directors to ensure that the duties have been discharged to the company.
Duties to creditors
Sequana highlighted that the duty to creditors is engaged when the directors know or ought to know that either the company is insolvent or is likely to become insolvent, or an insolvent liquidation or administration is more likely than not.
In Re BHS Group, the court brought to the forefront of directors’ duties that there is importance of creditors interests in times of financial distress and giving weight to those interests in light of financial difficulties. Directors should always exercise their reasonable care, skill and diligence when it comes to decisions as to finances when the company is in a precarious position. If financial borrowing is to be considered, existing creditors’ interests may be affected and if that eventuality arises, directors may find themselves personally liable should their actions cause prejudice to the interests of creditors.
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