What do you do? Important considerations for directors in circumstances of potential insolvency.
In the recently highly publicised decision of Wright v Chappell [2024] EWHC 2166 (Ch) (the “BHS Decision”), two former directors of British Home Stores (BHS) have been found liable to pay compensation totalling £110 million, pursuant to a claim by the Group’s joint liquidators. The decision represents a landmark ruling, where the directors were found to be liable pursuant to their duties to the company itself, as opposed to provisions under the Insolvency Act 1986 (the “IA 1986”).
This article provides a more detailed explanation as to what directors’ duties are and what can be done to ensure they are being complied with, something that any director should be giving careful and consistent consideration to.
Director duties and the decision in Wright v Chappell [2024] EWHC 2166 (Ch)
As with many decisions, the factual circumstances of the BHS Decision need to be understood when considering the conclusions which were drawn. The case questioned whether those in charge of BHS should have taken action to place the company into an insolvency procedure at an earlier date than they did. From the perspective of the claimant joint liquidators, on behalf of the company, the goal was to establish that a ‘cause of action’ (i.e. the breach that caused there to be a claim) arose as early as possible.
Section 214 of the Insolvency Act 1986 provides for the cause of action of wrongful trading. A director of a company can be found to be personally liable to contribute to the company’s assets in liquidation if, prior to the liquidation, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid entering insolvent liquidation or administration. While a director may act in a way which negates liability for wrongful trading (discussed below), the requisite knowledge level is high. Put simply, a company which has no real prospect of avoiding insolvency suggests a situation where there is no light at the end of the tunnel.
Going back to 2022, the Supreme Court delivered its judgment in BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 (“Sequana”). Sequana concerned the application of section 172(1) of the Companies Act 2006 (the “CA 2006”), being a director’s requirement to act in good faith and to promote the success of the company for its members. Sequana considered whether, in an insolvency situation, this duty should properly be interpretated to mean to consider the interests of creditors as well as members. The decision in Sequana was that the directors were not found to have breached any duty. However,
“where the company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the directors should consider the interests of creditors, balancing them against the interests of shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors."
With the Sequana decision in mind, section 212 of the IA 1986 allows for a director to be personally liable to contribute to the company’s assets where they have misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. This is known as ‘director misfeasance’. Unlike a claim for wrongful trading, a director misfeasance claim by a liquidator relies on an existing cause of action, namely a director’s failure to act in accordance with their fiduciary duties.
In the BHS Decision, the Court found that in respect of decisions made by them, the directors in question had breached their fiduciary duty under s.172 CA 2006. In doing so, the directors were personally liable to the company pursuant to s.212 IA 1986.
Action to be taken by directors
The BHS Decision is a warning to directors of corporate entities. Unlike the requisite knowledge level of a claim by liquidators for wrongful trading, insolvency need only to be a real possibility for a director to commit misfeasance for failing to consider the interests of creditors.
It is not all doom and gloom for directors. In the context of a wrongful trading claim, a director will not be found to be liable where a director does everything possible to minimise loss to creditors. Whilst a director may be at risk of being liable of misfeasance when insolvency is a reasonable option (as opposed to a near certainty), such liability can be similarly discharged by a director taking the proper steps in light of such a situation. It is a director’s fiduciary duty, pursuant to Sequana, that they must consider the interests of creditors where an insolvency action is a possibility and a demonstration of such consideration is paramount to discharge such duties. As important as doing this is an ability to reference decision making and to demonstrate accountability.
It is important to note that each individual director of a company is required to comply with their statutory duties, and misfeasance claims are brought against directors individually (though conduct is often shared). Where there are several directors, there is scope for a difference in opinion. Directors may want to consider taking professional advice in their personal capacity to ensure their actions are minimising the risk of liability.
How can Ellis Jones help
Our expert lawyers are well-placed to assist directors, in either their professional or personal capacity, or insolvency practitioners, in advising in this area and in assisting them to act accordingly. The firm has experienced legal experts across different areas, such as Banking & Finance Litigation, Insolvency and Business Services to provide comprehensive advice.
Advice for companies
As this article demonstrates, corporate entities should be demonstrating a continuing consideration for how and why governing decisions are being made. Subject to a company’s individual circumstances, the matters that this article addresses may begin to arise some time before an insolvency event, or such an event may be averted altogether. Given Ellis Jones’ wide sector coverage and long-standing professional relationships with related disciplines, we are able to come in and ensure that boards or directors are being provided with pragmatic advice in this regard.
Advice for directors
Ultimately, the BHS Decision is a warning for directors that they may be found to be personally liable to pay sums back to the company, should an insolvency event occur. Directors may wish to take individual advice with the immediate intention of obtaining comfort that they are acting in accordance with their regulatory obligations. The BHS Decision is clear that where directors can demonstrate a clear and justified process, this should go a long way to meaning they will not be the subject of scrutiny from an appointed insolvency practitioner.
If you would like to discuss any of the points raised in this article, please do not hesitate to contact Tim McMahon (Tim.McMahon@ellisjones.co.uk) or Daniel Lewis (Daniel.Lewis@ellisjones.co.uk)
About the Authors
Tim is a Senior Associate Solicitor in our London office and has expertise in Banking & Finance Litigation, Commercial Disputes, Insolvency, Cryptocurrency and Betting, Gambling & Gaming.
"The team at Ellis Jones have a fantastic knowledge of their subject and a real empathy for their clients, I would always recommend them."
Daniel is an Associate Solicitor in our London office and has expertise in Banking & Finance Litigation, Insolvency, Cryptocurrency and Betting, Gambling & Gaming.
"The process could not have gone more smooth. Dan kept me updated, where necessary, throughout and every detail or query was explained clearly and with complete proficiency."
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