The collapse of BHS in 2016 sent shockwaves through the high street. The subsequent litigation has had far wider reaching implications for company Directors, highlighting critical issues regarding their duties and the importance of corporate governance.
The liquidators of BHS subsequently sued three of its former Directors and, in June 2024, the High Court ordered two of them to pay at least £10.4 million and £8.1 million respectively by way of recompense, making it already one of the largest successful claims against directors to date.
There’s been much commentary on the legal analysis on the case and when it enables claims against delinquent Directors – but what lessons can a responsible Director take away from it?
The case
BHS fell into administration in April 2016, leading to the closure of its stores and the loss of thousands of jobs. It left a £571 million pension deficit, impacting the livelihoods of former employees. This attracted significant scrutiny, particularly concerning the actions of its Directors. The investigations into the collapse focused on several key issues relating to its directors:
Due diligence and governance: One of the main criticisms was the lack of adequate due diligence during the sale of the business to a third party, controlled by an individual (who also become a Director of BHS) who had no retail experience and a history of bankruptcies.
Fiduciary duties: Under UK law, Directors have a fiduciary duty to act in good faith and in a way they believe benefits the company and its creditors. The Directors were accused of failing to act in the best interests of the company and its creditors.
Conflict of interest: The sale of the business was seen as benefitting the former owner, Sir Philip Green (who was not sued as part of the case mentioned above), while putting the company at risk. Directors must avoid situations where personal interests conflict with their duty to the company. The potential conflict of interest was a significant issue.
Pension obligations: The massive pension deficit was a critical factor in the collapse. Directors have a duty to consider the interests of employees, particularly concerning pension schemes. The BHS case highlighted the importance of ensuring pension schemes are adequately funded and managed.
The Pensions Regulator and The Insolvency Service conducted investigations into the conduct of the BHS Directors. These investigations resulted in fines and disqualifications for some individuals involved.
The collapse prompted calls for stronger corporate governance and stricter enforcement of Directors’ duties. The UK government and regulatory bodies have since introduced measures to enhance accountability and transparency in corporate governance. Sir Philip Green also reached a settlement with The Pensions Regulator.
Wrongful trading and misfeasance claims were subsequently launched and proceeded against three of BHS’s directors. Two of them were the subject of the judgment against them in June 2024. The case against the third continues.
Lessons for company Directors
The June 2024 judgment serves as a stark reminder of the importance of Directors’ responsibilities and the consequences of failing to comply with them. It offers several critical lessons for company Directors:
Due diligence: Directors must ensure thorough due diligence in all transactions the company engages in, especially significant deals like mergers or acquisitions. This includes assessing the financial health, management capabilities, and potential risks associated with the transaction.
Adherence to fiduciary duties: Directors should always act in the best interests of the company and its stakeholders, including shareholders, employees, and creditors. This means making informed decisions based on accurate information and sound judgment.
Avoid conflicts of interest: It is crucial to avoid conflicts of interest and ensure that personal interests do not compromise decision-making. Directors should disclose any potential conflicts and recuse themselves from relevant discussions and decisions.
Ensure robust corporate governance: Effective corporate governance structures and practices are essential. This includes having a competent and independent board, clear policies and procedures, and regular oversight and reviews of the company’s operations.
Prioritise employee welfare: Directors must consider the welfare of employees, particularly concerning pension schemes and other benefits. Ensuring these are adequately funded and managed is a key responsibility.
Consider the risk of insolvency: The misfeasance and wrongful trading tests are applied to each individual Director, not the board of Directors as a whole. When considering their duties as a Director in this regard, each individual Director should:
• regularly assess whether they ought to conclude that there is no reasonable prospect that insolvency can be avoided. It is not enough to consider transactions by reference to short-term cash flow impact. One that buys time may lead to personal liability for a Director if they simply delay the inevitable;
• fully inform themselves about the affairs of the company, including asking for, receiving and carefully considering appropriate management information;
• document their decisions and reasons for them, and with the benefit of appropriate professional advice where required (although it is the Directors and not the advisors who must make the final judgment); and
• maintain adequate Directors & Officers insurance cover. In the 2024 case the judge refused to limit the compensation ordered payable to the level of cover the directors had in place.
