Being a company director is a serious undertaking. As well as being responsible for the success of the business, directors face a range of legal duties and obligations that carry potentially significant – not to mention expensive - personal consequences if they are breached. These legal responsibilities become particularly critical when the business is in distress, and a recent court decision has put the spotlight firmly back on the standard expected of directors in such situations.
The case in question involved the former directors of BHS and their conduct leading up to the company's dramatic collapse in April 2016. The decision in this case has resulted in multi-million pound orders for payment being made against directors as a result of wrongful trading and what is now being called ‘misfeasance trading’ - essentially, trading in breach of the duty to creditors when insolvency was probable, if not inevitable.
With Scottish business confidence surging last month, placing Scotland second in the UK, it’s still vital for business owners and company directors to take heed of the lessons from the BHS case to protect this positive standing. While the specifics of the case are complex, and the judgment spans over 500 pages, the key takeaways for Scottish company directors are clear:
Directors need to be up to the job
As Scotland’s business confidence soars and opportunities for growth - such as entering new markets and investing in team development - emerge, it’s crucial to recognise that strong leadership is essential for navigating these promising times.
The decision in the BHS case makes it clear that being inexperienced or taking a back seat in decisions - or even delegating them to others - doesn't absolve a director from liability, even where they act honestly. In this instance, some directors had significantly less corporate experience than their peers, yet this did not protect them from personal liability even though the judge acknowledged this could potentially result in their financial ruin.
Separately, viewed against this background, non-executive directors should think carefully about whether or not they actually want to take the risk of personal liability for decisions taken by others.
Professional advice isn't always a shield
It's a common mantra from lawyers that directors of distressed businesses should take professional advice as that advice might protect them from personal liability for wrongful trading. However, the BHS decision makes it clear that taking professional advice isn't a silver bullet to a claim against directors.
For it to offer any protection, the advice must be based on complete and accurate disclosure of all relevant facts, provided to the advisor at every critical stage. Moreover, directors must thoroughly consider and act upon the advice for it to have any real value in defending against potential claims.
D&O insurance cover might not be enough
Directors' and officers' (D&O) insurance cover is relatively common and is designed to provide protection against claims brought personally against company directors and officers. In the BHS case, the directors argued that their personal liability should be capped to the amount of their D&O cover.
However, the judge rejected this, clearly signalling that directors cannot rely on insurance to take undue risks without consequence. He also commented that the insurance cover in place was wholly inadequate to cover the possible claims against them, not least given the sums of money they were routinely dealing with.
Given these findings, directors should take a proactive approach and thoroughly review their D&O policy coverage to ensure it offers sufficient protection, rather than resting on their laurels.
Board minutes will be scrutinised – ensure they are accurate
Accurate and detailed board minutes are vital for distressed businesses facing scrutiny. The idea is that a record of the decisions taken will help in the defence of any wrongful trading or breach of duty claim.
In the BHS case, the judge made it clear that standard, pre-prepared board minutes—often drafted by lawyers before meetings—carry far less evidential weight than minutes that accurately and timely capture the full details of the board’s discussions. Directors of distressed businesses should keep this in mind and make sure their board minutes are bespoke, rather than boilerplate, if they want to rely on them in defence of a possible claim at a later date.
The BHS case highlights the serious responsibilities that directors in Scotland face, particularly when businesses are struggling. This ruling serves as an important reminder that directors need to be informed, proactive, and actively involved in their company’s decisions. Strong leadership, accurate record-keeping, and careful consideration of professional advice are all vital in achieving this.
As Scottish businesses enjoy rising confidence, it’s crucial for directors to apply these lessons to protect themselves and their companies. The risks of wrongful trading and misfeasance emphasise the importance of being vigilant and accountable. By learning from both past mistakes and these insights, directors can navigate challenges more effectively, ensuring both their own interests, and the wellbeing of their companies, are safeguarded.
Nicola Ross is a commercial litigation partner and contentious insolvency specialist at top 4 Scottish independent firm MFMac.
