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A Director’s Liability When A Business Goes Bust

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Last week news broke of yet another British high-street casualty.  Administrators for British Home Stores (BHS) announced they were unable to find a buyer for the financially troubled chain store and put the company into liquidation.  All 163 UK stores are to be closed down creating a loss of 8,000 jobs. A further 3,000 non-BHS employee jobs in catering and cleaning are also at risk. Furthermore, the employee pension fund is £571m in deficit (this figure is based on what it would cost an insurer to buy it out).

How you ask?

Anger has been directed at Sir Philip Green, who sold BHS for £1 in March 2015 to Retail Acquisitions, run by twice-bankrupt ex-racing driver Dominic Chappell, who burnt through more than £100 million in 13 months despite attempts by BHS management to block ‘inappropriate’ spending.

Sir Philip has passionately stressed that he is not responsible for the beleaguered department store’s ills.

“If you buy my house and it falls down, is it my fault?” he asked an interviewer. “As far as I’m concerned, in terms of the actions we’ve put in place, there’s no reason they should get in trouble.”

“Now, where they get to — I’m not the driver. If I give you my plane, right, and you tell me you’re a great driver and you crash it into the first mountain, is that my fault? I know what they’re getting today is 100 per cent clean.”

Is he right to think he can walk away from the BHS train crash unscathed?  What are the responsibilities of past and current company directors in the event of a company falling into liquidation?

Director’s duties for a company about to, or likely to become insolvent

Directors of companies which become, or are likely to become, insolvent are under a duty to maximise the return to that company’s creditors. This supersedes the duty to act in a way that ensures the company’s success.

The Companies Act 2006 sets out most, but not all of the duties imposed on directors by case law and equitable principles. There are seven general duties, of which three are most relevant to companies in financial difficulties:

  • the duty to promote the success of the company for the benefit of its members as a whole;
  • the duty to exercise independent judgment, and
  • the duty to exercise reasonable care, skill and diligence.

The period in which the directors’ duties change from being primarily owed to the shareholders of a company to being owed to its creditors is commonly referred to as the ‘twilight period’.

architecture-1048092_1920Personal liability of directors

Directors of companies experiencing financial difficulty or that are in administration need to tread carefully when making decisions to avoid becoming personally liable under the Insolvency Act 1986 or the Company’s Act 2006.

Company directors may find themselves personally liable if they commit the following whilst the company is in a financially precarious position, particularly given they owe their primary duty to creditors:

  • misfeasance,
  • fraudulent trading,
  • wrongful trading, and
  • voidable transactions (those which may subsequently be annulled or adjusted by the court).

Misfeasance

If a company director retains or misapplies company money or property, or is guilty of misfeasance or breach of fiduciary duty, the receiver or administrator can apply to the courts to have the company money returned and have the director compensate the company for the misfeasance or contribute towards the company’s assets that are available to its creditors.

Fraudulent trading

During the course of company administration or liquidation, a company director cannot carry out business in a way that is designed to defraud its creditors.  Fraudulent trading is generally hard to prove and requires a high standard of proof. If found in breach, a company director can be required to contribute towards the company’s assets that are available to its creditors and face criminal charges.

Wrongful trading

If, in the course of a winding up or administration of a company, it appears that before the commencement of the winding up or administration:

  • a company director, including a shadow director, knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration,
  • continues to trade, and
  • does not take all steps to minimising the potential loss to the company’s creditors

then the liquidator or administrator may apply to court for an order that the director be required to make such contribution towards the company’s assets as the court thinks fit.

It must be noted that a director who is appointed the role of finance director or managing director will be held to a higher standard than other directors.

Voidable Transactions

Pursuant to the Insolvency Act 1986, the transactions below may be altered or set aside by the court, if they are made by the company within a certain period before insolvency takes place:

  • transactions at an undervalue,
  • preferences,
  • extortionate credit transactions, and
  • lightweight floating charges.

Directors’ responsibilities regarding company pensions

One of the most contentious issues in the BHS collapse is the company pension fund.

Fortunately, in these situations, the Government steps in to protect past and present employees.  The Pension Protection Fund (PPF) is a government-run strategy to rescue the schemes of firms that have gone bust. It pays full pensions to those who have retired but imposes a 10 per cent cut for employees who retire early or remain in work.

This is where Sir Philip is likely to find he is not blameless.

The Pensions Regulator has the authority to pursue past directors of an insolvent company if they believe that the director still has responsibility to members of the pension scheme.

In Summary

Company directors shoulder enormous responsibility, especially in times of financial trouble.  Creditors and employers rely on the leadership team (the directors) of an organisation to ensure they receive, in as far as possible, what they are owed if a company is wound up.

It is therefore imperative for directors to seek expert legal advice to protect both their interests and the interests of all parties affected by an insolvency thereby limiting their personal liability.

Saracens Solicitors is a multi-service law firm based in London.  We have a dedicated and highly experienced insolvency law team who can assist you with any questions you have regarding company administration and liquidation.  For more information, please call our office on 020 3588 3500.



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