Sunil Patel
The collapse of British Home Stores and the subsequent High Court action against its directors serves as a stark reminder of the potential risks for company officers deemed to have breached their company duties.
The former high street chain went out of business in 2016 after running out of money.
Two former directors defending the subsequent Court action were held to be jointly and severely personally liable and ordered to pay £110 million to creditors.
One director was held to be innocent of dishonesty with the Court finding that he was “out of his depth” and unable to prevent detrimental decisions. However, the Court made it clear that it would not be able to exercise leniency as this could encourage others to make reckless decisions in the future.
With this article, my aim is to draw your attention to a few areas where directors may find themselves at risk of being personally responsible for breaches of their statutory duties. The issues affect more than just directors, those formally appointed to the post, but also shadow directors (i.e. persons not formally appointed but with sufficient influence and/or managerial control).
The responsibilities of Shadow directors are the same as their Companies House registered counterparts.
Statutory duties
Directors should have a solid understanding of the duties they owe to the Company under the Companies Act 2006 (“the Companies Act”), which include:
- Exercise Powers for Their Proper Purpose – Directors must use their powers only for the purposes for which they were granted. If a director misuses their authority, the Court may impose restrictions limiting the exercise of power to its intended purpose.
- Act in Good Faith and Promote the Success of the Company – Directors must act in good faith, considering the long-term impact of their decisions and the interests of the company’s members as a whole. If a company is or is likely to become insolvent, directors must prioritise the interests of creditors above shareholders.
- Exercise Independent Judgment – While directors can seek and consider third-party advice, including professional guidance, they must ultimately exercise their own independent judgment in decision-making.
- Exercise Reasonable Care, Skill, and Diligence – Directors are expected to act with the care, skill, and diligence of a reasonably competent person with relevant knowledge and experience. If a director has specialist expertise, the Court may hold them to a higher standard when assessing their decisions.
- Avoid Conflicts of Interest – Directors must not place themselves in a position where their personal interests conflict with those of the company. They should avoid profiting at the company’s expense or exploiting company assets, information, or opportunities for personal gain.
Knew or Ought to Have Known
One of the most common issues directors face is the failure to recognise when their company is trading while insolvent—continuing operations and accumulating debts that cannot be repaid. In such cases, a director’s duty shifts from prioritising shareholders to protecting the interests of creditors.
To determine whether a director knew or ought to have known that insolvent liquidation was inevitable, the Court will assess both:
- The director’s actual knowledge of the company’s financial state.
- Whether they exercised reasonable skill and experience, judged against what would be expected of someone in their position.
It is not enough for a director to simply be aware of financial difficulties. A liquidator will scrutinise what actions were taken to protect creditors, considering:
- Whether the director obtained and reviewed sufficient financial data.
- If and when internal and external professional advice was sought.
- The effectiveness of any steps taken to mitigate losses.
Directors can reduce personal liability by proactively seeking professional advice at the earliest signs of financial distress, ensuring they make informed decisions before the company’s situation worsens.
Contact
If you are affected by any issues discussed in this article, please contact Sunil Patel, a legal director from our highly experienced Litigation Department. Sunil Patel can be reached on 0203 114 1180 or sunilp@duncanlewis.com
Sunil Patel – Director and Solicitor, Litigation Department
Sunil Patel is a Solicitor and Director in the Litigation department, specialising in commercial and civil dispute resolution. His expertise spans a wide range of complex legal matters, including:
- Corporate Insolvency: Representing former directors of insolvent companies in cases involving allegations of unlawful trading and breaches of duties.
- Personal Insolvency: Handling high-value petitions, often linked to intricate financial arrangements.
- Multi-Track Litigation: Managing cases such as contractual disputes, partnership disagreements, contentious probate (including capacity challenges and beneficial ownership issues), and high-value debt recovery.
- Construction Disputes: Resolving disputes in the construction sector.
Sunil’s notable cases include representing a high-net-worth individual before the EU General Court to secure the removal of sanctions and advising partners in a multi-jurisdictional practice on contractual rights in insolvency-related matters.
With extensive experience in high-value and complex cases, Sunil provides strategic and effective solutions tailored to his clients’ needs.
Note: This article is not legal advice