Key recommendations for Guernsey NEDs when insolvency looms – lessons from BHS

In the wake of the collapse of British Home Stores (BHS), a prominent British retailer, a stark reminder has emerged for directors of Guernsey and other companies: the critical importance of robust governance and accountability in the face of potential insolvency. In this article, Simon Davies, Partner at Ogier in Guernsey, discusses the key lessons learned from the BHS case and provides practical recommendations for non-executive directors (NEDs) to navigate these challenging circumstances.

Case study: A cautionary tale from BHS

In 2015, the iconic British retailer, BHS, fell into administration after decades of trading. This high-profile collapse was followed by a series of investigations and legal proceedings that exposed serious corporate governance failures.

In June 2024, a significant legal ruling held two former directors of BHS personally liable for wrongful trading and a novel offense, trading misfeasance. This landmark decision, handed down by the English High Court, resulted in substantial damages, underscoring the severe consequences of directorial misconduct, particularly when a company is teetering on the brink of insolvency.

The court found that the directors had continued to trade the company while it was insolvent, despite knowing that it was unlikely to be rescued. They were ordered to pay BHS's liquidators £18m in damages from their own pockets for wrongful trading, and over £110m (in a later judgment) for trading misfeasance (by way of contribution to BHS's assets). This decision sent shockwaves through the corporate world, highlighting the importance of directorial duty and the potential personal liability that can arise from poor decision-making.

Practical steps for directors to take

Professional advice

Take outside professional advice (specialist legal/insolvency practitioner and financial) about the risk of liability for wrongful trading. To establish this the company must be in insolvent liquidation and its directors, at some point prior to the winding up, knew or ought to have realised that there was no reasonable prospect of insolvent liquidation being avoided (the knowledge test). Directors should give clear and fulsome instructions and information to their advisors and define the scope of any personal or company advice. Any directors' discussion about the advice should be carefully minuted. The costs associated with taking professional advice before any questions of liability are determined are often covered (at least on an interim basis) by Directors' and Officers' insurance policies.  In some cases, such costs might have to be repaid if a director is found liable for events that have led to an insolvency (and any associated regulatory findings).

Individual accountability

The knowledge test applies to each individual director, not the Board as a whole. Each must decide whether it has been met. Directors should ensure that they have an up-to-date picture of the company's management, trading, financial and cash flow positions, as well as financial forecasts. If necessary, these should be checked daily. Directors should document their decisions properly and contemporaneously, taking appropriate advice to minimise any exposure to personal liability. This will include making a record of any dissent from any decisions taken that they did not approve of. Any delegated functions must be monitored and supervised. Directors can only delegate functions not legal responsibility.  A director whose recommendations are constantly ignored or who is concerned that other directors are not acting in the best interests of the company should consider resigning and ensuring that the reasons for their resignation are properly and fully recorded in correspondence and relevant meeting minutes. The decision to resign should not be taken lightly because every director is required to take steps that should minimise loss to creditors. A director should not resign unless they have taken advice and when they have no other option.

Ask the right questions

Directors should each, and as a Board, consider carefully whether the company can be saved. This will mean considering plans to reduce costs, increasing income, ensuring adequate cash flow and making the company profitable again. This may involve selling parts of the business and making staff redundant. In Guernsey this may mean selling unprofitable assets overseas as there is often no trading or employees in Guernsey. Directors should insist on frequent board meetings and every director should be aware of their own area of responsibility and professional expertise within the company and a plan on what needs to be done. Directors should consider the advisability of putting the company into administration to give it breathing space and prevent action by individual creditors (although in Guernsey this will not prevent the secured creditors taking enforcement action) or placing it straight into liquidation if there is no hope of rescuing the company.

Creditor awareness

Directors have a duty to consider and give appropriate weight to creditor interests in times of financial distress. Major secured and unsecured creditors should be regularly informed and updated about what is going on i.e., whether you are going to continue to trade and if possible obtain their agreement. Directors are expected to exercise reasonable care, skill and diligence when making decisions when the knowledge test is satisfied, particularly if additional borrowing is being considered which may affect creditor interests in the future. Directors should resist short-term transactions which only delay the inevitable and which leave creditors in a worse position down the line. However, ceasing to trade is not necessarily the best option and directors may be found liable if the company entered an insolvency process when there was a good chance of trading through the difficulties. Obtaining proper advice is essential. 

Insurance

D&O insurance providers should be live to developing case law in this area i.e., about companies facing the risk of insolvency, and should ensure cover is commensurate to the size of the business. BHS tells us judges will protect creditor interests and may well ignore the confines of any policy cover, or a director's personal ability to pay, and impose money judgments that are substantial and can lead to personal ruin. 

How can Ocorian support non-executive directors in liquidating corporate structures?

Any process involving corporate structures closing activities or getting into difficulties (whether liquidation, administration or insolvency) is an intricate process that requires specialist knowledge and attention to detail. Missing deadlines or failing to take necessary legal steps can lead to penalties and unnecessary fees.

Our team have specialist knowledge and experience in winding up obsolete entities and handles hundreds of voluntary liquidations a year. If you opt to liquidate some of your entities ahead of potential insolvency, Ocorian can support in drafting all the necessary documents and complete all registry filings and legal notices. 

When did you last independently evaluate your board? 

Bovill Newgate, Ocorian’s financial services regulatory consultancy service offers independent advice on such matters and related governance services. Our panel of independent corporate governance experts from various industry sectors run a streamlined board evaluation exercise designed to spot risks and address potential exposures.

For more information on our Regulatory Consultancy, Governance, Board Evaluation and Voluntary Liquidation services, please reach out to the team. 

Authors 

Simon Davies, Partner
Ogier (Guernsey) LLP
 
Alex Horsbrugh-Porter, Partner
Ogier (Guernsey) LLP