Insolvency: Not So Easy Being Green?
The BHS saga continues this week, as former owner, Sir Philip Green, is appearing before MPs from the Work and Pensions Committee and Business, Innovation and Skills Committee today to discuss the sale and collapse of BHS. This follows explosive claims by BHS managers to MPs last week that subsequent owner, Dominic Chappell, who bought the company from Green’s Arcadia Group was "a liar" and had his "fingers in the till".
Since the future of BHS started to look bleak Sir Philip, came under the spotlight to account for the retail giant’s demise. Frank Field, who chairs the Work and Pensions Committee, has been particularly critical of him, suggesting the company was used to fund his family’s extravagant lifestyle and that he sold it on to Chappell knowing full well that the company was on the road to ruin. He has further openly admitted that he would like to see Sir Philip be held responsible and to put his hand in his own pocket to make up the shortfall in the pension scheme. So, when a company goes bust, to what extent are its office holders accountable?
Ordinarily, company directors, are under a duty to act in the best interests of the Company and its shareholders. However, once they form the view that the Company is insolvent or even, at risk of becoming insolvent, the director’s duty is to act primarily in the interests of the Company's creditors. This is set out in the Companies Act 2006 and Insolvency Act 1986. Failure to comply with this duty can expose all directors to the risk of personal liability for losses sustained by the Company's creditors following any insolvency process. As in this particular case, these losses can be huge.
In addition, there is a further obligation to manage the affairs of the Company with a view to minimising the potential losses to creditors from the Company's financial position. This is one of the main allegations levied against Green, in that despite significant losses to the pension scheme, BHS continued to trade and he went on to sell it to Chappell, an inexperienced retailer who arguably stood little chance of ever rescuing the company.
When a company goes into a formal insolvency procedure such as liquidation or administration, the insolvency practitioner appointed to manage the company's affairs will be tasked with a duty to investigate the circumstances in which the company became insolvent. This investigation will typically include looking at the conduct of directors, the decisions that were taken with regard to the management of the company's affairs and examining the transactions entered into by the company in the lead up to its insolvency.
The investigation will typically encompass the following grounds:
- Wrongful trading
- Fraudulent trading
- Misfeasance or breach of fiduciary duty
- Transactions at an undervalue
- Personal guarantees
- Various fraud and misconduct related offences under the Insolvency Act 1986
Directors can also be made subject to a disqualification order or undertaking under the Company Directors Disqualification Act 1986 as part of this process.
The crux of this is that directors could face civil and criminal liability as a result of such investigations which may also require them to make a substantial personal contribution to the creditors. Resigning from office or selling on the business is also not enough to avoid such liability. What is more concerning, is that some directors, don’t quite appreciate the extent of these duties before taking up office and more so, when these issues begin to arise, which is often too late.
Until any insolvency process has completed, it is suggested that matters are continually kept under review and records kept. Professional advice should also be sought immediately, particularly where there is any doubt as to how to deal with a particular issue.
Our Commercial Disputes Team deal with all insolvency matters. We can provide you with the specialist advice you need. We have experience in acting and negotiating on behalf of both insolvency practitioners and businesses alike who are themselves facing insolvency.