In a landmark judgment in June 2024, the High Court decision found two of the directors of the collapsed retail giant BHS each personally liable for £6.5 million of wrongful trading to its liquidators, plus a further £110 million in compensation for misfeasance; the largest ever such award. Their third co-director was subsequently ordered to pay at least £50 million to the liquidators. What can company directors learn two years on from the judgment?
A widening of directors’ liability
The Court recognised “trading misfeasance” (continuing to trade without considering creditors’ interests when insolvency is probable) as a viable claim against directors even where wrongful trading had not occurred, thus widening the liability window for directors of companies on the brink of insolvency (if not actually insolvent) and increasing the potential quantum.
The Court also confirmed that merely taking professional advice does not shield directors. They must consider, discuss, and follow it, and document their reasoning. In addition, the Court also refused to cap their liability to their D&O cover, making clear that underinsured directors cannot hide behind inadequate insurance.
Regulatory and legislative developments
BHS’s collapse catalysed broader corporate governance reforms already on the agenda and prompted new criminal investigation powers for the Pensions Regulator. The Economic Crime and Corporate Transparency Act 2023 (ECCTA) is now in force and has expanded the director’s disqualification regime (as well as introducing identity verification).
The Finance Act 2024 now enables HMRC to pursue disqualification of directors involved in tax avoidance; and additional Insolvency Service funding and ECCTA powers are expected to increase enforcement in 2026. There are also proposals being considered for educational programmes for directors to supplement the disqualification regime.
Practical implications
For directors, trading misfeasance is a potent new risk following the BHS judgment. Liquidators and administrators can now pursue them for breach of their duties when a company is approaching insolvency but not yet insolvent, allowing them to pursue directors personally for a greater window of losses to creditors. Although follow-on cases remain limited, the threat is already sharpening directors’ minds and encouraging earlier engagement with insolvency professionals.
Commentary has been extensive. The central concern is whether it blurs the line between wrongful trading and breach of the creditor duty, making it easier for liquidators and administrators to sue directors personally. Some worry this could discourage good-faith rescue attempts. Others counter that it will simply encourage earlier engagement and addressing issues rather than carrying on regardless. The law remains a developing area.
What you can do
The key to minimising the risk is to ensure that, while you are a director, the company’s finances are properly managed, and to deal with any pressing matters (where you can). Practical steps you can take are:
• familiarise yourself with your duties as a director and keep them front of mind when running the company. Also know what is in the company’s constitution and comply with it
• maintain accurate, up-to-date financial management information (it is no good if it is not current) and cash flow forecasts. Do not wait until the year-end accounts – it is out of date by then – and do not focus on just net assets – they are no help if you cannot pay the bills. Review them, and identify and address problems early
• prepare and regularly review and update business plans and forecasts
• hold regular board meetings to review the business plan, the finances, and other matters. Keep minutes of those meetings, and the reasons for decisions made. This will help spot potential problems early on, and enable decisions to be explained when they are questioned years down the line
• take professional advice as and when you need it. The earlier you do so, the more options you are likely to have.
The above is a general guide only. The expert team at DMH Stallard is always happy to assist both boards and individual directors who need more tailored advice.
