Following our previous article summarising the landmark judgment in Re BHS Group, we look more closely at the implications of the judgment for directors in the context of obtaining and considering professional advice.
By way of brief recap, on 11 June 2024, Mr Justice Leech handed down his judgment in Re BHS Group. He upheld the joint liquidators’ claims, granting: the largest-ever award for wrongful trading, on the basis that the two former directors (Henningson and Chandler) knew or ought to have known that there was no reasonable prospect that the companies would avoid going into insolvent liquidation by 8 September 2015; and the first award of misfeasant trading in the UK, on the basis that the directors had undertaken ‘insolvency-deepening activity’, failing to consider the interests of the companies’ creditors in breach of duty. The directors were also liable for various ‘individual misfeasance’ claims, for breach of various of the directors’ duties under the Companies Act. In a separate judgment handed down on 25 June 2024, Leech J found the third defendant, Dominic Chappell, liable for an aggregate of £50m in respect of the claims.
In assessing each of the joint liquidators’ claims, it was necessary for the court to determine what knowledge the directors had or ought to have had, at the various relevant dates, and to decide what matters and factors the directors considered, ought to have considered, or failed to consider in the purported exercise of their duties. In this context, the legal and professional advice obtained by the directors was highly relevant.
Throughout the period from acquiring the company until it entered administration, the defendants had obtained advice from numerous reputable professional advisers, including Olswang LLP (Olswang) and Grant Thornton (UK) LLP (GT), which advised on the acquisition and then acted for the BHS Group; and Weil, Gotshal & Manges LLP (Weil) and KPMG, which acted for the group in relation to the company voluntary arrangement (CVA), among others. Indeed, the court commented on the ‘particular resonance’ of the view of the Select Committee (a joint committee of the Work and Pensions and Business, Innovation and Skills committees) in its initial investigation in this regard: ‘Large numbers of advisers were involved… Many of those closely involved claim to have drawn comfort from the presence of others.’
The defendants sought to rely on the fact that they had obtained professional advice on the exercise and discharge of their duties as directors, and that where they had relied on that advice they had prima facie fulfilled those duties. In particular, they relied on the fact that (i) Olswang and GT did not advise at any stage that there was no prospect of avoiding insolvent administration or liquidation; (ii) Weil had positively advised that the companies continue to trade; and (iii) KPMG had advised that the CVAs were feasible.
However, while the court accepted, as a general proposition, that a director who takes expert advice ‘has gone a long way towards performing his duties with reasonable care’, Leech J emphasised that the weight which the court will attach to professional advice will depend upon a number of factors, including the scope of the engagement, instructions given, knowledge which advisers had or assumptions which they were asked to make, advice which they gave (or did not give) and the extent to which the directors relied on that advice. In particular, where a professional adviser did not advise the board that they should put the group into administration, the weight to be attributed to the absence of that advice will depend on a detailed assessment of the facts.
The court analysed these factors carefully in respect of each of the relevant advisers. In respect of key questions, including whether the companies had a reasonable prospect of avoiding insolvent liquidation or administration, the court held that this was not a question on which professional advisers could or should have been expected to express an opinion. It was a question of individual judgement for the directors of those companies. Advisers could not have been expected to do more than identify the issues which the directors had to consider (in Olswang’s case) and the severity of the financial position (in GT’s case).
It was also relevant that in some cases the information provided to advisers was misleading, inaccurate, unrealistic and/or incomplete, such that very little weight could be attached to the resulting advice. However, even where the information provided was materially accurate (as in the case of the information provided to Weil), the court did not find that the advice would have made any difference because the directors did not, in fact, consider it. Notwithstanding references in board minutes (prepared by Olswang and Weil) which stated that, for example, ‘after careful consideration… the directors would be acting in the way they considered would be most likely to promote the success of the company for the benefit of its members…’, the court did not accept that the directors had given any consideration, much less careful consideration to their duties, finding that ‘the minutes are formulaic and none of them record that there was any genuine discussion between board members about the risks of insolvency or the risks to individual creditors’.
So where does this leave directors – is there any point in obtaining professional advice? The answer is yes, but it is important that directors are aware that simply obtaining professional advice will not be enough to discharge their duties, which are personal to them and cannot be delegated. Re BHS Group makes clear that it will not be sufficient to ‘go through the motions’, in particular by including formulaic references to duties in board minutes, if those duties are not actively considered and discussed by the board. It is also of paramount importance, if the professional advice is to be of any value, that it is based on complete and accurate information, and that any assumptions made are robust and defensible.
Clare Hennessey is special counsel at Jenner & Block, London
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