Directors’ Liability When Relying on External Professional Advice

Directors routinely take professional advice on legal and other matters, but to what extent can they rely on it when discharging their legal duties under company laws? The expert corporate lawyers at ParrisWhittaker advise companies and directors on company and commercial matters and when disputes arise.

In a salutary ruling from the UK’s High Court¹, directors are reminded of the utmost importance of complying with legal duties – regardless of advice sought from professional advisers. The ruling has important persuasive authority on the courts in The Bahamas.

Directors’ duties

Directors of companies in the Bahamas owe strict duties under company law, even if the company is facing insolvency or already in liquidation. Their duties are set out in the Companies Act, and require that directors must “act honestly and in good faith” and with “the same care, diligence and skill that a reasonably prudent person would exercise” in similar circumstances.

Where a director is in breach of duty, they will not usually be personally liable for any losses suffered by the company (unless there is wrongful or criminal conduct, such as wrongful trading, fraud, or theft).

What’s the background?

The BHS (British Home Stores) Group was a retail giant on UK high streets for decades but went into liquidation in 2016. Following a wrongful trading trial, the defendant directors were found to have caused the already insolvent company to increase its financial deficit by £140 million without justification.

As a result, two of its directors were ordered to pay £6.5m each for wrongful trading (even though only one of them was found to have been dishonest).

They were also found liable for individual misfeasance claims having breached further duties under company law, including the duty to promote the success of the companies by considering the interests of their creditors.

If they had complied with their duties on or before the dates in question, the companies would not have continued to trade but would have gone into insolvent administration immediately.

Professional advice

Before it went into liquidation, the defendants had taken professional advice from a large number of law firms and accountancy firms – relying on this as evidence that they had discharged their duties as directors.

For example, two of those firms did not advise them that there was no prospect of avoiding insolvent administration or liquidation, while another advised that the companies continue to trade.

The judge noted that while, in general, a director who takes and acts upon expert professional advice “has gone a long way towards performing his duties with reasonable care” – that’s not enough in itself to defend a negligence claim.

Further, the weight to be attached to that advice will depend on factors including the scope of the engagement; the instructions given; the adviser’s knowledge and their advice – and the extent to which the directors relied on it.

The judge added: “Where a professional adviser did not advise the board of directors of a company that they should put the group into administration or liquidation, the weight to be attributed to the absence of that advice will depend on a detailed assessment of the facts.”

In this case, whether or not there was a reasonable prospect of avoiding insolvent liquidation or administration was not a question the professional advisers could or should have been expected to express an opinion on. Rather, it was a question of individual judgment for the directors.

In addition, some of the instructions to advisers had been misleading (one firm had not even been given any relevant financial information).

The outcome is an important reminder that company directors carry the overall responsibility for the decisions they make in respect of the company. Seeking professional advice from external advisers is valuable and necessary – but is not enough to shift the burden of showing their corporate duties have been discharged.

In the worst case scenario, a director faces personal liability for corporate breaches, particularly if they negligently fail to protect the interests of creditors.

How can we help?

We are able to advise directors and other company officers on their legal duties and responsibilities and how to ensure they are compliant. For expert advice from experienced company and commercial lawyers at ParrisWhittaker, call us now on +1.242.352.6112.

¹Wright and Rowley, BHS and others v Chappell and others [2024] EWHC 1417