'I can't be responsible for every single thing that goes on at Sports Direct.  I can't be. I can't be!' 

Mike Ashley founder and Executive Deputy Chairman Sports Direct appearing before the Business Innovation and Skills Select Committee (June 2016)

We're sure few sympathised with billionaire Mike Ashley defending himself against the appalling working conditions and practices at Sports Direct. He does however raise an issue that we're sure many directors only really consider when something goes wrong.  To what extent is a director responsible for what happens on 'their watch'?

Is there a difference as Phillip Green, former Chairman of collapsed construction firm Carillion, tried to suggest between responsibility and culpability?  When appearing before the Works and Pension Committee in February 2018 he said his responsibility for the collapse of the company was '…full and complete, total …..Not necessarily culpability but full responsibility'.  He appeared to accept responsibility but not the blame, a form of 'no fault' responsibility. 

During the VW emissions scandal Group Chief Executive Martin Winterkon resigned saying his company had 'broken the trust of our customers and the public'. A slightly softer way of saying we were guilty of criminal offences by actively installing software that artificially lowered nitrogen oxide during testing on 11 million of our diesel engines to 'cheat' emissions test. In the U.S.VW admitted guilt to all criminal charges costing them approximately US$25Billion. A very costly' breach of trust'.

In the UK there is a significant amount of legislation placing duties upon directors, breach of which can result in personal liability including: disqualification; fines and imprisonment. 

Dominic Chappell, former owner of BHS is a recent example of a director being held in breach of his duties. Mr Chappell purchased BHS from Sir Phillip Green for £1 in 2015. 13 months later BHS was placed into administration with a £571m pension deficit. During the 13 months Mr Chappell personally extracted £2.6m from BHS.

In March 2018, the Insolvency Service announced that it intends to ban Dominic Chappell and 3 former BHS directors from serving as company directors for 15 years pursuant to the Company Directors Disqualification Act. He was also fined £50,000 plus £37,500 in costs for the criminal offence of failing to provide information and documents to The Pensions Regulator (the first prosecution of its kind). Mr Chappell is appealing the £9.5 million The Pensions Regulator previously ordered him to pay towards BHS's collapsed pension scheme. 

Interestingly despite the Parliamentary Committees' investigating the collapse of BHS concluding that: 'Sir Phillip Green, Dominic Chappell and their respective directors advisers and hangers-on are all culpable.' Sir Philip Green has not faced disqualification proceedings. As part of a settlement with liquidators Sir Phillip paid £363m to BHS's pension fund and agreed to pay £30m to BHS creditors. 

Although the action taken against Dominic Chappell demonstrates that our legislative and regulatory framework does have 'teeth'. There appears to be an increasing trend for 'society' to want more by way of punishment than provided for by the current legislation and regulation. Directors asked to account before a committee of M.P's regularly find themselves at the centre of a media circus. The focus of which, is often not the legality of their actions, but rather what society views as 'morally acceptable'. When things go wrong publically 'naming and shaming' those in charge can appear as important as applying legal sanctions/penalties.

With Damian Collins MP, Chair of the Digital, Culture, Media and Sport Committee, insisting that Mark Zuckerberg, Facebook's chief executive, attend before the committee to give evidence on the data incident between Facebook and consultancy firm Cambridge Analytica. The trend for directors being very publically held to account seems set to continue.

Corporate Governance Reform

The Government's first major announcement in the light of these (and other) stories came in November 2016 when it published its Green Paper on Corporate Governance Reform. This sought to strengthen the framework around executive pay, corporate governance in large privately-held businesses, and the steps that company boards take to engage and listen to employees, suppliers and other groups with an interest in corporate performance.

It intends to introduce secondary legislation to:

1. Require quoted companies to report annually the ratio of chief executive total remuneration to the average pay of the company's UK employees, and to set out more clearly in remuneration policies the impact of share price growth on long-term executive pay outcomes

2. Require all companies of significant size to explain how their directors comply with their requirements under Section 172 of the Companies Act 2006 to have regard to employee and other interests

3. Require the UK's largest companies, including privately-held businesses, to disclose their corporate governance arrangements, including whether they follow any formal code, except where they are already subject to an equivalent reporting requirement.

Insolvency and Corporate Governance

The Government's second initiative came on 20 March 2018: DBE&IS published a consultation seeking views on new proposals to improve corporate governance of companies when they are in or approaching insolvency. 

Responses are due by 11 June. The proposals consider the following:

Sale of Businesses in distress

4. Large companies in the UK often operate under a group structure under the control of a holding company (Top Co). This facilitates the ring fencing of high risk ventures from those that are more stable by placing them into separate subsidiaries. This enables start-ups within a group to get off the ground or loss making businesses time to turn themselves around, in each instance with financial support from the parent. 

Sometimes Top Co will wish to dispose of this type of business. This may follow a strategic review across the group, a desire to focus on other core business areas, the need to generate cash or simply that the subsidiary needs more finance or time than Top Co is able to provide.

If the subsidiary subsequently fails, this can adversely affect its employees, customers and suppliers. There is however no requirement of the directors of Top Co to consider the purchaser's credentials and no duty of care to the subsidiary's employees or future creditors.

The proposal seeks to deter reckless sales (like the one to Dominic Chappell). The proposal is that Top Co's directors may be held liable for losses following a sale of the group subsidiary, subject to the following criteria:

  • At the time of the sale, the group subsidiary must either be insolvent, or insolvent but for guarantees provided by other companies or directors in its group;
  • The subsidiary enters into administration or liquidation within two years of the completion of the sale;
  • The interests of its creditors must have been adversely affected between the date of the sale and the liquidation or administration; and
  • At the time that they made the decision to sell the company, the director could not have reasonably believed that the sale would lead to a better outcome for those creditors than placing it into administration or liquidation.

The administrator or liquidator of the former group subsidiary should be able to apply to court for an order that the director contribute a sum that the court thinks fit towards the subsidiary’s creditors. The director should also be liable to be disqualified where appropriate.

This is the most significant change of duty being proposed, (although it remains to be seen in reality how often businesses are sold recklessly). The proposal does not require there to be any causal link between the sale and the failure. It would introduce more due diligence (and cost) on the part of the vendor in the transaction. Directors like certainty and one of the key challenges should this measure be introduced would be to understand exactly what they must do to demonstrate a "reasonable belief" that the sale would lead to a better outcome.  It is difficult to argue with a "reasonable belief" standard, but what is reasonable to one person, may not be to another. Might there be an objective and subjective element introduced as per the test for wrongful trading? What practically should be done? For example, should they be required not only to obtain the purchaser's plans for the business, but to seek supporting evidence?  Would that need independent corroboration? That will either need to be set out in the legislation or more likely developed through case law.

It is possible that this creates a conflict of duties. For example, a duty to act in the best interest of the members of Top Co to get best value (by a sale not liquidation of the subsidiary) might conflict with the new duty being proposed if the credibility of the purchaser was suspect. If any legislation is introduced it might be helpful to make clear which of those duties took precedence so that directors' were not inadvertently caught between a rock and a hard place.

Reversal of Value Extraction Schemes

5. With an eye on the BHS saga, the consultation postulates that the current rules for challenging antecedent transactions do not readily lend themselves to unravelling modern complex value extraction schemes. The proposal seeks to address this issue.  For example, if an investor purchases a company in financial difficulties, introduces a loan payable at a very high rate of interest (from which they benefit) and takes a debenture and the company subsequently enters into an insolvency process, then the scheme to extract value might be set aside.  The rationale is such schemes are said to unfairly protect the investor at the expense of other creditors and do not add value to the company.  

The period of time in which the purchaser could be caught is 2 years within entering into a formal insolvency procedure and only connected parties could be caught. There would be no requirement for the company to be cash flow or balance sheet insolvent at the time of the transaction. 

The introduction of such a rule might have unintended consequences for suppliers of turnaround finance. One challenge would be how to assess whether the rate of interest is excessive. By definition, lenders to distressed businesses are going to want an enhanced level of return that reflects their risk. A second issue would be how to assess what isn't adding value. If the incoming lender gives a company more breathing space to attempt a turnaround, then its directors might consider that it is adding value. If however the company eventually enters into liquidation with more debt than at the time of the introduction of such finance, others may have a different view about whether value was added. 

The Goldilocks outcome would be of course if legislation could be introduced that would be effective to remedy the mischief without supressing turnaround finance.

Dissolved companies

6. The Government proposes that the scope of the current investigation and enforcement regime be extended to dissolved companies. The trigger for an investigation would probably be a creditor complaint. The rationale is that complaints are regularly made by unpaid creditors of wrongdoing by directors who run successive companies which are dissolved. Currently such wrongdoing can only be investigated by the Secretary of State following an application to restore the company to the register. This may make it easier for directors to avoid accountability

The proposed change will doubtless be welcomed by those who have fallen victim to serial wrongdoing by directors.

Other proposals

The consultation asks:

7. Whether existing transparency and governance measures allow for sufficient oversight and control of companies with complex group structures (presumably with an eye on Carillion)
8. What more could be done to promote more engaged stewardship of companies by their shareholders including the active monitoring of risk
9. Whether the framework within which distributable profits can be challenged needs reform, for example:

  • is the definition of distributable profits fit for purpose;
  • whether there is enough accountability and transparency to shareholders and other stakeholders for decisions taken by companies on how to allocate capital as between, the competing demands of investment in R&D, returns to shareholders, pay and benefits for employees, making the business more sustainable and contributions to pension funds.

10. Whether some directors are commissioning and using professional advice without a proper awareness of their duties as directors, and in particular the requirement to apply an independent mind; and
11. Should Government consider new options to protect payments to SMEs in a supply chain in the event of the insolvency of a large customer? The prescribed part (the money ring fenced for unsecured creditors) was introduced in 2003 and is a maximum of £600,000 and hasn't changed since then.


There will always be corporate failures that cause public indignation. Good corporate governance is inherently less newsworthy.  The regulatory framework for directors will continue to tighten.  The proposals should go part of the way to prevent history repeating itself, or at least give insolvency practitioners and regulators more firepower if it does.  Of course the way in which any new regime is implemented will be equally important to its success.

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.