Sophia Harrison clarifies the law surrounding culpability and the demise of BHS.

Read almost any article about the recent demise of BHS, and you will be drawn into a lurid tale of directors and advisors allegedly driven by greed, self-interest and evidencing a stunning lack of judgement. Indeed, you would be forgiven for thinking it were an episode of House of Cards starring Wall Street’s own Gordon Gekko. But, for all the vitriol and indignation expressed by the public, government and media, no one has yet been held accountable.

BHS was founded in 1928 and was bought by Sir Philip Green in 2000. In March 2015 it was sold to Dominic Chappell’s Retail Acquisitions Limited for £1. Just over one year later, it went into administration.

There was an immediate, almost deafening, public outcry and, soon afterwards, the First Report of Work and Pensions Committee and Fourth Report of the Business, Innovation and Skills Committee into BHS’s demise (the “Report”) was produced.

Running to 61 pages, the Report is damning and emotive. In its conclusions, Green, Chappell and other directors, advisors and “hangers on” are all identified as culpable.

The Report repeatedly criticises Green for (amongst other things) pushing through a rushed sale to someone he knew was a wholly unsuitable purchaser (Chappell), who is described as being out of his depth and in effect having his “hands in the till”. The Report finds that Green’s failure to resolve the problems of the BHS pension contributed substantially to BHS’s demise and that he has a “Moral duty to act” to resolve this problem.

By the last page of the Report, one could almost hear the cries of “Outrage!” and “Something Must Be Done!” from the masses picketing outside Westminster.

However, to date, not a lot has happened. The Pensions Regulator has sent warning notices to Green, his Group and Chappell. The Financial Reporting Council launched an official investigation in June into the PwC audit of BHS for the 2013/2014 financial year after a preliminary enquiry found grounds for misconduct. The SFO is inquiring into the collapse of BHS, but no full investigation has yet been announced. Further, the bar to merit a full investigation by the SFO is high and although an investigation into PwC’s audit is welcome, it will not address the actions of those parties that the Report identifies as being the cause of this collapse. Indeed, while the Report has a very loud “bark”, it seemingly has no bite.

Other legal mechanisms do exist which could seek to hold the culpable to account. The Companies Act 2006, has attempted to codify the duties of directors and the Insolvency Act 1986 contains provisions aimed at constraining and penalising wrongful or fraudulent trading and misfeasance by directors. Various other employment and pension laws also govern directorial behaviour. But are our laws, in particular our insolvency laws, adequate as a tool for driving better “corporate responsibility”?

Arguably, the law’s role is not to impose morality on directors. Morality and law are related, but the law is not a moral code, and for good reason. Whose moral code would the law apply? Yours? Mine? Robert Maxwell’s? Importantly, laws that seek to proscribe specific actions run a real risk of seeming to permit, and therefore endorse, those actions that are not proscribed, leaving the ingenious and their cunning advisors to achieve the same undesirable outcome by non-proscribed routes.

As for our insolvency law, in its purist form, it exists merely to create an orderly winding up (a decent burial if you will) out of the unfairness and chaos of insolvencies, such as that of BHS. So, it may be that our law is not unfit for purpose, but rather that its purpose is not what one might wish it were. As a solution, our insolvency law may benefit from adopting an outcome-based approach to the issue of directorial culpability in an insolvency.

In other words, companies fail for many different reasons. Sometimes the directors were reckless, negligent, fraudulent, careless or just plain stupid and sometimes market and outside forces were at play. The difficulty for the law is in identifying those corporate failures attributable to, or exacerbated by, culpability of the directors rather than outside causes. A mechanism similar to that used in tax law where a distinction is drawn between “evasion” and “avoidance” may be useful in interrogating the motives of directors and thereafter attributing appropriate responsibility and sanctions on the culpable.

That said, if we employ the law to reduce the risk of failure by punishing harshly the authors of those failures, we do so at the risk of discouraging entrepreneurial risk-taking and inadvertently harming the economy in a way that is probably more difficult to correct.