Liquidation and Fiduciary Duties: No Rest for (the Wicked?) Directors

15 April 2020

In Hunt (as Liquidator of System Building Services Group Ltd) v Michie & Ors [2020] EWHC 54 (Ch), ICC Judge Barber has confirmed that directors of insolvent companies remain subject to fiduciary duties, even after those companies enter into an insolvency procedure.

Background

Mr Michie was a director of System Building Services Group Ltd (“SBSG”). SBSG was placed into administration on 12 July 2012 with unsecured creditors claiming more than £1m. At that time, Mr Michie was the sole director and sole shareholder of SBSG. InJuly 2013 the administration was converted into a creditors’ voluntary liquidation. Mrs Gagen Sharma was the appointed office holder throughout both insolvency procedures. 

SBSG was dissolved in February 2016 and subsequently restored to the register by Mr Hunt, the applicant, who was appointed as SBSG’s liquidator on 3 May 2017. The reason for the restoration was that Mrs Sharma had been found liable for serious misfeasance while appointed to office in another matter, and was later adjudged bankrupt and therefore no longer permitted to act as an insolvency office holder. Mr Hunt took over a number of Mrs Sharma’s appointments and restored various dissolved companies of which she had been the office holder, of which SBSG was one, in order to investigate the probity of their insolvency processes.

The court proceedings concerned four heads of claim arising from the events leading up to SBSG’s dissolution, of which the following two were the subject of arguments concerning the applicability and scope of a director’s fiduciary duties:

  1. Mrs Sharma permitted Mr Michie to acquire a property at a substantial undervalue from SBSG in 2014, while he was still a director of SBSG during the liquidation period; and
  2. Mr Michie ‘caused or allowed’ SBSG to pay £19,000 to a particular creditor, very shortly after SBSG had entered into administration, on 17 and 19 July 2012.

The issue

Claims were asserted against Mr Michie for breach of his statutory fiduciary duties in respect of the above two heads of claim. This led to a debate at trial about the scope of the duties contained within sections 170 to 177 of the Companies Act 2006 (“CA 06”). In particular whether a director of an insolvent company continues to owe duties to the company in circumstances where an office holder with full statutory powers has been appointed and that director is no longer capable of exercising any management powers without the permission of the office holder or liquidation committee. 

Mr Michie’s counsel submitted that a director’s duties do survive entry into an insolvency process, but only insofar as they apply to the exercise of power by that director as a director. Against this, Mr Hunt’s counsel submitted that in an insolvency process directors, as well as office holders, have an important part to play, and the continuation of the directors’ fiduciary duties during that time is an important element of the protection afforded to the company and its creditors under English law.

The decision

ICC Judge Barber had little difficulty in dismissing Mr Michie’s position, making the following points in her judgment, amongst others:

  • The duties in sections 170 to 177 of the CA 06 are general duties. They are not engaged only when a director is exercising their powers. For example, the duty not to accept benefits from third parties by reason of being a director applies by virtue of that person simply being a director – there is no exercise of power needed.
  • Certain duties, such as the duty to avoid conflicts of interest, continue to apply even after a director has ceased to hold office.
  • The statutory duties are based on, and to be interpreted in accordance with, the common law and equitable duties that preceded them. These duties are understood to apply well beyond entry by the company into insolvency.
  • Section 172(3) CA 06 expressly qualifies the duty to promote the success of the company by making it subject to any law requiring that directors consider or act in the interests of a company’s creditors in specified circumstances. The provisions of the Insolvency Act 1986 contain just such requirements.

Having confirmed that the director’s duties contained in sections 170 to 177 CA 06 survive the entry into insolvency by a company, ICC Judge Barber went on to examine the facts underlying the heads of claim, and found Mr Michie liable in respect of both of those set out above (and indeed a third, which was pleaded on a different basis however).

Comment

It was argued by Mr Michie’s counsel that prior to the present case, the issue of whether a director’s duties survived insolvency was covered only by a slim volume of cases concerning the exercise of a director’s powers post insolvency. While this was not in fact the case, the judge accepted that there were indeed few cases and commentaries dealing with the subject.

For directors of companies facing or going through insolvency, Hunt v Michie sends a clear message that they must abide by their fiduciary duties even after they have lost management control of the company. This is worthy of special consideration where ‘pre-pack’ insolvencies are being contemplated, facilitated by or with the assistance of a ‘friendly’ liquidator or administrator. Should aspects of such arrangements be challenged in the future, directors will need to bear in mind that their actions both before and after entry by the company into insolvency may be scrutinised by the Court, and they may be called upon to evidence compliance with their duties, post insolvency, in subsequent proceedings. If they cannot do so, they may find themselves liable for breach and face a significant order for damages.

Further information

The Dispute Resolution team at Kingsley Napley has extensive experience of dealing with contentious insolvency matters as well as disputes involving allegations of breach of fiduciary duty against directors. If you or your business are in need of assistance in order to navigating these potentially problematic areas, please contact us to find out how we can help you.

About the author

Richard Clayman is a Senior Associate in our Dispute Resolution team. His experience covers a broad range of commercial disputes, acting for claimants and defendants, often in complex, multi-jurisdiction and high value claims.

 

 

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