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Directors’ duties cease on insolvency – or do they?

Directors’ duties cease on insolvency – or do they?

4 March 2020: In the recent matter of System Building Services Group Limited (in liquidation) the Court confirmed that a director’s fiduciary duties continued after the appointment of an administrator or liquidator and the subsequent purchase by the sole director/shareholder of a company asset from the office holder was held to be in breach of those duties.

The relevant facts of the case are these. The Company entered administration in July 2012 and the administrator’s proposals circulated in August 2012 estimated the value of the property to be £200,000. In the statement of affairs signed by the director in September 2012, the director stated that the estimated value of the property was £180,000.

The property was not placed on the open market for sale. In December 2012, the administrator and the director reached an ‘in principle’ agreement that he would purchase the property. In her final progress report, circulated in July 2013, the administrator confirmed that she anticipated that there would be a distribution to unsecured creditors which assumed an anticipated sale price of £180,000 for the property.

In June 2013, the administrator informed creditors of her decision to move the Company from administration into a creditors’ voluntary liquidation (CVL) in order that a distribution could be made to unsecured creditors.

In July 2013, the administrator was appointed as liquidator. In July 2014, the director and liquidator agreed that the property would be sold to the director for the sum of £120,000 and a deposit of £40,000 was paid by the director. In September 2014, the director transferred the balance of £80,000. The payment of the balance of the purchase price did not coincide with completion. According to the transfer form, completion did not take place until December 2014. Just two years later, in February 2017, the director put the property up for sale for £365,000. At trial, an expert witness gave evidence that the value of the property in July 2014 in good repair was £265,000.

The liquidator was removed from office and an alternative liquidator was appointed, who brought the proceedings. The Court was of the view that the director had seen an opportunity to acquire an asset cheaply and ordered that the property was held on constructive trust for the company. It was found that at all material times he would have known that the price achieved for the property would have a material impact on the prospect of a distribution to unsecured creditors.

It goes without saying that when a director determines that a company is insolvent (or will be shortly) they must make creditor interests the priority as the Court will not hesitate in ensuring that creditors are not unduly prejudiced by a director’s conduct. If you or a client would like to discuss any insolvency related matter please do not hesitate to contact any of the BRI management team.