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The Director’s Duty to Creditors Continues In Liquidation

Overview Of Director Duty to Creditors

Director Duty to Creditors. In the case of Systems Building Services Group Ltd, Re [2020] EWHC 54 (Ch) a company Director, Mr Mitchie, acquired property of the company in liquidation at a “significant undervalue” and appeared to engage in a number of transactions that appeared not to have been in the company in liquidation’s best interests but out of “self-interest”. That position culminated in the Liquidator, Mr Hunt, succeeding in his application against the Director.

The case appears to have been a bit of a classic where a Director’s personal interests appear to have come into some conflict with those of the company in liquidation.

Some interesting issues were thrown up in what appears to have been a fascinating piece of litigation, that perhaps might well warrant being a feature in any Directors’ Duties textbook.

In addition, this case served up for readers prepared to trawl through all of its 252 paragraphs:

  • incomplete records
  • successor liquidator appointed after the restoration of the company
  • personal payments to Directors
  • off-market asset purchase
  • undervalue sale of assets
  • and there was more…

A conspicuously interesting feature that sprouted was the Court’s position on the continuation of Director Duties after the Administration procedure had commenced when the Director purchased a property from the then Liquidator, Mrs Sharma (“Head 1”). Having put the property on the Statement of Affairs at a value of £180,000, he nevertheless acquired it from Mrs Sharma for £120,000.

The extension of the Director Duties seems to have added to other duties, such as the duty to disclose their own misconduct, as was helpfully elucidated in the matter of Item Software (UK) Ltd v Fassihi & Ors [2002] EWHC 3116 (Ch).

Not once but twice in relation to claims against the Director, Judge Barber was not distracted if there was blame elsewhere; notably, if the former Liquidator was at fault: “The fact that Mrs Sharma may also have been at fault” was held “no defence” to claims against the Director.

Too Far?

Did Systems Building Services Group Limited, Re [2020] EWHC 54 (Ch) extend liability too far for the Director in respect of the Head 1 of the claim, in respect of purchase of the land from the former Liquidator at undervalue?

So long as Mrs Sharma was in control of the liquidation, could it not be argued that irrespective of whether or not the sale arose at undervalue that the rules of commercial bargaining should not be fettered?

How are the Director’s duties extended through liquidation if their powers cease automatically by virtue of Section 103 of the Insolvency Act 1986, absent creditor sanction?

If the Director has no power, then how can he or she act in breach of fiduciary duty as opposed some other form of duty? A fiduciary duty presumably arises from an exercise of powers. The duties referred to in the Companies Act 2006 for Directors relates to an exercise of powers commonly associated with codification of fiduciary duty. It might be considered axiomatic that if there are no powers capable of being deployed, then one might wonder how such a breach can arise. Did the Director cause the loss or did Mrs Sharma cause the loss?

It does not seem clear that the Court lept to the position that the Director was some de facto liquidator – did it?

Is it not in this case an instance of commercial bargaining, albeit that perhaps it was not very ‘commercial’ for the creditors? Whilst equity might not wish to assist a volunteer, does that mean the volunteer cannot negotiate?

Not Far Enough?

On the other hand, did Systems Building Services Group Ltd, Re [2020] EWHC 54 (Ch) go far enough on records retention duties for Director Payments?

There was a reference to it not being the fault of the Director that the company records were incomplete.

Questions:

1. Was there evidence to show the company records were complete when produced to the first liquidator?

2. Should it be a mandatory obligation for a Director to retain a complete personal record to justify receipt in any event or else is the burden referred to in cases such as Toone v Robbins, Maroo and Re Idessa etc one lacking much force?

Nevertheless, Judge Barber suggested that Mr Michie had allowed his conduct to drop to ‘that trodden by the crowd’.

Where company records were unavailable, Judge Barber appeared unimpressed by an apparent failure to produce documents that might have been available from within Mr Mitchie’s own personal accounting records.

This is a case where there can be no substitute for reading the full judgment applicable to this post “Director Duty to Creditors” is available here: https://www.bailii.org/ew/cases/EWHC/Ch/2020/54.html

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Disclaimer: Director Duty to Creditors

This page: Director Duty to Creditors is not legal advice and should not be relied upon as such. This article Director Duty to Creditors  is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.