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Insolvent company – director liable for cheap deal

The HC has considered a case involving an insolvent company and the liability of directors. A director purchased a property at a substantial undervalue from the company acting by its liquidator. The allegation was that this was for the director’s own benefit and that he did not have regard to the interests of the creditors as a whole. It was alleged that this was in breach of the duties owed by the directors to the company under ss171-175 Companies Act 2006 and in particular his fiduciary duty to act in the best interests of the company’s creditors. The judgment helpfully summarises these provisions:

  • s171 – a director of a company must only exercise powers for the purposes for which they were conferred;
  • s172(1) – a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole;
  • s172(3) – the duties imposed by s172(1) and (2) have effect ‘subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company’;
  • s174 – a director of a company must exercise reasonable care, skill and diligence;
  • s175 – a director of a company ‘must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’.

The court held that the above provisions apply to directors beyond the life of the company and into liquidation.

The property in question was owned by the company and was not placed on the open market for sale. The judge accepted the assertion that the director saw an opportunity to ‘pick up an asset “on the cheap” and took advantage of that opportunity; an opportunity which he only knew about through his position as sole director of the company, as the property had not been put on the open market’. He also listed the circumstances which convinced him that the director knew that the property was worth significantly more than he paid for it:

  • he had a long association with the area;
  • he knew the purchase price originally paid for the property;
  • he had signed audited accounts for the company, giving the value of the property;
  • he had informed the liquidator of the higher values and he had signed a statement of affairs confirming the value;
  • the fact that the liquidator may also have been at fault was no defence as far as the director is concerned – his fiduciary duties as its director were independent of the duties owed by the liquidator.
  • The HC was not prepared to accept the argument that the director ought fairly to be excused from liability for his breach and held him liable to pay the liquidators the shortfall. Where the company is insolvent or likely to become insolvent, the duty of a director to act in the best interests of the company is regarded as a duty to act in the interests of its creditors as a whole. See System Building Services v Michie [2020] EWHC 54 (Ch) and reported on www.bailii.org.

 

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