General duties of a director survive a company’s entry into administration or creditors' voluntary liquidation (Re Systems Building Services Group Ltd (in liquidation))

General duties of a director survive a company’s entry into administration or creditors' voluntary liquidation (Re Systems Building Services Group Ltd (in liquidation))  

In Re Systems Building Services Group Ltd (in liquidation), the liquidator of a company successfully sued the company’s former director and a company to whom the director had permitted payments to be made after the company had entered administration. The High Court held among other things that: (1) the director’s fiduciary duties to the company survived the company’s entry into administration or creditors' voluntary liquidation (CVL)—and (2) in knowingly purchasing from the company in administration a freehold property which had not been placed on the open market and at a substantial undervalue, the director had acted entirely out of self-interest and failed to have regard to the interest of creditors. He had acted in breach of his fiduciary duties and held the property on constructive trust for the company.

The decision provides a welcome clarification, if needed, that a director’s fiduciary duties extend into administration or CVL. Those duties are independent of and run parallel to the duties owed by an administrator or liquidator. Written by Raj Arumugam, barrister at 9 Stone Buildings, who appeared for the liquidator.

Re Systems Building Services Group Ltd (in liquidation) [2020] EWHC 54 (Ch)

What are the practical implications of this case?

Prior to this decision—and as noted in the judgment—there was limited caselaw and textbook commentary expressly addressing the question of whether a director’s duties continued beyond the company’s entry into a formal insolvency process.

Following this judgment, it is now clear that directors’ duties do indeed continue into the company’s entry into administration or CVL.

Aside from being a significant authority for liquidators considering the probity of directors’ post-insolvency conduct, the case has potential practical implications for directors thinking of buying back assets from an insolvent company. The decision underlines the need for directors to consider whether the sale of those assets by the company at the price negotiated by the director is in the interests of the company’s creditors as a whole. This will be of particular of relevance to directors and insolvency practitioners in the context of ‘pre-pack’ administrations.

What was the background?

The company entered into administration on 12 July 2013, at which time Mr Michie was its sole director and shareholder. The administration was converted into a CVL on 3 July 2013 and the company was dissolved on 24 February 2016.

The company was subsequently restored, and Mr Hunt was appointed liquidator on 3 May 2017.

Mr Hunt applied to the court for relief in relation to four heads:

  • First, after the company entered into administration, Mr Michie bought from the company a freehold property which he knew (and procured) had not been placed on the open market. Mr Michie paid the administrator £120,000 for the property, which was valued at the time at £245,000. Mr Michie put the property up for sale two years later for £365,000. Mr Hunt alleged that Mr Michie was in breach of fiduciary duty and he therefore held the property on constructive trust for the company  
  • Second, payments of £19,000 were made by the company to CB Solutions UK Limited days after the company entered into administration. Mr Hunt alleged that Mr Michie had caused or allowed these payments to be made, without any good reason, and was guilty of misfeasance under section 212 of the Insolvency Act 1986 (IA 1986) and liable to repay those sums to the company

  • Third, the company made payments totaling £169,537 to the second respondent (SBSL) after entering into administration. Mr Hunt alleged that SBSL provided no consideration for any of those payments and sought repayment on the grounds of unjust enrichment. In the alternative, Mr Hunt alleged that £64,135.51 of the payments made to SBSL were excluded from a contract for book debts and work in progress (WIP) entered into between the company and SBSL, and therefore should be repaid to the company on the grounds of unjust enrichment  
  • Fourth, the company made payments to Mr Michie over a two-year period, of which £137,674.59 remained unaccounted for after allowing for alleged dividend payments and certain other payments. Mr Hunt sought repayment of that sum from Mr Michie on the grounds that it represented an outstanding director’s loan or informal unsecured borrowing by Mr Michie from the company

Generally, the liquidator argued that Mr Michie had acted in breach of duties owed to the company under sections 171 to 175 of the Companies Act 2006, including his fiduciary duty to act in the best interests of the company's creditors from the time at which the company became insolvent. The director argued that once a company entered into administration or CVL, the general duties of a director only survived in respect of any exercise by that director of powers qua director in accordance with the IA 1986.

What did the court decide?

The court decided that:

  • the general duties of a director survived the company’s entry into administration or CVL. In procuring the sale of the property without it being placed on the open market and, as he knew, at a substantial undervalue, Mr Michie had acted entirely out of self-interest and failed to have regard to the interests of the creditors as a whole. He was in breach of fiduciary duty and held the property on constructive trust for the company  
  • the director was guilty of misfeasance under IA 1986, s 212 in respect of the payment of £19,000 by the company to CB Solutions UK Limited and he was ordered to pay that sum to the company  
  • Mr Hunt succeeded on his alternative case on the third head, namely that although there was a valid contract for the sale of WIP and book debts to SBSL, no consideration was given by SBSL for payments of £64,135.51 made by the company, which sum SBSL was ordered to repay  
  • Mr Michie was liable to repay the sum of £65,513.28 in respect of sums he had withdrawn from the company and for which there was no reason

Case details

  • Court: High Court, Business and Property Courts, Insolvency and Companies List  
  • Judge: Insolvency and Companies Court Judge Barber  
  • Date of judgment: 21 January 2020

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.