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Directors’ duties post insolvency: Case Law update

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Directors’ duties post insolvency: Case Law update

Directors’ duties post insolvency: Case Law update

Our recent articles have focused on how, as a director of a company, you have certain duties imposed on you by law. This article examines the recent case of Systems Building Services Group Ltd, Re [2020] EWHC 54 (Ch) (21 January 2020), which confirms that directors continue to be bound by such duties after the company enters a formal insolvency process.

In the case of Systems Building Services Group Ltd, it was alleged that Mr Michie, the sole director, purchased a property from the Company acting by its liquidator, at what he knew to be a substantial undervalue. In addition shortly after the Company had entered administration he caused or allowed three payments to be made to a Company creditor.

Judge Barber was asked to consider whether in regard to these transactions the director had acted in breach of his director’s duties, specifically sections 171 -175 of the Companies Act 2006. In determining his judgement, Judge Barber considered the extent to which these general duties of directors survived a company entering into a formal insolvency process.

Of particular relevance to his judgement, Judge Barber stated that:

“The fact that, on a company's entry into administration or creditors voluntary liquidation, the Insolvency Act 1986 is engaged, imposing a series of additional specific duties on the part of a director and limiting his managerial powers to those authorised under or in accordance with the Act, does not, in my judgement, operate so as to extinguish the fundamental duties owed by a director of a company to the company as reflected in ss.171 to 177 CA 2006.”

So what does this mean for directors and what practical steps can a director take to ensure that post insolvency they are not in breach of their duties?

Act in the best interests of creditors

A director must continue to act in the best interests of the company’s creditors. This means ensuring that any assets they seek to purchase from the company have been independently valued and appropriately marketed for sale prior to purchase.

Inform the company’s bank

A director needs to ensure that upon entering a formal insolvency procedure no further payments are made from the company’s bank account by themselves or the company’s employees (save for where they are instructed to do so by the appointed insolvency practitioner or their staff). It is irrelevant whether the payment benefits the director or is a payment to a company creditor.

Co-operate

A director should respond promptly to the company’s appointed insolvency practitioner’s request to provide information and documentation pertaining to the company that is within their knowledge and control.

Remember you are still a director!

A company’s entry into administration or creditors voluntary liquidation does not of itself operate to remove a director from office. Directors should bear this in mind and ensure that their continued conduct does not breach their duties as a director.

If you need any help understanding your position prior to and during insolvency, or you want to take early action to safeguard your position, please contact Frank Bouette or Nicola Holton or you can give us a call on 0345 070 6000.

To find out more about what our Restructuring and Insolvency team can offer, please click here.