Directors remain ‘on the hook’ after an insolvency office holder is appointed18 Feb 2020 // Insights
Suzanne Jones examines directors' duties in her recent article.
Many directors are of the view that they are released from their duties as a director following the appointment of an insolvency office holder. The recent case of Hunt (as Liquidator of System Building Services Group Ltd) v Michie & Ors  EWHC 54 (Ch) reminds directors that their duties continue after an insolvency process. Indeed, there is little case law on these matters and little commentary, however this is not new law (see, by way of example, McTear v Engelhard & Ors  EWHC 1056 and Mortimore on Company Directors, Duties, Liabilities, Remedies (Third Ed, 2017). The lack of case law in this area is likely down to the fact that, for the most part, insolvency practitioners are highly effective guardians of the assets of the companies to which they are appointed.
Directors duties continue when a company enters into administration or creditors’ voluntary liquidation. Although these provisions do not remove a director from office, a director of a company in administration may not exercise management power without the consent of the administrator, and subject to s.114(2) and (3). On a company’s entry into creditors’ voluntary liquidation, all the powers of the directors’ cease, save to the extent that the liquidation committee (or absent that, the creditors) sanction their continuance. Note however, that a director’s powers cease once a company enters into compulsory liquidation. The duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation. Those duties are independent of, and run parallel to, the duties owed by an administrator or liquidator appointed in respect of the company.
The case of Hunt v Michie & Ors is a stark warning to directors that they still owe duties after the appointment of an administrator or a liquidator of a voluntary liquidation.
Below I discuss the two heads of claim which relate to directors’ duties post administration or creditors’ voluntary liquidation. The facts of this case are unusual, as it is rarely the case that a director has as much control over company assets as Mr Mitchie, the director of this Company had; insolvency office holders usually take control of company assets and act as guardians of the assets, and a director would not have the opportunity to deal with company assets in the manner in which Mr Mitchie was permitted to do so in this matter. This case highlights many failings on part of the administrator and first liquidator (Mrs Sharma). It appears that she failed to preserve and protect the assets, and realise the best possible price, however, the second liquidator who brought these proceedings (Mr Hunt) decided, quite rightly, not to enter into costly litigation with Mrs Sharma, as she is a bankrupt individual.
First head of claim: The Property
The first claim against the director was in respect of a residential property owned by the Company (the Property). Mrs Sharma obtained a valuation, although she did not market the Property. Not only did she fail to market the Property, she allowed the director to use the Property rent free. It is not clear when sale of the Property completed, however it was at least 14 months after the commencement of the administration. It appears that Mrs Sharma breached her duties as she did not preserve and protect the assets and realise best possible price; however, while she may also have been at fault, this is no defence for Mr Mitchie, or indeed any other director who faces such proceedings. The duties owed by Mr Michie to the Company are independent of those owed by Mrs Sharma. Mr Mitchie sought to buy the Property for himself, and in evidence he repeatedly referred to paying the ‘proper value’, ‘proper price’, or ‘market value’, although he did not identify a figure. Evidence of the expert at trial was that the value of the property was significantly higher than Mr Mitchie paid for it. As a director, Mr Mitchie owed duties to the creditors, and the manner in which he dealt with the acquisition, in that he sought to secure the purchase of the property for himself and he failed to offer this to the market, is a clear breach of duties. He acquired the Property at a price which was advantageous to himself and to the detriment of the creditors. The judge found that he had breached his duties in respect of how he dealt with matters concerning the Property and that there was an institutional trust.
Second head of claim: Payments to CB Solutions UK Limited
Following the appointment of the administrators three payments were made to CB Solutions UK Limited (CB Solutions), which had a long association with the Company as a provider of labour for projects. Mr Hunt’s case was that Mr Mitchie had 'caused or allowed' these payments to CB Solutions, in breach of his duties as a director of the Company under ss171, 172, and 174 of the Companies Act 2006, and was therefore guilty of misfeasance under Section 212 IA 1986. On the evidence, the Judge found that these payments were not direct debits or automated payment/drawdown but were instead effected manually, online, by someone with knowledge of the Company's online banking passcodes. Mr Michie ultimately accepted this in cross examination. The Judge found that someone other than Mrs Sharma (and her team) was continuing to monitor and use the Company's bank accounts after it entered into administration. Again, although it is unusual for a director to have access to a company bank account, the point is that Mr Mitchie did and Mrs Sharma did not protect and preserve the assets. The fact that an office holder may have been at fault is no defence. Before the administration CB Solutions were a creditor, however, 6 weeks post the administration it was no longer a creditor, and had been paid in full with money from the Company’s bank account. CB Solutions was a company that was clearly of significance to Mr Mitchie and his connected company. In causing or knowingly allowing the CB Solutions payments to be made after the Company was placed in administration, Mr Michie (1) failed to give proper consideration to the interests of the creditors as a whole, in particular their entitlement to share rateably in the Company's assets on a pari passu basis, contrary to s.172 CA 2006; (2) failed to exercise reasonable care, skill and diligence, contrary to s.174 CA 2006: and accordingly (3) was guilty of misfeasance under s.212 IA 1986.
The duties owed by a director to a company, and its creditors, survive a company's entry into administration and voluntary liquidation. Those duties are independent of, and run parallel to, the duties owed by an administrator or liquidator appointed in respect of the company. A director must act in the best interest of the creditors, even after an administrator of a liquidator or a creditors’ voluntary liquidation is appointed. Directors often think that once an office holder is appointed, all matters concerning a company are dealt with by the office holder. It is indeed correct that permission must be obtained if they are to exercise management powers, however, there are matters, as highlighted in this case, where express consent is not necessarily given or matters may be dealt with without consent, which will expose a director to liability.
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