Do directors’ duties remain after a company enters into a formal insolvency process?

Nick Booth, partner in Harrison Drury and dispute resolution specialist, comments on the recent ruling that addresses the continuing duties of directors after a company enters into administration or creditors’ voluntary liquidation.

In the Insolvency and Companies Court, Judge Barber ruled in the case of Systems Building Services Group Limited [2020] EWHC 54 (Ch) that company directors continue to owe duties to a company’s creditors following that company having been put into administration and subsequently into creditors’ voluntary liquidation. In this case a director had acquired a freehold property at an undervalue from the company’s liquidators.

Judge Barber found that the general duties of directors as set out in ss171 to 177 Companies Act 2006 survive a company’s entry into administration and creditors’ voluntary liquidation. Whilst in office, a director will continue to owe the company these duties which will continue to be applied and interpreted in accordance with the underlying common law rules and equitable principles.

Importantly, the duty owed by directors pursuant to ss172(3) of the Companies Act 2006; that a director in certain circumstances must ‘consider or act in the interests of creditors of the company’, will continue after a formal insolvency process. On this occasion, the purchase of a company asset ‘on the cheap’ and to the disadvantage of creditors was found to be in the self-interest of the director, disregarding the interests of creditors.

The fact that the liquidator may also have been at fault was no defence for the director and the Judge rejected calls for relief under section 1157 CA 2006 (which would have allowed the court to excuse the director for his conduct in certain circumstances if it were satisfied that he had acted honestly and reasonably having regard to all the circumstances).

Whilst this decision may be welcome news to creditors, it is a salutary lesson for directors who must recognise the potential for personal liability if they do not comply with their duties, particularly in circumstances where they are seeking to acquire company assets at an undervalue and without having regard to the rights of creditors.

It is therefore important that company directors are familiar with and understand their duties and responsibilities owed to the company in which they are a director and the personal liability that they could face if these are not fully complied with.

Directors should take independent legal advice when considering purchasing assets from a company in which they are a director, particularly in circumstances where a duty to consider the rights of creditors has arisen.

If you would like to find out more about directors’ duties or to seek specialist legal advice from Harrison Drury’s dispute resolution and insolvency specialists please contact Nick Booth on 01772 258321.