Directors’ Duties on Corporate Insolvency

Can the duties of a company director survive the insolvency of the company? The courts have decided that they categorically do, in a decision that companies and their directors should note. The specialist corporate lawyers at award-winning Bahamas law firm ParrisWhittaker are highly experienced in advising both corporate clients and individual directors on their duties.

What’s the background?

This ruling was handed down by the UK’s High Court which has persuasive authority on the courts in the Bahamas.

The respondent was the company’s sole shareholder and sole director and he procured and agreed on the sale of a residential property. The property was a company asset and sold by the company administrator to the respondent himself, at a marked undervalue and at a time when he knew the company was in fact insolvent. In fact, he knew it was worth significantly more than he paid for it at the time.

The company
and its administrator brought proceedings against the director. The court ruled
that the duties owed by a director to the company and its creditors “survive
the company’s entry into administration and voluntary liquidation”. Such duties
are independent of and run parallel to the duties owed by an administrator or
liquidator appointed for an insolvent company.

So on the facts in this case, the court concluded that the director had acted entirely out of self-interest, with no regard to the interests of the creditors as a whole. He knew, for example, that buying the property at a significant undervalue would have a material impact on the prospect of a distribution to unsecured creditors.

The court
described the director as “an intelligent
experienced businessman… He cannot possibly have believed that a sale of the
Property to him at that price without any proper marketing was in the interests
of the creditors as a whole”.

He was found to be in breach of his fiduciary duty under section 172(3) of the Companies Act 2006 and had “allowed the level of his conduct to drop to ‘that trodden by the crowd”. The director, therefore, held the property on trust for the company.

What does this mean?

Directors should resist the temptation to do what the director in this case did. As the judge said, he “saw an opportunity to pick up an asset ‘on the cheap’ and took advantage of that opportunity; an opportunity which he came to know about through his position as the sole director of the Company”.

A director’s duties
remain notwithstanding the insolvent state of a company. The court made clear
the continuing nature and extent of those duties, for example, the duty not to
exploit property (even after they cease to be a director) under company law.

How can we help?

We advise and represent a wide range of corporate
clients as well as directors in their corporate duties and obligations. If you
have any concerns in relation to your corporate duties or there is a potential dispute,
contact the expert company and commercial lawyers at ParrisWhittaker for strategic
advice and representation.

¹Re Systems Building Services
Group Limited [2020] EWHC 54