Director’s Liability: Can It Continue After Losing Director Status?

Directors are warned about dealing or intermeddling with company assets after the company has entered into liquidation, as they could attract personal liability. At ParrisWhittaker, our award-winning corporate team advises directors and companies across many industries on corporate and personal liability.

A recent Court of Appeal¹ ruling from the UK, involving a business incorporated in the British Virgin Islands (BVI), has clarified that a former director was still personally liable – even though he was no longer a director of the company. The ruling has persuasive authority on the courts in The Bahamas and should be noted.

Directors’ personal liability

Ordinarily, a director is not personally liable for losses suffered by a company. However, there are important exceptions, for example an individual director may be liable in circumstances such as where corporate losses resulted from that director’s criminal conduct (eg dishonesty or fraud) or they neglected their duties towards the company.

This particular appeal case is particularly fact-specific but it imparts important lessons for companies, directors and legal advisers.

Share transfer

M was a sheikh and an international businessman with several companies which he had founded. One of those companies (MBI), of which he was sole director and shareholder, was established in 2004 for the purpose of holding real estate. A brief timeline of events conveys the essential issues:

• By 2008 – M was thinking about restructuring his business empire
• By 2009, as part of a restructuring, MBI acquired a significant minority shareholding in another of M’s companies, JJW. M was also sole director of JJW
• In 2010, M signed various Instruments of Transfer for the purpose of transferring MBI shares to JJW. The actual Share Transfer Forms were not signed and no further action was taken at the time to complete the transfer
• In 2011, a winding-up order was made in the BVI in respect of MBI
• In 2013, M unsuccessfully applied for the liquidation of the company to be terminated and a subsequent appeal was also refused
• In March 2016, another of M’s companies (JJWG) was entered in JJW’s share register as the new holder of the shares which MBI acquired from JJW back in 2009. The relevant transfer forms were signed by M in 2016

Under English law, a director ceases to hold office when a winding-up order is made in respect of the company. So, under English law the post-liquidation transfer of shares to JJW would have been void.

However, under company law in the BVI, BVI companies and directors are under a slightly different legal position, under section 175(1) of the BVI’s Insolvency Act 2003. This meant the transfer was not without having legal effect.

Therefore, the liquidators brought a claim against M for breach of director’s duty, and that he was liable to compensate MBI. M resisted the claim on the basis that his director’s powers and functions had ended with the liquidation. In other words, he had no powers that he could abuse – so he wasn’t liable.

He also denied the suggestion that he was liable on the basis that he had been ‘intermeddling’ with corporate assets.

Liability

The appeal court found that M was personally liable.

The BVI rules meant that though M remained in office as director, the liquidator had custody and control of the company’s assets and M’s directors’ powers, functions and duties had effectively ended. But even though had no legal power to transfer the shares by 2016, he purported to have exercised his powers as a director he signed the Share Transfer Forms back in 2010. That was what had caused the shares in MBI to be transferred to JJWG.

So while the share transfer forms were not valid, they still facilitated the registration of the shares in JJWG’s name and, therefore, the transfer of title from MBI to JJWG. The share transfer forms had practical effect despite their lack of legal validity.  JJWG had acquired legal title.

M had also breached his fiduciary duty and was personally liable.

The appeal judges also made general observations on the issue of intermeddling. The lead judge noted the fact that M had not personally received the shares was not itself an objection to the liquidators’ claim.  He stated that company property can be the subject of intermeddling without ever being in the hands of the intermeddler.

“In particular,” he said, “causing title… to be transferred elsewhere can potentially amount to intermeddling regardless of whether the intermeddler receives the property.”

How we can help you

If you are a director of a company that is insolvent or has gone into liquidation, it is vital to take expert legal advice before taking any action involving company assets. Contact the specialist corporate solicitors at ParrisWhittaker on +1.242.352.6112

¹Mitchell and another v Al Jaber and others [2024] EWCA Civ 423