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Directors’ duties and liabilities survive insolvency – a new court ruling

directors' dutiesA recent High Court ruling on directors’ duties after insolvency has said that they cannot buy assets from their liquidated companies at below market value.
The ruling was made after solicitors for the company’s second liquidator who took over the case, Stephen Hunt, argued that Brian Michie as former owner and director of the construction company, System Building Services Group Ltd, had “unfairly bought a two-bedroom house from the original insolvency practitioner involved for £75,000 less than it was worth, 18 months after his company went out of business”.
The company went into administration in July 2012, and then into a creditors’ voluntary liquidation in July 2013 following which Mr Michie bought the property in Billericay, that was owned by his company, for £120,000 in 2014 from the previous liquidator Gagen Sharma.
The case revolved around whether director’s duties survived the insolvency of a company and specifically those relating to the purchase of assets post insolvency.
Directors have specific obligations where a company becomes insolvent. Under the Insolvency Act 1986 (IA 86), they must act to minimise further potential loss to creditors. Under the Insolvency Act 1986, the directors must recognise their duty to the company’s creditors, including current, future and contingent creditors.
While the case did not involve a pre-pack, where the business and assets of an insolvent company are sold by its Administrator to a new company, in this case the assets were sold by an insolvency practitioners back to the director and it has implications for such a sale since it was argued that the director knew the real value of the assets and knowingly bought them for less than what they were worth known as a ‘sale at undervalue’ which is a breach of the IA86.
Mr Hunt has been quoted as saying that: “This wasn’t a pre-pack case in the normal sense, but it was a predetermined sale of assets back to the director through a company that the insolvency practitioner assisted in forming.
“The moral case for pre-pack sales to directors has often been questioned, but this decision opens up the possibility of a clear legal difference between a third-party sale and one to the existing owners.”
I would strongly advise company directors to familiarise themselves thoroughly with their duties and liabilities.
You can download a copy of my Guide to Directors Duties here.

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The main elements of director duties

directors chairBeing a company director carries with it many responsibilities, some laid down by the company’s articles of association, others requiring compliance with various laws and in particular understanding their duty of care and how to avoid breaching the Company Director Disqualification Act 1986.
Directors have a responsibility to guide a company, not only in its compliance with company law but also in the best interests of its ability to operate profitably, and to be mindful of the company’s obligations not only to shareholders but to its employees and suppliers as creditors, as well as its customers and the general public.
They must put the interests of the company before their own and be mindful of the company’s financial position at all times.  While the Company Secretary might carry out the administration and compliance with statutory and regulatory requirements the directors are responsible for all decisions and actions by everyone on behalf of the company and therefore should oversee their activity.
Directors also have specific obligations where a company becomes insolvent. Under the Insolvency Act 1986 (IA 86), they must act to minimise further potential loss to creditors.
They must therefore be careful not to continue to trade in a manner that causes further detriment to creditors, nor to prefer themselves or other parties by paying specific creditors, selling assets under value, or knowingly trading fraudulently.
Continuing to trade is a decision that should be taken by the board of directors with a note made of any dissent. The decision to continue to trade and the reasons why the directors believe this is in the best interests of creditors (not the company) should be recorded in the minutes.

Director duties are covered by a wide variety of laws and regulations

Individually and collectively directors have a duty of care to both employees and members of the public such as compliance with Health and Safety regulations and should be aware of their liabilities under the Corporate Manslaughter and Corporate Homicide Act 2007. This includes actions by their employees.
They must also ensure that the company complies with the Companies Act 2006 and other legislation relating to Employment, Competition, Bribery, the Supply and Sale of Goods, Data Protection and a ton of industry-specific legislation.
In a wider sense, a company’s board of directors should determine and oversee the company’s strategic objectives and policies and monitor progress towards achieving them.
They have responsibility for appointing senior management and ensuring accounts are up to date and that they are aware of the financial position. They must also account for the company’s activities to relevant parties, including shareholders, and can be held to account by the press, Parliament and public bodies.
You can download a free, comprehensive guide to directors’ duties from our knowledge bank