Systems Building Services Group Ltd, Re

The court held that the statutory general duties of company directors (ss.170 to 177 Companies Act 2006), including the duty in s.172 to have regard to creditors' interests when the company is insolvent, survive a company's entry into administration and creditors' voluntary liquidation. Applying those duties, the judge found that the first respondent, Mr Brian Michie, breached his fiduciary duties by procuring or agreeing to an offmarket sale of the company's residential property at a substantial undervalue and by causing or knowingly allowing payments of £19,000 to CB Solutions shortly after the company entered administration, conduct amounting to misfeasance under s.212 Insolvency Act 1986. The court declared that an institutional constructive trust arose in respect of the property (subject to credit for the £120,000 purchase price and an allowance of £20,000 for repairs found to have been undertaken by Mr Michie), and ordered Mr Michie to contribute compensation for the £19,000 payments. The court also held that two payments totalling £64,135.51 made by the company to the purchaser SBSL were excluded from the sale of work in progress (being pre-existing 'cash at bank') and must be restored, and that Mr Michie must repay £65,513.28 (net) found to be unaccounted withdrawals from the company.

The company, Systems Building Services Group Limited, entered administration on 12 July 2012 and later a creditors' voluntary liquidation. The liquidator, Mr Stephen Hunt, and the restored company applied for a series of remedies against (1) Mr Brian Michie (longstanding director, majority shareholder and later sole director) and (2) Systems Building Services Limited (SBSL), a related purchaser of the company's work in progress.

• Reliefs sought: declarations that the Property (55 Crown Road) was held on trust for the company, relief under s.212 IA 1986 for payments to CB Solutions, recovery from SBSL of monies paid (for want of consideration/unjust enrichment or excluded 'cash at bank'), and a declaration and repayment order in respect of an alleged director's loan/unaccounted withdrawals by Mr Michie.
• Issues framed: (i) whether the Companies Act 2006 general duties survive entry into administration/CVL and their scope; (ii) whether the sale of the Property to Mr Michie at £120,000 gave rise to a constructive trust for the company because of breach of fiduciary duty (s.172 in insolvency); (iii) whether Mr Michie caused or allowed post-administration payments of £19,000 to CB Solutions in breach of duties and thus guilty of misfeasance (s.212 IA 1986); (iv) whether five payments to SBSL (total £169,537.06) lacked consideration or, alternatively, whether two of them (£17,644.80 and £46,490.71) constituted excluded 'cash at bank' under the WIP sale agreement; and (v) whether sums paid to Mr Michie pre-administration remained unaccounted for and repayable.

The judge first addressed the preliminary legal point and concluded that the general duties in ss.170–177 CA 2006 do continue to apply to directors while in office after a company enters administration or CVL, interpreted in light of the common law and equitable principles and subject to statutory limitations in the Insolvency Act where expressed.

On the facts the judge found:

• The Property had not been marketed and Mr Michie, fully aware of previous valuations and the company's insolvency, purchased it off-market in July 2014 for £120,000 — a clear undervalue compared with expert evidence of c.£245,000–£265,000 in July 2014. Mr Michie did not honestly or reasonably believe the purchase was in the creditors' interests. A constructive trust therefore arises, with credit to be given for the £120,000 paid and an allowance of £20,000 for repairs Mr Michie was found to have carried out.
• Three online payments of £5,000, £6,000 and £8,000 to CB Solutions on 17 and 19 July 2012 were made after administration and, on the balance of probabilities, were caused or knowingly allowed by Mr Michie (or by someone acting with his access). Those payments breached ss.172 and 174 CA 2006 and amounted to misfeasance under s.212 IA 1986; Mr Michie was ordered to contribute the £19,000 with interest.
• SBSL purchased the company's debts and work in progress under a written agreement for £30,000 plus VAT. The primary claim for recovery of the full £169,537.06 failed because the WIP sale was proved and consideration was paid. The secondary case succeeded in part: two payments of £17,644.80 and £46,490.71 were found to be pre-existing cash receipts of the company (cash at bank) and therefore excluded from the WIP sale; SBSL was unjustly enriched and must restore those sums with interest.
• On the director's loan/unaccounted withdrawals, after accounting for declared salaries and dividends (taking into account missing company records and certain tax evidence produced by Mr Michie), the judge found that £65,513.28 remained unaccounted and declared repayable by Mr Michie with interest. The court declined to grant relief under s.1157 CA 2006.

The judge reserved precise wording and calculation adjustments for the final order and indicated costs would be addressed on handing down.

This was a first-instance decision in which the court (ICC Judge Barber) found against the first respondent, Mr Brian Michie, on multiple heads. The court held that the Companies Act 2006 general duties (ss.170–177), including the duty under s.172 to have regard to creditors when the company is insolvent, survive a company's entry into administration and CVL. Applying those duties, the court held that Mr Michie breached his fiduciary duties by procuring an off-market sale of the company's property at a marked undervalue and by causing or knowingly allowing post-administration payments of £19,000 to a creditor; both breaches justified equitable and compensatory relief. The court declared that an institutional constructive trust arose over the property (subject to credit for payment and allowed repairs), ordered compensation for the £19,000 misfeasance, ordered SBSL to restore two payments (£64,135.51) treated as excluded 'cash at bank', and ordered repayment by Mr Michie of £65,513.28 found unaccounted, with interest. The court refused to relieve Mr Michie under s.1157 CA 2006.