Systems Building Services Group Ltd, Re

A director’s general duties under the Companies Act 2006 continue during administration and creditors’ voluntary liquidation. Those duties operate independently of the office-holder’s duties and include the duty to consider the interests of creditors as a whole when the company is insolvent.

The creditor-interest duty is ordinarily subjective, but an objective test applies where there is no evidence of actual consideration or a material creditor interest has been overlooked. An insolvent company director who procures an off-market sale of company property to himself at a substantial undervalue breaches that duty. A director may also be liable for knowingly causing or allowing payments to a creditor after administration, and must account for unexplained withdrawals of company money.

The liquidator and the company applied for relief against the former sole director and a successor company. The claims concerned an alleged undervalue sale of company property, payments made to a creditor shortly after administration, payments made to the successor company under a business and assets sale agreement, and unexplained payments to the director.

The court considered whether the director’s general duties survived administration and creditors’ voluntary liquidation; whether the property transaction breached the duty to consider creditors’ interests; whether the creditor payments amounted to misfeasance; whether sums paid to the successor company represented excluded cash at bank; and whether the director had accounted for payments received from the company.

1. General duties during insolvency. The general duties in ss 171 to 177 of the Companies Act 2006 continued while the respondent remained a director during administration and creditors’ voluntary liquidation. The duties were independent of, and operated in parallel with, the duties of the administrator or liquidator. The restrictions imposed by the Insolvency Act 1986 limited the exercise of managerial powers but did not extinguish those general duties.
2. Creditors’ interests. Where a company is insolvent or likely to become insolvent, the director’s duty under s 172 includes acting in the interests of creditors as a whole. The test is ordinarily subjective. Where there is no evidence that the director actually considered the company’s or creditors’ interests, or where a material creditor interest was objectively overlooked, the court applies the objective question whether an intelligent and honest director could reasonably have believed that the transaction benefited creditors.
3. Property claim. The director procured an off-market sale of the company’s property to himself for £120,000 when he knew it was worth substantially more and knew that the company was insolvent. He failed to regard the interests of creditors as a whole and breached s 172(3). The possible fault of the liquidator did not provide a defence. Relief under s 1157 was refused. An institutional constructive trust arose, subject to credit for the purchase price and £20,000 proved expenditure on works.
4. Payments to CB Solutions. The director either made or knowingly allowed three manual online payments totalling £19,000 shortly after administration. He thereby failed to consider creditors’ pari passu interests and failed to exercise reasonable care, skill and diligence. He was liable for misfeasance under s 212 of the Insolvency Act 1986. Relief under s 1157 was refused.
5. Payments to SBSL. The company’s debts and work in progress had been sold to SBSL for £30,000 plus VAT. The first two payments to SBSL, totalling £64,135.51, represented cash at bank excluded from that agreement. SBSL had provided no consideration for those sums and was unjustly enriched. It was ordered to restore them with interest.
6. Director’s account. Once receipt of company money by a director was established, the burden was on him to show that the payments were proper. Missing company records did not justify adverse inferences against him where the loss of those records was not his fault. However, the court could draw adverse inferences from the absence of his own accounting records. He failed to account for £65,513.28 and was ordered to repay that sum with interest.
7. The court found for the applicants on the property and CB Solutions claims, on the secondary SBSL claim, and on the director’s account claim. Costs and the precise form of order were reserved for further submissions.

First-instance decision of the High Court (Chancery Division). No appeal is stated in the judgment.