Directors owe a range of statutory, regulatory and common law duties to their company and, in an insolvency situation, to the creditors of a company. It is important that those duties are satisfied as far as possible, as a failure to comply can bring severe penalties. However, understanding what the law requires is not always straightforward, as proven by the volume of litigation in this field.
The recent case of Davis v (1) Ford (2) Monks and (3) Greenbox Recycling Kent Limited  EWHC 686 (Ch) has highlighted the need for directors (or any person qualifying as a shadow director) to consider the need for specialist advice when putting their company through a dissolution or striking off procedure. This is not least because a poor decision can be revisited many years after the date of dissolution or striking off. Our insight below explains more.
Directors' duties continue despite insolvency
The director duties under the microscope in this case were the fiduciary duties that directors have to promote the success of the company and avoid conflicts of interest, as codified in sections 172 and 175 of the Companies Act 2006.
The directors of a recycling company, Greenbox Recycling Limited ('GBR') were accused of breaching these two duties by diverting business to a company that they had set up whilst in office. The new company, Greenbox Recycling Kent Limited ('GBRK') was owned entirely by the two directors and was developed by them into a successful recycling business.
On the face of it there was a clear conflict between the directors' duty to GBR and GBRK and a failure to promote the success of GBR. So, why would the directors have concluded that it was ok to behave in this way?
One of the directors argued that, at the relevant time, GBR was close to insolvency, had been abandoned by its owner, and was unable to trade. Therefore, it was not in a position to take on new business itself so the new business was taken on by GBRK and GBR dissolved.
That was not considered to be an acceptable defence and the judgment emphasises two points in relation to these duties:
- Sub-section 172(3) Companies Act 2006 is a recognition of the common-law rule that, in circumstances where a company is insolvent or of doubtful solvency, it is incumbent on the directors to take account of the interest of creditors. The rationale being that, because of the company's insolvency, its assets are, in a practical sense, the assets of and for the creditors, pending its liquidation or return to solvency.
- Sub-section 175(3) Companies Act 2006 explicitly clarifies that the 'no conflict' rule applies "in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity)”.
The message was very clearly given that these directors' duties would continue, despite any insolvency of GBR and/or GBR's inability to take on the diverted business itself.
Winding up is not (necessarily) the end
It is worth remembering that companies that have been subject to a dissolution or voluntary striking off procedure can be restored to the register upon the application to court of anyone appearing to have an interest in the restoration of a company. This is potentially a wide pool given that it includes creditors, parties in a contractual relationship with the company and anyone with a potential legal claim against the company (amongst others). It means that actions taken by directors prior to striking off a company can be revisited long after the event.
In most circumstances, an application for restoration must be made within six years of the date of dissolution. This is comparable to the six-year period that an injured party has to bring a claim for breaches of fiduciary duty. However, in this case, the judge concluded that there had been deliberate, dishonest and ultimately, fraudulent behaviour. Therefore the six-year limitation period on the claim for fiduciary duty would not apply and the claim could be made.
Not just directors
The general duties examined in this insight are owed by every person who is a director of the company and any shadow director.
In this context:
- a director includes any person occupying the position of director, regardless of whether their title includes the word director; and
- a 'shadow director' includes a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
Here to help
Whilst there are traps for the unwary, there are also sources of help. For more information please refer to our insight on Directors' duties in testing times or contact one of our specialists who are able to advise on how best to manage the challenges associated with a company that is insolvent or in troubled waters.