Director’s Duties Can Survive Insolvency Process

In the recent high court case Re Systems Building Services Group Ltd [2020], there was considerable debate and judgement made on whether a director’s general duties, as outlined in section 171 to 177 of the Companies Act 2006, survive a company’s entry into a formal insolvency process.

Although traditionally equitable principles are rooted in common law, since their codification many now see the ‘General Directors Duties’ as the pillars of correct corporate governance. Their cataloguing in the Companies Act has not, however, limited their discussion in legal proceedings; constant debate is had as to their reach and application to the day to day running of a company. In essence, the Companies Act places a mandatory responsibility on Directors to comply with the following duties during their tenure as director, and, in some instances, beyond:

1. To act within their powers;
2. To promote the success of the company;
3. To exercise independent judgment;
4. To exercise reasonable care, skill and diligence;
5. To avoid conflicts of interest;
6. Not to accept benefits from third parties; and
7. To declare interest in proposed transaction or arrangements with the company.

In Re Systems Building Services Group Ltd [2020] the Company’s liquidator, Mr Hunt, had commenced proceedings against its System Building Services Limited and their former director Mr Michie. Amongst a number of allegations, the liquidators claimed that Mr Michie had breached the director’s duties (listed above) by ‘causing or allowing’ payments to a creditor.

Specifically, Systems Building Services Group Limited claimed that Mr Richie breached duties 1,2 and 4 by paying out a total of £19,000 in favour of one of the Company’s creditors, shortly after the company had entered into administration. ICC Judge Barker found that, in causing or allowing these payments to be made to CB Solutions on the eve of the Company entering into administration, the First Respondent:

“(1) failed to give proper consideration to the interests of the creditors as a whole, in particular their entitlement to share rateably in the Company assets on a pari passu basis, contrary to s.172 CA 2006; (2) failed to exercise reasonable care, skill and diligence, contrary to s.174 CA 2006; and accordingly (3) was guilty of misfeasance under s.212 IA 1986”.

Key to Barker J’s findings was that the Companies Act 2006 makes it clear that the general duties of a director have the propensity to extend beyond a director’s time as a director. For example, the duty to avoid a conflict of interest with the company (s.175 CA 06) and duty not to accept benefits from a third party (s.176 CA 06) explicitly continue to apply beyond the ending of a director’s tenure. Additionally, given that the duties are rooted in common law and equity (as mentioned above) Judge Barker reiterated that the duties should be interpreted and applied with that in mind:

“these underlying common law rules and equitable principles [on which the duties were based] were plainly of sufficient flexibility to extend beyond the company’s entry into formal insolvency process such as administration or voluntary liquidation.”

Finally, looking to Insolvency legislation, Judge Barker noted that the Insolvency Act 1986 makes it clear that just because a company enters administration or voluntary liquidation, this does not itself guarantee the removal of a director from office. “There is nothing in case law preceding the Companies Act 2006…to suggest that such duties cease on a company’s entry into a formal insolvency process” she concluded.

Directors are uniquely subject to specific legal obligations in many areas of their business life. This recent case serves as a timely reminder that these duties will survive a company’s entry into administration and that such duties are independent of, although will likely act alongside, the duties any appointed administrator or liquidator.

The full judgement can be found here.