Duties as a director never end until you resign… and even after that you cannot use information obtained as a director

Summary

In the Matter of System Building Services Group Limited (In Liquidation) [2020] EWHC 54 (Ch), the court confirmed that a director’s fiduciary duties continued after the appointment of an administrator or liquidator and that the subsequent purchase from the administrator/liquidator of a property at an undervalue was in breach of those duties. As a result, the property was declared to be held by the director on a constructive trust for the company.

Does that mean every pre-pack administration is at risk of being overturned? Not quite. It was something of an extreme case in that the defendant director was the sole director and sole shareholder of the company, the property had not been offered on the open market or even independently valued for the administrator and the expert evidence put the market value at about twice the sum at which the property was sold back to the director.

What happened

The events which led to this conclusion may help explain it:

The Company entered administration on 12 July 2012. In the Statement of Administrator’s Proposals dated 30 August 2012, the estimated value of the Property was given at £200,000.

In the Statement of Affairs signed off by the director on 5 September 2012, the director stated that the estimated value of the Property was £180,000. The Property was not placed on the open market for sale.

On 21 December 2012, the administrator and the director reached an ‘in principle’ agreement that he would purchase the Property.

In her Final Progress Report circulated on 5 July 2013 the administrator confirmed that she anticipated that there would be a distribution to unsecured creditors which assumed an anticipated sale price of £180,000 for the Property.

On 13 June 2013, the administrator informed creditors of her decision to move the Company from administration into a creditors’ voluntary liquidation (CVL) in order that a distribution could be made to unsecured creditors. In July 2013, the administrator was appointed as liquidator.

By email dated 4 December 2013, pressing the director to get on with the purchase, the liquidator referred to the fact that HSBC, the mortgagees, were ‘chasing their redemption amount’.

On 2 July 2014, the director and liquidator agreed that the Property would be sold to the director for the sum of £120,000. £40,000 was paid by the director as a deposit. The sale price was based on the director’s offer of £120,000; there was no horse-trading.

In September 2014, the director transferred £80,000 (the balance of the agreed purchase price of £120,000). The payment of the balance of the purchase price did not coincide with completion. According to the transfer form TR1, completion did not take place until 12 December 2014, almost two months later.

Just over two years later, on 7 February 2017, the director put the Property up for sale for £365,000. An expert gave evidence that the value of the Property in July 2014 in good repair was £265,000.

The legal argument

The director argued that even though he remained a director, his powers were so limited by the administration and liquidation that it was only if he took a decision within the constraints of the administration or liquidation that he had to exercise any duties.

It was held the duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation. Those duties were held independent of and run parallel to the duties owed by an administrator or liquidator appointed in respect of the company: to have regard to the interests of the creditors as a whole.

The fact that, on a company’s entry into administration or CVL, the Insolvency Act 1986 is engaged, imposing a series of additional specific duties on the part of a director and limiting his managerial powers to those authorised under or in accordance with the Act, did not operate so as to extinguish the fundamental duties owed by a director of a company to the company as reflected in ss.171 to 177 CA 2006.

The liquidator was replaced by a second one who alleged that the director knowingly purchased the property off-market at a substantial undervalue for his own personal benefit and that this was in breach of his fiduciary duties.

The defences argued

The following arguments by the director were all rejected:

• That the Liquidator was said to be at fault: that was no defence
• That the Property was a ‘bespoke’ property and difficult to sell
• That at all material times, the director was unaware that the Property had not been placed on the open market for sale
• That the liquidator had ‘sought to sell the Property without success’ and that the Property was sold to him ‘after it had failed to sell to a third party’.

Further:

• The sale price of £140,000 achieved for a nearby property in February 2013. The sale price was held to be an anomaly. The most obvious explanations were that it was sold tenanted or that it was not an arms-length sale.
• In order to ensure that he purchased the Property at market value, the director should have done more than base his offer on that one exceptionally low sale price, which was in any event one year and five months out of date. He could have asked a local estate agent, for example (as he did when later marketing the Property). It suited his purposes not to do so at the time of purchasing the Property
• The director’s deposit of 33% of the purchase price, paid on 2 July 2014 without a legally binding contract in place, which he accepted ‘continued to ensure that the liquidator would not market the Property on the open market’, spoke for itself; as did the subsequent payment of the balance of the purchase price in full, again, without a formal contract in place, approximately two months ahead of completion. These were held to be actions showing that he knew that he was getting the Property at a significant undervalue.
• His claims to have relied upon the liquidator’s ‘expertise’ when he agreed to purchase the property at that price were not made out on the evidence: he was found to have influenced the liquidator.
• Finally it was submitted that the director should be relieved from liability for his breach under s.1157 CA 2006 on the grounds that he acted honestly and reasonably and that having regard to all the circumstances of the case he ought fairly to be excused. This was rejected on the grounds his conduct in connection with the purchase of the Property was not reasonable and this was not a case where he ought fairly to be excused.

Conclusion

It was found that the director saw an opportunity to pick up an asset ‘on the cheap’ and took advantage of that opportunity; an opportunity which he came to know about through his position as sole director of the Company. It was found that at all material times he would therefore have known that the price achieved for the Property would have a material impact on the prospect of a distribution to unsecured creditors.

This was a case of quite blatant conduct. The court placed emphasis on the need for independent third-party valuations and placing assets on the open market for sale.