Directors of insolvent companies should not be allowed to buy assets of the business on the cheap, the High Court has ruled. In Systems Building Services Group Limited  EWHC 54 (Ch), the court this week ruled that a director is liable to pay the liquidators of his company money he saved by not placing a house owned by the company on the open market when the company went under.
Solicitors acting for the claimant said the case was the first to consider what directors’ duties survive the insolvency of a company.
Insolvency and Companies Court Judge Barber ruled that Brian Michie unfairly bought a two-bedroom house In Billericay, Essex, from an insolvency practitioner 18 months after the company of which he was a sole director was placed in administration.
Barber J said it was 'clear from Mr Michie's actions that he knew that he was getting the property at a significant undervalue' and that, as an intelligent experienced businessman Michie 'cannot possibly have believed' that the sale was in the interests of creditors. She found that Michie acted in breach of his fiduciary duty to act in the interests of the creditors as a whole.
In judgment Barber J ruled that ‘the duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation’.
The claim was brought by national full service firm Devonshire Solicitors acting for liquidator Stephen Hunt. Jim Varley, an insolvency partner at Devonshires, said: 'This is a landmark ruling that reminds directors that they cannot simply place their company into administration or liquidation and then buy back the assets from a “tame” IP on the cheap. This is good news for people who are left out of pocket when companies go into liquidation and I am delighted we have managed to secure this judgment for our client.'
Hunt said that, while the case was not strictly about so-called 'pre-pack' sales of insolvent businesses, it may create a useful opportunity to review guidance on pre-packs to develop the scope and practical effect of post-insolvency directors’ duties.
Raj Arumugam, instructed by Devonshires Solicitors, appeared for the applicants; Cheryl Jones, instructed by Solomons Solicitors, for the respondents.