Directors' Duties: Striking Off: Think Carefully, Are You Putting Yourself At Risk?

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 [2020] 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...