High Court Confirms That Directors Continue To Owe Fiduciary Duties Post Insolvency

The case of Hunt (as Liquidator of System Building Services Group Ltd) v Michie & Ors [2020] EWHC 54 (Ch) examines whether directors' duties continue after the company has become insolvent and confirms that they do, bringing welcome clarity to the point. As such, Insurers will need to review their policies to make clear if they wish to cover this risk.

In this case, System Building Services Group Limited (the Company) was placed into administration on 12 July 2012 and dissolved on 24 February 2016.1 Mr Michie had been a director of the Company on and off for many years and was the sole director of the Company from April 2012.

Following Mr Hunt's appointment as liquidator, claims were brought against Mr Michie for, inter alia2, (i) breach of fiduciary duties in relation to a purchase by him of a property belonging to the Company and (ii) misfeasance (under section 212 Insolvency Act 1986 (IA 1986)) and breaching his fiduciary duties to the Company by causing or allowing payments to be made to one creditor.

Head (i) largely relied on section 172 Companies Act 2006 (CA 2006) which provides that "a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole." Where a company is insolvent, this duty is to act in the best interests of the creditors as a whole (Re HLC Environmental Projects Limited [2013] EWHC 2876 (Ch)).

The breaches of fiduciary duties alleged under head (ii) focussed on section 172 and section 174 CA 2006, which requires a director of a company to exercise reasonable care, skill and diligence.

Directors' duties

Counsel for the defendant sought to argue that once a company enters into administration or a creditors' voluntary liquidation (CVL), the duties owed by directors under CA 2006 only continue insofar as the director is actually exercising the powers of a director, in the capacity of a director, under powers preserved or permitted by the IA 1986. In so arguing, Counsel sought to contend that Mr Michie could, therefore, not be in breach of his fiduciary duties under CA 2006.

The Judge rejected this argument for a number of reasons: The duties in sections 170-177 CA 2006 "extend beyond the exercise by a director of any given power qua director." He gave various examples for this position: section 175, which provides that a director must avoid conflicts of interest, is not dependent on the exercise of a given power...

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