Duties of a Director in the Insolvency of a Company

Core Duties

A director is in a fiduciary position to their company. These duties include:

• a duty to act and use their powers in good faith, in the best interests of their company.
• a duty to exercise their powers only for the purposes for which they were conferred.
• a duty not to put themselves in a position where the interests of the company conflict with personal interests, or a duty owed to a third party.
• a duty not to make a personal profit out of their position as director unless permitted by the company to do so.
• a duty not to contract with others in such a way as to fetter their future discretion.

In addition to these core duties, a director owes duties of skill and care based on the following principles:

• a director must exhibit a degree of skill and care in the performance of his duties.
• a director is not bound to give continuous attention to the affairs of the company
• Certain duties may be entrusted, in the absence of grounds for suspicion, to another official of the company to perform them honestly.

There are also duties imposed on directors by statutory provisions, covering: inside dealing, insolvency, tax and health and safety.

Claims against a director on insolvency

Misfeasance or breach of duty

Under section 212 Insolvency Act 1986, an action may be brought against someone who ‘is or has been an officer’ or the company, in the event that the company in which they held office us wound up, allowing a liquidator, shareholder or creditor to bring an action if that office-holder has:

‘…misapplied or obtained, or become accountable for, any money or other property of the company or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’

A successful action will result in the court ordering the director to repay, restore or account for the money or property.

Wrongful trading

This is where a director allows a company to continue trading where there is no reasonable prospect of avoiding insolvent liquidation. The point where the director should have known that insolvent liquidation was inevitable has been found to rest on the individual facts of each case. The director’s conduct is judged by an objective and subjective standard; objectively, that of a reasonably confident director of the nature and size of the company in question, and subjectively, in the event that the director’s ability is greater than that of the average reasonably competent director, by the standard which that person should have attained.

Disqualification order

The Company Directors Disqualification Act 1986 allows a court to disqualify a director for a set period of time; this may be up to 15 years. When a company is placed into liquidation or administrative receivership, the relevant office-holder is under a duty to submit a report on the conduct of the directors of the company to the Department of Trade and Industry.

Administrative Receivers

An administrative receiver is defined in s 29(2) Insolvency Act 1986 as:

“..receiver or manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.”

An administrative receiver has various obligations when he is first appointed. He must first confirm his acceptance of the appointment, and then send to the company notice of his appointment. He then has 28 days after his appointment, unless there are specific court directions, send such a notice to all the creditors of the company.

Statement of Affairs

An administrative receiver is required to ask for a statement of affairs to be submitted to him by some or all of the following persons:

• Past or present officers of the company
• Those who have taken part in the company’s formation at any time within one year before the date which the administrative receiver was appointed.
• Those who are or have been within that year officers of, or employed by a company which is, or within that year was, an officer of the company.

Any failure to comply with any obligation imposed by the administrative receiver, without a defence, can result in a conviction on indictment to a fine, or on summary conviction to a fine not exceeding the statutory maximum and to a daily fine not exceeding one-tenth of the statutory maximum.

The statement must be verified by an affidavit by the person required to submit it and must show:

• The particulars of the company’s assets, debts and liabilities.
• The names and addresses of creditors.
• The securities held by them respectively.
• The dates when the securities were respectively given.
• Any further information as may be prescribed.

Anyone required to submit a statement of affairs to the administrator must do so within 21 days from which notice was given.

Notice

The administrator must send notice to each person who he would like to submit a statement of affairs from. The notice must inform the recipients of:

• names and addresses of all others, if any, to whom the same notice has been sent.
• The time within which the statement must be delivered.
• The penalty for non-compliance.
• The application to him and all other recipients of their duty to provide information, and to attend on the administrator if required.

Co-operation with Administrative Receivers

Various persons are under a statutory duty to co-operate with an administrative receiver, including:

• Past and present officers of the company (which includes directors).
• Those who have taken part in the company’s formation at any time within one year before the date which the administrative receiver was appointed.
• Those who are or have been within that year officers of, or employed by a company which is, or within that year was, an officer of the company and the administrative receiver deems capable of giving information which he requires.
• Any person who has acted as administrator, administrative receiver or liquidator of the company.

The obligations on each such person are:

•     to give to the administrative receiver such information concerning the company and its promotion, formation, business dealings, officers or property as the administrative receiver may at any time after his appointment reasonably require
•     attend on the administrative receiver at such times as the latter may reasonably require: s 235(5) 1986.

Failure to comply will render the guilty person liable to a fine. An administrative receiver may apply to a court to make an order enforcing this statutory duty. Under s 236(2) 1986, the court may, on application of the administrative receiver, summon to appear before it:

•  Any officer of the company.
•  Any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company.
•  Any person whom the court deems capable of giving information concerning the promotion, formation, business dealings, affairs or property of the company.

These persons may be required to submit an affidavit to the court containing an account of his dealings with the company or to produce any books, paper or records in his possession or under his control relating to the company or any matters concerning the promotion, formation, business dealings, affairs or property of the company.

1. What is the legal effect of a notice of disclaimer?

Power to Disclaim

The liquidator of a company has the power to disclaim onerous property of the company: s 315 Insolvency Act 1986. The purpose of such power was to speed up the process of winding up a company. For example, the liquidator may convert an onerous lease into a monetary liability which could then be proved for immediately. If there is an onerous contract, which the other party refuses repudiation of, the liquidator may disclaim that contract in order to bring the winding up to a close. Disclaimer does not enable the company to disclaim liabilities.

The liquidator does not need leave of the court to disclaim onerous property: s 178(1) 1986. However, the court does retain an inherent jurisdiction to interfere with the liquidator’s decision if an application is made to it under s 168(5) 1986.

An administrator does not have the power to disclaim onerous property, making it preferable for a company to go into liquidation rather than administration.

Property to be disclaimed

‘Onerous property’ is defined as:

•  any unprofitable contract
•  any other property of the company which is unsaleable, or not readily saleable, or is such that it may give rise to a liability to pay money or perform any other onerous act: s 178(3) 1986.

‘Property’ is defined so as to include:

‘…money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest whether present or future or vested or contingent, arising out of, or incidental to, property’: s 436 1986.

Procedure

The liquidator may disclaim property under s 178 1986, following the correct procedure. The liquidator must give notice to every person who claims any interest in the disclaimed property, or is under any liability in respect of the property, not being a liability discharged by the disclaimer (including guarantors). The notice must contain such particulars of the disclaimed property and be signed by the liquidator and filed in court with a copy. The court will then seal the notice and the copy, endorse them, and return them to the liquidator. Copies of the notice should then be sent out to the persons to be served within 7 days after the copy notice has been delivered to the liquidator.

The liquidator must notify the court as to the persons to whom he has sent or given copies of the notice of disclaimer, giving names and addresses and the nature of their respective interests.

Restrictions

A notice of disclaimer may not be given if any person with an interest in the property has applied in writing to the liquidator requiring him to decide whether he will disclaim or not and a period of 28 days beginning with the day on which the application was made, has expired without a notice of disclaimer being given.

Effect of disclaimer

Crown Disclaimer

Where there has been a Crown disclaimer, it has the effect of deeming the property not to have vested with the Crown on the dissolution of the company. It also determines the rights, interests and liabilities of the dissolved company in or in respect of the disclaimed property as if the property had been disclaimed by the liquidator immediately before the dissolution of the company but does not affect the rights or liabilities of any other person except insofar as is necessary for the purpose of releasing the company from any liability.

Anyone suffering loss or damage as a result of the disclaimer is unable to recover it. Instead, they must apply for an order declaring the dissolution to have been void: s 178(4) and 179 Insolvency Act 1986. The effect of the order is that the dissolution is declared void, the company’s property is treated as though it never vested in the Crown on dissolution and the notice of disclaimer is also declared ineffective.

2. What effect does restoration have on the notice of disclaimer?

Where property vests in the Crown as bona vacantia, title may be disclaimed by a notice signed by the Treasury Solicitor. The property will be deemed as not having vested in the Crown. If the company is subsequently restored to the register, the property is deemed never to have vested in the Crown and the disclaimer is treated as never having occurred: Allied Dunbar Assurance plc v Fowle [1994] 2 BCLC 197, [1994] BCC 422.

Conclusion

Directors’ duties are imposed by the Companies Act from the time of their appointment, and continue after a company enters liquidation or administrative receivership. These duties require a company director to act in the best interests of the company. In the event of insolvency of a company, the liquidator or administrative receiver takes charge of the assets of the company for the benefit of the creditors of the company. Company directors would be well advised to give proper attention to enquiries, when called on to do so by the liquidator or administrative receiver.

MORE INFORMATION
For further information and legal advice on duties of directors in the insolvency of a business contact our Michael Czechyra or call us on 020 7353 2732.