Directors’ fiduciary obligations to Insolvent Company breached

In: Bulletin Published: Sunday 11 February 2018

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Ball (Liquidator of PV Solar Solutions Ltd) v Hughes  [2017] EWHC 3228 (Ch)

The interests of an insolvent company, or a company of dubious solvency, lie with the creditors, and so the directors fiduciary obligation to act in the best interests of the company amount to an obligation to act in the best interests of those creditors. Typically a subjective test is applied to the directors evaluation but this subjective test only applies where there was evidence of actual consideration of the best interests of the company. Where there was no such evidence, the proper test is objective, namely whether an intelligent and honest man in the director's position could reasonably have believed that the impugned transaction was for the benefit of the company (see Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), [2014] BCC 337)

The case of Ball (Liquidator of PV Solar Solutions Ltd) v Hughes  [2017] EWHC 3228 (Ch) is a helpful illustration of these principles in action.

In Ball, two directors of PV Solar Solutions Ltd had applied three, allegedly, unjustified credit entries against their directors' loan accounts. The issue was, did this amount to a breach of their fiduciary obligations to the company. It was the liquidators that commenced the action under section 212 of the Insolvency Act 1986.

Held: The directors were unjustified in applying the three impugned credit entries against their directors’ loan accounts. Such was a breached their fiduciary obligations to act in the best interests of the company's creditors, contrary to the Companies Act 2006 section 172. They had misapplied the company’s assets for their own benefit and failed to exercise their powers for proper purposes, contrary to section 171. That amounted to misfeasance for the purposes of section 212 of the Insolvency 1986 Act and so they were ordered to repay monies to the company. 

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.