High Court rules directors cannot buy assets of their liquidated company on the cheap

The High Court has ruled that company directors cannot buy assets from their liquidated companies at below market value.

Insolvency and Companies Court Judge Barber gave her ruling in Systems Building Services Group Ltd, Re [2020] EWHC 54 (Ch), a case concerning the liquidation of a construction firm Systems Building Services Group.

Law firm Devonshires, which acted for the liquidator, said the case was the first to consider which director’s duties survived the insolvency of a company and what restrictions a director will face in purchasing assets from an insolvency practitioner.

Brian Michie was the sole director of System Building Services Group, which was placed into administration and subsequently creditors’ voluntary liquidation.

He was found to have unfairly bought a two-bedroom house from the original insolvency practitioner involved for £75,000 less than it was worth, 18 months after his company went out of business.

Mr Michie’s company went into administration in July 2012, and creditors’ voluntary liquidation in July 2013.

He bought the property in Billericay, formerly owned by his company, for £120,000 in 2014 from the liquidator Gagen Sharma.

Ms Sharma was though found liable for misfeasance in another case and made bankrupt in 2016. It was not alleged that Mr Michie knew of any investigations or complaints regarding Mrs Sharma at the time that he instructed her.

The case was then taken on by liquidator Stephen Hunt, of Griffins, for whom Devonshires partner Jim Varley acted.

Judge Barber found Mr Michie underpaid by £75,000 for the property, whose true value was £195,000.

She found he breached his fiduciary duty to act in the interests of the creditors, and consequently held the property on trust for the company.

Judge Barber said: “The duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation.”

Devonshires said she had made a landmark ruling because it meant that directors “cannot simply place their company into administration or liquidation and then buy back the assets from a ‘tame’ insolvency practitioner on the cheap”.

The firm said the ruling confirmed that directors have a duty to creditors beyond the insolvency of their company.

Mr Hunt said: “This wasn’t a pre-pack case in the normal sense, but it was a predetermined sale of assets back to the director through a company that the insolvency practitioner assisted in forming.

“The moral case for pre-pack sales to directors has often been questioned, but this decision opens up the possibility of a clear legal difference between a third-party sale and one to the existing owners.”

Mark Smulian