Trading beyond the Twilight Zone? What are a director’s duties and responsibilities after liquidators are appointed?

Introduction

In a recent article we considered the nature and extent of directors’ duties to take into account the interests of a company’s creditors when a company is in financial difficulty. A recent High Court decision (Mitchell & Krys v Al Jaber & ors [2023] EWHC 364 (Ch)) considered the issue of directors’ duties in the subsequent situation where a company has entered liquidation. Whilst the relevant company was based in the British Virgin Islands (BVI), the case includes analysis of the position in English law.

Background

The facts of the case are complex. In short, the relevant company, MBI, was one of a number of global companies under the control of F. F was MBI’s sole shareholder and F and his daughter (D) were MBI’s directors. In 2007, F restructured various companies via an IPO in another BVI company (JJW Inc). F was JJW Inc’s majority shareholder (holding 88.8%, with the ownership of the other 11.2% being a central feature of the dispute).

In 2009, around 890,000 shares in JJW Inc held by two other group companies (JJW Guernsey and JJAB) were transferred to MBI, and MBI thus became the holder of the remaining 11.2% of JJW Inc’s issued shares. However, the share transfer forms were never registered. JJW Guernsey and JJAB wrote demand letters to MBI in December 2009 seeking payment in respect of the shares, and MBI was wound up in October 2011. Under BVI law, F and D remained as directors following the liquidation and in 2016 F purported to sign share transfer forms assigning the 890,000 shares in JJW Inc from MBI to JJW Guernsey.

The claim

So far as post-liquidation claims are concerned (the pre-liquidation claims are not addressed in this article), the liquidators argued that F and D continued to owe duties as directors post-liquidation and that they had breached those duties by failing to deliver up the shares to the liquidators. They also alleged that F had caused registration of the transfer of the 890,000 shares to JJW Guernsey on 8 March 2016, which had the effect of transferring title away from MBI, and that F had not done so honestly, or in good faith, or in the best interests of MBI.

The decision

Under the BVI legislation, the duties of a company’s directors effectively ceased on liquidation save where a director held company property, in which case he had a duty not to deal with it. On liquidation in 2011, the shares were in the liquidators’ control and they failed to establish any general duty to deliver them up following the purported transfer of legal title, by registration, to JJW Guernsey. There was a strong prima facie presumption under BVI law that MBI was the beneficial owner of the 890,000 shares. The share transfer forms had not been signed until 2016, so MBI retained both the beneficial and the legal ownership of the 890,000 shares until that time. F had not acted honestly, or in good faith, in signing the 2016 transfer forms, and D had therefore dealt adversely with company property after liquidation. F and JJW Guernsey were ordered to pay equitable compensation for the misappropriation of the 890,000 shares.

Analysis

MBI was registered in the BVI, where directors formally remain in post after liquidation. However, the rationale for retaining directors in their position post-liquidation was not clear to the parties’ respective expert witnesses on BVI law, not least since directors “cease to have any powers, functions or duties other than those required or permitted under this Part [of the relevant legislation]”, with those latter duties being extremely limited. That does not reflect the position in English law where a director’s appointment is terminated automatically on compulsory liquidation.

However, under s103 of the Insolvency Act 1986 (‘the Act’) in English law directors do remain in post on administration or creditors’ voluntary liquidation (‘CVL’). In general (there are various exceptions) a director of a company in such situations may not exercise a management power without the consent of the administrator or (in the case of CVL), the liquidation committee or creditors.

The statutory provisions in the Act were considered in Re Systems Building Services [2020] EWHC 54, in which it was agreed that the director remained in post notwithstanding the Company’s entry into administration and thereafter voluntary liquidation. Admittedly only after hearing limited argument on the point (the issue was only raised in the respondent’s skeleton argument for trial), the Court also held that directors’ duties under ss171-177 of the Companies Act (‘CA’) 2006 continued to exist after entry into administration or CVL (“Those duties are independent of and run parallel to the duties owed by an administrator or liquidator appointed in respect of the company”).

Returning to the decision in Mitchell, the primary argument of the liquidator was based on an extension of the position in Re Systems Building Services, namely that notwithstanding the statutory limitation on a directors’ powers post-liquidation in s175 of the BVI Act, the directors remained under the relevant statutory duties in BVI law (ie the BVI equivalent of ss171-177 of the CA 2006). The experts on BVI law disagreed with that assertion, and the Judge therefore rejected it as overlooking the expert evidence and seeking to “push the boundaries of a director’s duties following liquidation far beyond those identified in the statute”. The Judge noted various points of distinction with the English position and with the decision in Re Systems Building Services, including that the Judge in that case had made her decision by reference to various features of English law that were not part of the BVI regime.

The alternative argument advanced by the liquidator was based on the directors owing post-liquidation fiduciary duties to the Company – or alternatively becoming constructive trustees, liable to account to the Company as if they owed such a fiduciary duty, in respect of Company property. The view of the experts was that there is a duty post-liquidation (whether it be characterised as a fiduciary duty or not) not to deal or “intermeddle” with company property and to account for that property. In this regard, there was no suggestion of any difference to English law.

The issue of constructive trust was closely bound up in the issue of fiduciary duty.  In English law (which had been adopted in the BVI cases), there were two types of constructive trust. First, where parties enter into a lawful transaction and intend one party to take control of property on another’s behalf (in which case D becomes a constructive trustee) and secondly where a party is held liable to account as a constructive trustee as a result of benefiting from a fraud, in which he never in fact becomes a trustee in the true sense.  Directors dealing with company property are the first type of trustee. However, it was in the second type of situation with which this case was concerned, and in the very specific circumstances of adverse dealing with company assets after liquidation, in which circumstances Cs asserted a duty as a fiduciary or a liability as a constructive trustee (as if a fiduciary duty was owed) continues to exist.

In light of his analysis of the English authorities (which it was accepted would be applied in the BVI) the Judge found that the obligations of fiduciary stewardship owed by directors are capable of continuing post-liquidation in respect of company property (albeit in a much reduced form and applicable only in circumstances where unauthorised dealing with company assets occurs).

Comment

Whilst the decision was made directly in respect of BVI law, the Judge considered and based his decision on the interpretation of English authorities, so the case has implications for directors’ post-liquidation duties in both jurisdictions.

The judgment includes an important reminder that allegations of fiduciary duties are not ‘all or nothing’ questions; fiduciary duties can exist between parties for certain purposes but not others, and whether such duties exist will depend heavily upon the facts of the case and the relationship between the relevant parties. The typical scenario where a fiduciary duty will be held to exist is where someone undertakes to manage the property or affairs of another and to make discretionary decisions on behalf of that person. They are “required to act unselfishly in what they perceive to be in the best interests of their principal”. Accordingly, where the Judge had accepted the experts’ view that, notwithstanding that the role as a director continues, a director in the BVI is effectively divested of his powers and duties following a liquidation, it is hard to see how fiduciary duties could continue to exist. However, as the Judge noted, that was not what this case was concerned with, instead the case was “concerned with the specific proposition that, during the course of his stewardship of the company, a director has obtained custody and control of company assets, which custody and control continues following liquidation (at least in the sense that the director is able improperly to take control of, or “deal” with, the assets). It is in this very specific circumstance (adverse dealing with company assets) that I am invited to find that a duty as a fiduciary or a liability as a constructive trustee (as if a fiduciary duty was owed) continues to exist”.

Given the facts of the case, it is perhaps not surprising that the Judge was unwilling to find that the directors’ liability ceased upon liquidation, and indeed the Judge made clear that he thought his decision was in accordance with what justice should dictate: “Standing back … it would be surprising if the liability of a director under BVI law for misappropriation of, or unauthorised dealing with, company assets could be extinguished solely by reason of the relevant dealing having taken place after liquidation of the company (notwithstanding his or her continuing status as a director)”.

It should be noted that the Court of Appeal last week granted the claimants’ permission to appeal, including on the issue of whether, as a matter of BVI law (and English law, to the extent they overlap), a director owes fiduciary duties in respect of a company’s assets post-liquidation, and if so, the scope of those duties. It will be self-evident that the continuing nature of directors’ duties post-insolvency and post-liquidation has implications for directors and their insurers alike, and the appeal is awaited with interest.