Duties of directors on company insolvency

Kenneth Davies v (1) Stephen Ford (2) Richard Monks (3) Greenbox Recycling Kent Ltd [2020] EWHC 686 (Ch)

29 June 2020

Boardroom

In the current climate, where the risk of insolvency for many companies remains high due to the COVID-19 crisis, the idea of a director taking advantage of an opportunity that their company is unable to pursue may be more tempting than ever.

A recent English case is a timely important reminder of the strict fiduciary duties owed by directors, even if the company is insolvent or close to insolvency and that the Court will penalise directors if these duties are breached, even in respect of opportunities which directors consider the company could not pursue.

Greenbox Recycling Limited (“GBR”) was incorporated in 2010 by the claimant, Mr Davies. The defendants, Mr Ford and Mr Monks were directors of GBR. In January 2011 – while they were directors of and each 10% shareholders in GBR – Mr Ford and Mr Monks incorporated a new recycling company called Greenbox Recycling (Kent) Limited (“GBRK”).

After GBRK had been operating for several months, GBR was struck off the register of companies. Neither Mr Ford nor Mr Monks had resigned as directors of GBR. Meanwhile, GBRK had grown to become a successful business.

Proceedings were brought by Mr Davies against Mr Ford and Mr Monks on the basis that they diverted the business of GBR to GBRK, and that such diversions were breaches of contract and breaches of their fiduciary duties as directors of GBR. Their defence was that by early 2011 GBR was insolvent (or close to insolvency) and for various reasons was not able to take advantage of the various business opportunities which were then exploited by GBRK. Mr Monks claimed that GBR had no corporate assets, and therefore there was no breach of duty.

The judge found that the interests of GBR and GBRK were in direct competition – both were operating the same business from the same premises and Mr Monks could not have promoted both simultaneously.

The judge dismissed the argument that, where a company is insolvent and not capable of exploiting any business opportunity presented to it, there is no conflict in a director seeking for himself to exploit that same opportunity. Such an argument would cut across one of the most basic principles of fiduciary law. A breach of duty was not dependent on the misapplication of pre-existing corporate assets, Mr Monks had still put himself in a position of conflict and thereby had made an unauthorised profit. This stringent approach is even more appropriate when the company is near insolvent or is insolvent because such companies have a greater need for protection. A duty had been owed to GBR from Mr Monks and he was held to have breached that duty.

If you would like any further information or advice, please contact the Corporate team at Carson McDowell.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

Back