Corporate Ship Sinking? Directors, Keep Your Hands Out of the Till!

When a corporate insolvency is on the cards, directors can be tempted to remove as much money as possible from the kitty before the ship sinks. However, a High Court ruling has strikingly shown how unwise it is to take such a course, and that sensible directors take professional advice at the first sign of trouble.

The case concerned a group of companies engaged in the business of property development and commercial and residential lettings. At its peak, the group had 350 properties in the UK and turned over more than £30 million a year. It was, however, heavily dependent on government contracts and its fortunes crumbled after they were withdrawn. The group went into administration and, ultimately, liquidation.

Prior to the administration, the group’s sole director and controlling shareholder had transferred to herself various offshore properties that she had previously held on trust for the benefit of companies within the group. Most of the properties had subsequently been sold and the proceeds dispersed. In those circumstances, the group’s liquidators launched proceedings against the director to recover the properties, or their proceeds of sale, and for compensation for breach of trust and breach of fiduciary duty.

The director contended that the properties had been transferred to her validly, her purchase of the beneficial interests in the same having been funded by dividends or from her director’s loan account. She argued that the properties were only held by her on trust for companies within the group to the extent that they had contributed to their original purchase prices.

In upholding the liquidators’ claim, however, the Court found that various documents that on their face indicated that dividends had been validly declared in favour of the director had been dishonestly backdated. A deliberately false record of events had been kept with a view to deceiving those who might later read them.

The group was in any event at real risk of insolvency at the time of the transactions and the director had breached her fiduciary duty in failing to have regard to the interests of the group’s creditors and potential creditors. She had also acted in breach of trust in selling some or all of the properties when she still held them on trust for the group. The Court found that any remaining properties belonged to the group and that, to the extent that they had been sold, the director was liable to pay damages equal to the proceeds of sale.