PV Solar Solutions Ltd traded in the supply and installation of solar panels, and enjoyed the benefit of government subsidies designed to encourage the exploitation of solar energy. Following the reduction of those subsidies, the company went into administration and then, in November 2014, liquidation. The liquidator applied to recover from the company’s two directors (and only shareholders) sums in excess of £750,000 that they had between them received in 2012 by way of credits to their loan accounts. The application was heard in the Companies Court by Registrar Barber in Ball (PV Solar Solutions Ltd) v Hughes and another [2017] EWHC 3228 (Ch).
Key Issues
The central issue that arose was whether the directors had breached their duty under s 172 CA 2006 (the duty to promote the success of the company), as that duty applies in an insolvency context. The Court also had to address certain defences that are commonly run by directors in this kind of situation: first, that the benefits in question formed part of their remuneration which had been approved informally in accordance with the principles established in Re Duomatic Ltd [1969] 2 Ch, and, second, that the credits could be justified on a quantum meruit basis.
Directors’ Duties
Under s 172(1), company directors are required to act in what they consider would be the way most likely to promote the success of the company for the benefit of its members as a whole. However, this requirement is subject to the common law rule, preserved by s 172(3), that in an insolvency context the directors must instead act in the interests of its creditors, so that, in the common formulation adopted by Registrar Barber, the interests of the creditors become ‘paramount’.
In analysing this duty in respect of creditors, Registrar Barber gave consideration to two particular questions: first, when is the duty in respect of creditors triggered; and, second, is the conduct of the directors to be assessed objectively, by reference to a standard of reasonableness, or subjectively, by reference to the directors’ own views.
When is the duty in respect of creditors triggered?
On behalf of the liquidator, it was argued that the duty in respect of creditors is triggered whenever there is a ‘question mark’, or any doubt at all, over the company’s current or future solvency. Registrar Barber was not prepared to go that far. On the other hand, the Registrar also rejected the notion that the trigger should simply depend upon a ‘snapshot’ analysis, based upon asking, “whether, arithmetically, the numbers add up on a given day”. Instead, in reliance upon the judgment of Mr John Randall QC in Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), the Registrar held that the duty in respect of creditors was triggered where there was a real, as opposed to remote, risk of insolvency.
In the application of the ‘real risk of insolvency’ test, the Registrar acknowledged it would often be necessary to have regard to the future, remarking that in some cases it would be appropriate to consider matters that “will impact materially in the near future on the trading viability of the company using its existing trading model” (emphasis added). However, it is to be noted that this rather qualified language suggests a reluctance to look beyond risks that are reasonably proximate in time. In this regard, the judgment echoed the approach adopted by Rose J in BTI 2014 LLC v Sequana S.A. [2016] EWHC 1686 (Ch). In that case, where there was alleged to be a clear and serious, albeit distant in time, risk of insolvency, it was held (at [483]) that this risk was, “not enough in my judgment to create a situation where the directors are required to run the company in the interests of the creditors rather than the shareholders.”
In the present case, the Registrar held that the duty in respect of creditors had been triggered because the company was cashflow insolvent, or at least “of sufficiently dubious solvency for the interests of creditors to intrude” at the relevant time.
Is the test objective or subjective?
On the question of whether the conduct of the directors in an insolvency context is to be assessed by an objective, or a subjective standard, the Registrar held that the starting point is that the duty is a subjective one. This reflects the wording of s 172(1) itself, and the well-established position under the old common law formulation of the duty; to act in good faith in what he considers to be the best interests of the company: Re Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 per Jonathan Parker J at [120].
However, it seems clear that in an insolvency context it would not be sufficient for a director merely to show that he had acted in the way that he considered, in good faith, would be most likely to promote the success of the company. He would further have to show that he had effectively identified the interests of the company with those of its creditors, and had treated the creditor interests as paramount. A failure to approach the matter in this way would leave the director exposed to the possibility of a breach of duty claim, even if he had acted in good faith.
There is also authority to the effect that an objective test will apply where a director has acted without giving any consideration at all to the question of the best interests of the company. In such a case, it has been held in an insolvency context that the Court will apply an objective test, asking whether an intelligent and honest man in the position of the director could, in the circumstances, have reasonably believed that the transaction in question was for the benefit of the company: Re Cosy Seal Insulation Ltd (In Administration) [2016] EWHC 1255 (Ch). In the present case, Registrar Barber, having found that the directors had failed to consider the interests of the company’s creditors, applied this test in holding that the directors were in breach of their duty under s 172.
It is important to note that there is no authority that considers whether the ‘intelligent and honest man’ test, which derives from the case of Charterbridge Corp v Lloyds Bank [1970] Ch 62, could now still be applied in the context of a solvent company following the codification and reformulation of the basic fiduciary duty of a director under s 172. It remains to be seen how the Court will now approach the situation where a director has acted without considering the interests of his (solvent) company, especially given that the application by the Court of the objective ‘intelligent and reasonable man’ test would be complicated by the express requirement to have regard to the various factors stipulated under s 172(1)(a)-(f).
Defences
The credits had not been authorised by any express resolution of the company. In the circumstances, the directors, being the company’s only shareholders, argued that they should be taken to have authorised the credits by way of unanimous informal assent in accordance with the principles established in Re Duomatic Ltd [1969] 2 Ch.
This argument was rejected on two grounds; first, the doctrine of unanimous informal assent could only be of assistance if the members had actually directed their minds to the subject matter of the putative resolution, which had not happened in this case, and, second, this doctrine does not apply where the company is insolvent, or is rendered insolvent by the impugned transaction (the burden being on the party seeking to rely upon the doctrine to establish that the company was solvent at the relevant time). In this way, the Registrar followed established principles, but the case is a useful reminder of the limitations of the doctrine of unanimous informal assent.
In the alternative, the directors argued that the credits were justified on a quantum meruit basis, relying upon the recent decision of HHJ Paul Matthews in Global v Hale [2017] EWHC 2277. This argument was also rejected, on the strength of the decision of the House of Lords in Guinness plc v Saunders [1989] UKHL 2 (not cited in Global), which established that a quantum meruit could not lie in favour of a director of a company if it would amount to the payment of remuneration in a manner that was not authorised by the company’s articles of association.
Although, in Guinness, Lord Goff had left open the possibility that a company director might be able to benefit from an equitable allowance in respect of services rendered, by analogy with the position in respect of trustees following Boardman v Phipps [1967] 2 AC 46, Lord Goff only contemplated such an outcome if it could not “have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.” This idea has not been developed further in the cases, and it is very difficult to see how it could have any practical application in a case where the award of a payment to company directors would conflict with the articles of association. In such a case, the decision in Guinness effectively rules out a quantum meruit.