Ball (liquidator of PV Solar Solutions Ltd) and another -v- Hughes and another [2017] EWHC 3228 (Ch)

The Facts

PV Solar Solutions Ltd (the "Company") supplied and installed solar panels. When the government reduced preferential tariffs, the Company's profits were affected and it entered Administration in May 2013. The Company subsequently entered into voluntary Liquidation in November 2014.

Neither director had an employment contract with the Company, instead withdrawing money by way of management fees. After the tariff rate reduction was announced by the government, the directors continued to withdraw substantial sums from the company into their directors' loan accounts, repackaging withdrawals as tax credits under a scheme they were involved in. The withdrawals totalled around £750,000 and were made despite the Company's poor financial position.

The Liquidators challenged the loan withdrawals on the grounds that the withdrawals could not be retrospectively categorised as remuneration, as the directors had expressly chosen to pay credits pursuant to a tax saving scheme.

Furthermore, at all material times the Company was in financial distress. The interests of creditors should therefore have been paramount and directors, they argued, had breached their duty to act in the best interests of the creditors under s.172 Companies Act 2006.

The Verdict

The High Court found that the directors had breached their fiduciary duties to the company by not acting in the best interests of the creditors.

The Judge considered the point at which the duty to consider creditors' interests became applicable, referring to the principle established in Re HLC Environmental Projects Limited that "directors are not free to take action which puts at real (as opposed to remote) risk the creditors' prospects of being paid, without first having considered their interests rather than those of the company and its shareholders". The Judge agreed with this principle but decided that on the facts of this case, it was not necessary to determine the moment the duty to consider creditor's interests was applicable, as the Company was cash flow insolvent at all material times in any event.

The Court held the directors were guilty of misfeasance for the purposes of s.212 IA 1986. The directors had not only been aware of the Company's poor financial circumstances, but also that HMRC, as a creditor of the Company, had raised concerns about the scheme they were involved in.

The directors were found jointly and severally liable for the full amount of the repayments with interest.

Our Comment

This case provides more useful commentary on the point at which the duty to consider the interests of creditors "bites" for the purposes of misfeasance claims reliant on s 172 CA 2006. The Company was cash flow insolvent at all material times, meaning it cannot be considered an authority as to when this duty is effective, but the Judge considered the position at length nonetheless. The Judge expressed approval of the approach taken in previous decisions such as BTI v Sequana and Re HLC Environmental Projects Limited - however, no definitive authority exists, suggesting some further scope for developments in future.  

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