Liquidations:- Company property and directors duties

In the recent decision of R -v- McCredie and R -v- French, the Criminal Court of Appeal made it clear that the duty upon company directors to assist liquidators is both pro-active and continuing.

Facts

Two directors of a company in liquidation removed from the company premises certain disks and documents and used them to recreate a customer list which they then sold to a third party, keeping the consideration for themselves personally, rather than paying it to the company. They were charged with various offences, in particular, for failure to comply with s.208(1) and s.206(1) of the Insolvency Act 1986 (the "Act").

By way of defence, the directors claimed that the liquidator had abandoned the property by leaving the items in question at the company's premises. The legal consequence of abandonment would have been that the items ceased to be the company's property and became that of the directors, to deal with as they wished. The court held that the liquidator could only abandon the property if he had sufficient knowledge of what was being abandoned. As the liquidator's knowledge at the relevant time was very limited, there had been no abandonment and the disks and documents continued to be the property of the company.

Both directors were disqualified under s.2 of the Company Directors Disqualification Act 1986 and received sentences of community service. Their appeal of certain of the convictions was unsuccessful. The Court of Appeal held that:

(i) the obligation on the directors to deliver up the company’s books and papers included “the fruits of the company property .... certainly when compiled by an officer of the company owing the Section 208 duties to the company”;

(ii) the duty arising under Section 208(1) does not have to be triggered by a request from the Liquidator; and

(iii) the duty is a continuing one.

Comment

The practical consequences of this case are twofold. First, a liquidator should make clear to the officers of a company that they have a pro-active and on-going obligation to disclose documents and other information relating to the company which is in their possession or under their control. Liquidators may consider amending their standard letter or explanation to company directors. The penalties for directors failing to comply with their obligations in accordance with Section 208 of the Act include imprisonment and fines.

Another unrelated but nevertheless useful point is that the Liquidator should make it clear whether any property which remains at the company’s premises has been abandoned or if it should be regarded as remaining the property of the company. Even if the liquidator authorises certain items (e.g. waste paper) to be discarded, they remain the property of the company until disposed of by refuse collectors.