Pre-pack sale must be in the interests of creditors, not just business continuity
In the recent case of Capital For Enterprise Fund A LP and another v Bibby Financial Services Limited [2015] EWHC 2593 (Ch) the High Court has held that a director of a company had breached his duties to the company by putting the preservation of the company’s business above the interests of the company and its creditors.
The case concerned a pre-packaged sale by the administrator of the business and assets of a software company (Q). The purchaser was a newly incorporated company, owned as to 30% by one of Q’s directors (C) and as to 70% by a major creditor who supplied services essential to the continued operation of Q’s business. The creditor indicated that, given the financial position of Q, it was no longer willing to supply the services to Q. C negotiated the pre-pack sale, on the basis that it was the only means of preserving Q’s business. However, C did not inform Q’s other board members of the negotiations. Nor, in negotiating the transaction, did the C take into account the likely return to the other creditors of Q. Arguably, greater value would have been available in a stand alone sale of Q’s proprietary software.
The High Court held that C had breached his duties to Q and its creditors. He had a duty to inform the board of the proposed pre-pack sale and to act in the best interests of all creditors, not just in the interests of the major creditor. Accordingly, although the deal saved the business of Q, it was not in the best interests of Q or its creditors.
The case applies settled law, but serves as a useful reminder of the need for a director of a company in financial difficulties to distinguish between the interests of the business of the company and that of the company and its creditors. In the circumstances, the court considered that, although C had acted unlawfully, the claimants had not established that the unlawful conduct had caused them the loss and damage that they alleged.
For more information about this case or for any insolvency queries please contact Lauren Hartigan-Pritchard on 01905 677051 or lhartiganpritchard@thursfields.co.uk
