The recent Court of Session case of Tayplan Limited (in administration) v Smith, is particularly interesting as it is a case where the administrator chose to pursue directors for breach of fiduciary duties rather than using any of the more common statutory remedies.

The Facts

Tayplan Limited was a family business with two directors - Mr Smith senior and Mr Smith junior. Mr Smith senior and his wife each held 50% of the shares in the Company.

Once appointed, the administrators discovered that the record keeping of the Company had been poor and they considered that the directors had misappropriated company funds and property in three transactions:

  1. Drawing salaries to which they were not entitled;
  2. Claiming interest on directors’ loan accounts; and  
  3. Failure to pay the full consideration due to Tayplan for the sale of a property to one of the directors.  

For all three transactions, the directors had failed to obtain the formal approval of the Company. There was no evidence to show that the shareholders had agreed to these transactions. Resolutions had been prepared, but these were invalid as they had been signed by Mr Smith junior, who was not in fact a shareholder. In addition, the third transaction had not been properly accounted for in the books and records.

The Decision

The Court held that by failing to keep proper accounting records and by appropriating the sums, the directors were in breach of their fiduciary duties to Tayplan. Fiduciary duties are for the protection of not only the members of the Company but also of those who deal with it. The directors’ breaches were deemed to have contributed materially to the losses suffered by Tayplan. Accordingly, the directors were accountable to Tayplan in administration.

This decision is notable as it serves as a reminder to insolvency practitioners that there are a variety of ways in which the actions of directors can be challenged. While the Insolvency Act ss242, 243 and 214, etc are routinely considered by insolvency specialists, it is important always to bear in mind that the broader rules and duties that apply in the company law sphere may also come into play.