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Directors' duties in relation to property development companies

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Posted on 15 August 2011

A recent Court case highlighted the need for directors to be aware of their duties and position in relation to the financial status of their company, in particular in relation to property development companies.

The case in question was decided by the High Court in February this year. The case was Roberts v Frohlich. It concerned whether the directors of the property development company, Onslow Ditchling Limited (“ODL”) had acted improperly in the context of misfeasance and breach of duties as directors and wrongful trading.

Experienced developers

ODL was a special purpose vehicle to buy and develop a site at Ditchling which had planning permission for a number of industrial units. The entire development would be funded with borrowed money. The directors, Mr Frohlich and Mr Spanner, were both experienced property developers.

Matters did not progress as planned, and in 2005 ODL appointed administrators. In spite of a sale of assets, there was a shortfall of approximately £900,000.

The appointed liquidator commenced proceedings against the directors, claiming they were guilty of misfeasance and breach of duties of directors. He also accused them of wrongful trading in breach of Section 214 of the Insolvency Act 1986.

The Judge in the case spoke of the “wilfully blind optimism” of the directors that “something might turn up” to save the company.

The court

Of one of the directors, Mr Frohlich, the Judge commented that “he did not come to Court to mislead me, but his recollection was of little assistance and generally unreliable”. He denied knowledge of much, denied receipt or sight of many of the key documents, denied responsibility for the creation of significant financial documents and asserted that he did not avail himself of the opportunity to examine the documents in ODL’s files or to speak with Mr Spanner (the other director).

The Court found that both directors were guilty of a breach of their directors’ duties, guilty of misfeasance in failing to exercise the required level of skill and care, and guilty of wrongful trading. The two directors knew, or ought to have concluded that, from the autumn of 2004 that ODL was likely to become insolvent.

In financially bumpy times, this case serves as a reminder and indeed a warning to directors, particularly those of property development companies, to maintain an ongoing review of their company’s financial position and related trading.  Closing one’s eyes to what may be a painful reality could have significantly adverse consequences, as in this case. The directors in the ODL case may now face a fine and/or disqualification proceedings.  

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