Creditors' interests must be taken into account when determining what is in the best interests of a company

The Court has decided that consideration of what is in the best interests of a company must include the creditors as well as the shareholders.

In this case1, a company (the first company) was making heavy losses on two large contracts.  Its directors (who were also the shareholders) transferred the company's assets and business into another company (the second company), which they also owned.  The sale price did not include any amount for goodwill. 

The first company subsequently went into liquidation while the second company traded profitably.  Two creditors who did not fully recover in the liquidation of the first company claimed that the directors' actions breached section 131 of the Companies Act 1993, which requires that directors, in good faith, act in what they believe to be in the best interests of the company.

The claimants contended that the sale at undervalue was intended to avoid liability to creditors.  The defendants argued that the sale was a legitimate restructuring to "clean up" the business structure for possible sale and to avoid potential liability for trading while insolvent.

The judge found that, if goodwill had been taken into account, the first company was not insolvent at the time of the sale and that a sum in respect of goodwill should have been paid in respect of any transfer of the business. 

The directors were held to be mistaken in not having required a payment in respect of goodwill.  Furthermore, the judge determined that the interests of a company include discharging its obligations to creditors, and the directors were mistaken in not considering the creditors' interests.  Whatever the directors' subjective intention, these mistakes meant that they did not understand their duties and were not acting in good faith.

The judge commented that the case highlights the importance of professional valuation advice when transferring a business out of a company, especially where the transfer is not at arm's length.

The case also confirms that consideration of the best interests of the company must include the creditors as well as the shareholders.

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