In a recent decision issued in the context of an application for interim orders (the application), handled by our law firm, the court came up to very important findings regarding the residual powers of the directors of a company in receivership.
The lawsuit and the application had been initiated by a Company under receivership against a creditor and its Receiver/ Manager. With the application they requested, inter alia, orders prohibiting the Receiver/ Manager from acting as a person who is authorized to deal with the administration and/ or management of the company, entering the premises without the consent of the company and carrying out the exercise any right that may arise from the Floating Charge and/ or prevent the Defendants from approving and/ or authorizing in any way the sale and/ or alienation of the company's property.
The application was accompanied by an affidavit of the director and one of the shareholders of the Claimant company.
The court noted with reference to the relevant case law that when the Floating Charge covers in essence all or most of the company's assets, then its directors do not actually control its commercial activity or represent the company in court.
Furthermore, the court noted that the directors nevertheless retain residual powers exercised in addition to the right to challenge the Receiver’s/ Manager’s appointment and in cases where the Receiver/ Manager refuses to take steps to serve the interests of the company. In such a case, the directors of the company have the right to take all necessary measures, including lawsuits to protect the property and interests of the company. However, they must first undertake the obligation to pay the costs in the event that their lawsuit is dismissed as this is a parameter that affects the assets that are the subject of the Floating Charge.
In the present case, the director of the company, exercising the residual powers had in accordance with the aforementioned case law, challenged the appointment of the Receiver/ Manager. However, he did not give any assurance upon filing the lawsuit that he would undertake to compensate the company in case an order to pay the costs was issued against the company. This is a very important point because it concerns the legitimacy of the director to file the lawsuit on behalf of the company.
The assurance was given in a later stage, with the affidavit of the director accompanying the application for interim orders. According to the court, the assurance should have provided time of filing the lawsuit since the said assurance is a prerequisite for the filing of the lawsuit.
Finally, according to the court, the absence of such assurance from the commencement of the proceedings was in itself a catalyst for the rejection of the application.
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