Once a company is insolvent, it becomes vulnerable to liquidation claims from all angles. It is therefore important for directors who are having to liquidate their company to take positive steps to protect their position, both pre and post insolvency. This article delves into the types of claims which a director is open to and the nature of such claims, including what a director on the receiving end of claims can do.
Who Can Bring Claims Against The Director of an Insolvent Company?
Once a company is insolvent and liquidated, it is not just claiming from the liquidator which the Director should be concerned with. There are two broad categories of potential claims a Director of an insolvent company can face: financial claims and regulatory claims (which include criminal investigations and prosecutions). These can be brought for a variety of reasons, some of which are discussed below.
Misfeasance / Breach of Duty
Claims of this nature generally cover any misconduct by a Director which causes a loss to the company or its creditors. It covers the retention or misapplication of company assets as well as breaches of both fiduciary and statutory duties. Examples of misfeasance or breach of duty include: improperly investing or spending company money; illegal or ultra-views dividends; authorizing payments to themselves resulting in a loss to the company; and, causing a material loss to the company by selling or transferring property outside the normal course of business.
Wrongful trading under s214 of the Insolvency Act 1986is aimed at holding directors accountable for failing to minimise losses to creditors when the company was heading towards insolvency or was insolvent. It is broadly defined to cover any type of misconduct where a director failed to take ‘every step’ to minimise the potential loss to the company’s creditors, although they knew or ought to have concluded that there was a reasonable chance that the company would go into liquidation.
Fraudulent trading s213 of the Insolvency Act 1986 is taken very seriously and can result in a criminal prosecution (it’s an offence under s993 of the Companies Act 2006. In terms of civil claims, fraudulent trading is where any person (not only directors) knowingly carried on the business of the company with the intent to defraud creditors. If the claim is successful, the court has the power to order a contribution, of an amount it deems appropriate, from the defendant to the company’s assets.
Transaction at an Undervalue
Directors are also vulnerable to a liquidation claim being made against them if they enter into, and are responsible for, transactions at an undervalue s238 of the Insolvency Act 1986 or if they preference a creditor to the detriment of other creditors s239 of the Insolvency Act 1986 in the period leading up to company insolvency. If the claim is successful, the court will set the transaction aside, making an order aimed at restoring the position as if the transaction had not taken place.
Undervalue transactions include any gift, agreement or arrangement where the company receives either no consideration or that which is significantly less than its value. An unfair preference is where a creditor is put in a better position than the other creditors, such as a repayment or part-repayment of debt or the granting of a charge within six months of the onset of insolvency.
What Can a Vulnerable Director Do?
The above claims inevitably cause the Director (and their family) stress and inconvenience which places a strain on what may be scarce personal financial resources to defend such claims. The financial claims inevitably attack the Director’s financial base and often, their financial interest in the family home. All of this at a time when the Director may be trying to get their new company up and running or defending a well-established company which ran into a few complications. There is only so much that a person can deal with. Which is why Lexlaw can help.
Why Choose Our Insolvency Lawyers?
Lexlaw provide a no cost initial case review to establish whether or not we can help you. We are experts in the City of London law firm with Solicitors & Barristers based in the Middle Temple Inns of Court adjacent to the Royal Courts of Justice. The Lexlaw team consists of unmatched experience with negotiating with debtors/creditors, serving statutory demands as well as setting aside statutory demand and winding up petitions/ defending them at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules.