While it’s usually the case that directors must act in the interests of the company and its shareholders, once it becomes clear that the company is no longer solvent, they must act in the interests of the company’s creditors. If they fail to do so, they can be held personally liable for the company’s losses via a liquidation claim. Pursuing or defending against such claims requires a deep understanding and vast experience of the UK’s complex corporate and insolvency law. It also requires a bespoke litigation strategy, tailored to each case’s particular circumstances.
At Selachii, our tenacious commercial litigation solicitors provide expert advice and assistance on all manner of contentious company insolvency issues. We pride ourselves on building case-winning strategies tailored to our business clients’ needs and budget. If you require first-class, cost-efficient and commercially-minded legal advice on liquidation claims against a director, or any other commercial matter, please contact us.
Claims Against Directors of Insolvent Companies
As soon as a company is in financial trouble, the behaviour of its directors comes under intense scrutiny. Should the company then go into liquidation, the liquidator or administrator can hold directors personally liable if they failed to act in the interests of the company and its creditors. These claims are pursued so that directors pay compensation to the company, which in turn is used for the benefit of the company’s creditors.
In order to make such a claim, there must be evidence of some kind of wrongdoing or misconduct by directors, such as misfeasance, breaches of statutory or fiduciary duties, or a contravention of the insolvency legislation, such as wrongful or fraudulent trading, or an undervalue transaction or preference. These broad grounds for bringing a liquidation claim, examined in more detail below, cover many different types of behaviour, making liquidation claims highly fact-specific. Generally, however, if a director wishes to minimise their risk of liability, they must act in good faith and be proactive, ensuring they document and explain the action or inaction they have taken.
If a director fails to convince the court that their behaviour was justified and responsible, the court is likely to order the director to either repay money or restore property (with interest at a rate the court deems appropriate), or compensate the company by contributing towards its assets in order to satisfy debts and liabilities. An order for compensation can be apportioned between directors, if the court sees fit.
Misfeasance / Breach of duty
Claims of misfeasance broadly cover any misconduct by a director that causes a loss to the company or its creditors. It encompasses the retention or misapplication of company assets as well as breaches of both fiduciary duties (those owed to the company and its shareholders under the common law, such as to act legally, honestly and in good faith) and statutory duties (those listed in the Companies Act 2006, such as to avoid conflicts of interest and not accept benefits from third parties).
Examples of misfeasance or breach of duty include: improperly investing or spending company money; illegal or ultra-views dividends; authorising payments to themselves (or a connected person, such as a spouse or civil partner) 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 (section 214 of the Insolvency Act 1986) is aimed at holding directors accountable for not minimising the 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 (section 213 of the Insolvency Act 1986) is taken very seriously and can result in a criminal prosecution (it’s an offence under section 993 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.
Undervalue transactions and preferences
Directors are also vulnerable to a liquidation claim being made against them if they enter into, and are responsible for, transactions at an undervalue (section 238 of the Insolvency Act 1986) or if they preference a creditor to the detriment of other creditors (section 239 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.
Liquidation claims against other parties
Although liquidation claims are most commonly brought against directors, shadow directors or de-facto directors, in some circumstances, liquidators or creditors may also seek civil recovery against third parties, such as spouses or associates. Please contact us for more information.
Selachii LLP – Expert Commercial Litigation Lawyers
Selachii is a dynamic litigation and dispute resolution law firm based in Kensington, London. We put the best interests of our clients at the heart of everything we do. We work with both businesses and private individuals, giving them legal advice and support which is unique to them and their situation. We don’t believe in simply handing out one-size-fits-all solutions to problems. We will focus on your specific circumstances before working out the best and most cost-effective way of helping you achieve your aims. Please contact us for more information.