Claims Against Company Directors

Directors of companies in financial difficulty have many things to consider. Primarily directors have contractual and statutory obligations to shareholders to manage the business to recovery. Directors also have a statutory duty to the company’s creditors to ensure the relevant debts are paid as far as possible, or even wind up the company.

Companies entering liquidation or administration will usually be subject to investigation by the Official Receiver, or an appointed insolvency practitioner to understand why the company has failed. The investigation will include a review of the directors’ conduct leading up to the demise of the company; and the transactions that were entered into by the company’s directors. The Insolvency Act 1986 gives a liquidator powers to challenge those transactions.

Without sound legal advice as to which is the best course of action, a director may be made personally liable for the company’s losses. The Company Directors Disqualification Act 1986 also gives powers to liquidators to disqualify directors for up to 15 years.

Our barristers have experience in advising and representing all parties including directors and relevant stakeholders in defending and bringing the following claims:

Guarantee Claims

Directors will often give personal guarantees when the company applies for a loan. These guarantees also extend to lessors of hiring equipment and landlords of the company’s business premises. The guarantees can also be supported by security over the directors’ homes. Upon liquidation or administration, lenders are quick to call in guarantees, putting directors at risk of losing their home.

Breach of Duty

Pursuant to sections 171-177 of the Companies Act 2006, claims may be made against directors if they breach their fiduciary duties to shareholders pursuant to contract and generally under common law to act legally, honestly and in good faith and statutory duties.

Preference Payments

A Preference Payment is a payment by a company to a creditor placing it in a preferred position to other creditors. Upon liquidation of the company, the liquidator can bring a claim against the alleged favoured creditor for a refund of any monies received. The company must have been insolvent at the time of the transaction or become insolvent as a result; and the company must have desired to prefer the creditor.

Repayment of the loan account

During an insolvency practitioner’s examination, the director may be subject to what are commonly referred to as clawback claims. In owner managed businesses the directors will usually have a low salary, but withdraw cash at their convenience. These may be accounted for as drawings/salary expenses or dividends upon the company’s financial year end, or the director’s loan account. Directors may be subject to claims to repay these loans or dividends, if the company had insufficient profits at the time.

Transactions at an Undervalue

Transactions at an undervalue (“TUV”), occur when a company transfers an asset to another for consideration less than the market value of that asset, or no consideration at all. The transaction must have taken place within the two-year period before the onset of the insolvency; and the company must have been insolvent at the time of the transaction or become insolvent because of it.

Transactions Defrauding Creditors

Transactions that defraud creditors are transactions by the insolvent company that are intended to place assets out of reach of the creditors. Sections 213 and 246ZA of the Insolvency Act 1986 aim to prevent companies from disposing of assets to the detriment of its creditors. If successful, the transaction will be void and the assets returned to the company. The Court must be satisfied that the transaction was intended to affect the creditors detrimentally and there is no time limit attached to the transactions.

Wrongful Trading

Wrongful trading is an offence that can be committed by directors if they continue to trade a company knowing that the company could not avoid insolvency. The offences in sections 214 and 246ZA of the Insolvency Act 1986 cover actual and objective tests of knowledge and if wrongful trading is successfully established, directors may be personally liable for any of the company’s losses as a result.