What actions can insolvency practitioners take against individuals following formal insolvency?
There are several actions that can be made by Insolvency Practitioners against individuals following formal insolvency:
Misfeasance
A liquidator can make a claim against a director if during the course of the winding up of the company, he/she has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
Transactions at an Under Value
A liquidator or administrator can make a claim against any person where (a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or (b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.
The transaction must have taken place within the 2 years preceding the onset of insolvency, and the company must have been insolvent at the time of the transaction, or became insolvent as a result of the transaction.
Preference Payments
A liquidator or administrator can make a claim against any person where (a) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
The payment made in preference must have been made within 6 months preceding the onset of insolvency. If the individual is a connected party to the company, this stretches back to 2 years. The company must have been insolvent at the time of the transaction, or became insolvent as a result of the transaction.
Transactions Defrauding Creditors
This action is not limited to liquidators or administrators, as any individual/entity can claim this if they can show that they have been prejudiced (with permission of the court). Relevant individuals/entities can make a claim to set aside a certain transaction if that transaction was entered into for the purpose of (a) putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
Wrongful Trading
A liquidator or administrator can make a claim against a director if it can be shown that some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
Fraudulent Trading
A liquidator or administrator can make a claim against a director if during the course of the winding up of the company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose.
When should a director seek professional advice?
A director should seek advice at the earliest available opportunity. In an insolvency context, a director should be seeking advice as soon as he/she believes or has reason to believe that the company is insolvent, or may not be able to trade out of insolvency, or may become insolvent in the future absent based on current projections.
If you are in receipt of a letter from an insolvency practitioner with a request for information or to attend an interview, you should seek legal advice.
Can a director seek relief from liability from the court?
Yes – under section 1157 of the Companies Act 2006. A court may relieve a director from liability for negligence, default, breach of duty or breach of trust if it considers that (a) the director has acted honestly and reasonably, and (b) when taking into account all of the circumstances of the case, the director ought fairly to be excused.
A director can also apply to the court under section 1157 of the Companies Act for relief in advance of any claims made against him/her.