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Misfeasance claims & breach of statutory duty claims by liquidators against directors – a whistlestop tour

Misfeasance claims & breach of statutory duty claims by liquidators against directors – a whistlestop tour

We are seeing a significant increase in Misfeasance Claims. Why and what are the issues?

Here at NDP, our 9 strong team of Insolvency and Commercial Litigation Solicitors are currently seeing a significant rise in the number of Misfeasance claims/breach of Director duty claims being pursued against Directors of failed limited companies, often for significant sums. This article is a whistle stop tour of some of the issues that arise in such claims. Many of the issues we refer to below are deserving of an article to themselves.

If the Director wishes or needs to defend a Misfeasance claim, then the Director must do so with eyes wide open as to the risks and consequences of such litigation. If Directors in that knowledge have the necessary evidence and wish to litigate and defend the claim, then bring it on!

We have a strong record of success in defending and settling Misfeasance and breach of duty claims by Liquidators. Click here to see some of our testimonials.

Misfeasance claims

This article looks at:

  1. Possible reasons for that spike in Misfeasance/Breach of Duty cases.
  2. Noticeable trends in Misfeasance Claims
  3. Why such claims are pursued.
  4. How should the Director best react to such a claim?
  5. Factors that can influence the outcome of a claim.
  6. Losing a Court case.
  7. Who else might be liable to pay or contribute to the claims?
  8. Conclusions

1. Possible reasons for the spike in new Misfeasance Claims cases

The rise in new Misfeasance claims is, at least in part, attributable to one or more of the following factors:

  • The Covid lockdown period has given Liquidators time and opportunity to review their historic liquidation cases and formulate claims from within those cases against Directors. There are plenty of law firms out there, willing to pursue such cases for Liquidators on a ‘no win no fee’ basis.
  • The increased activity of Litigation Funders, keen to take assignments of claims from Liquidators (i.e. the right to pursue claims) and pursue cases against Directors. The involvement of such Litigation Funders as a Claimant adds new dynamics to such claims, impacting on issues to include funding, tactics and likely outcome.
  • Pressure on Liquidators from their external professional regulators and from creditors to identify claims and pursue Directors in respect of their conduct that has given rise to claims.

2. Noticeable trends in Misfeasance Claims

We discern the following trends and patterns from the most recent 30 cases where we have been instructed by Directors, since lockdown:

TREND 1: LIMITATIONS

  • Liquidators and Litigation Funders are pursuing older claims that are close to the primary Limitation period of 6 years.

Claimants (to include Liquidators) generally have to commence Court proceedings within 6 years of the matters complained about by them. That time can however extend well beyond that primary 6 year period depending on the type of claim that is alleged against the Director (on which, see below).

  • Limitation

The Limitation Act 1980 prescribes different Limitation periods for different categories of claim.  In the Insolvency world, claims are generally divided into 3 categories:

  • Actions based on a ‘speciality’ have a Limitation period of 12 years, to include (for example) claims to recover property (to include setting aside a transaction in an insolvency context).
  • Claims to recover a sum of money under statute, which have a Limitation period of 6 years.
  • Claims which have no Limitation period, to include claims for fraudulent breach of trust.

Why is Limitation important?

If Court proceedings are commenced after the applicable Limitation period has expired, then the claim will be time barred and the Director will have a complete defence to the claim.  Old, stale claims can be problematic to pursue for the Liquidator (e.g. evidence in the form of company records, contemporaneous emails etc, may be lost due to the passage of time).  Such claims require a particular approach by the Solicitors for the Director.  That subject matter is an article in itself.  It remains as always for the Claimant to demonstrate that it has the evidence to prove its claim.

The pursuit of aged claims against Directors raises the question as to why that claim has not been pursued much earlier within the relevant Limitation period, if the Liquidator truly considers it a good claim.

TREND 2: TYPES OF ALLEGATIONS BEING PURSUED AGAINST DIRECTORS

  • The claims we are seeing against Directors typically allege breach of statutory duty and Misfeasance under section 212 of the Insolvency Act 1986 (i.e. mis-application of company funds or company property) arising out of, for example:-
  • Alleged illegal Dividend Such claims need a careful, forensic approach.  They are rarely ‘open and shut’ cases.
  • Alleged Overdrawn Director Loan Account (‘DLA’) Again, such claims are rarely straightforward.
  • Alleged Preference and Transactions at an Undervalue (‘TAAU’) claims, where the Liquidator seeks to upset and recover earlier payments.
  • Historic investments made by companies on the instruction of Directors into Employee Benefit Trusts (‘EBT’s’) and similar schemes (e.g. EFRBS’s).
  • Claims against Directors arising from such investments are a particular growth area, as evidenced by a series of recent High Court decisions in such cases where Liquidators have (not always successfully) pursued Directors personally for recovery of monies paid into such schemes from now insolvent companies. Such claims are anything but straightforward for Liquidators/Funders to pursue successfully.

SUMMARY OF ALLEGATIONS AGAINST DIRECTORS

  • It is the rarest of scenarios where there is nothing substantive to say in response to the claim against the Director. The opposite is usually the case.

TREND 3: PARALLEL DIRECTOR DISQUALIFICATION INVESTIGATIONS (‘DDI’) AND OTHER PARALLEL INVESTIGATIONS

Often, we see Directors faced with a DDI claim and a Misfeasance claim from a Liquidator or Litigation Funder, being pursued at the same time and arising out of much the same factual background.   Whilst the relief sought in the claims is often very different, the conduct of all of the claims has to be carefully managed.

There may also (as we are increasingly seeing) be a parallel Criminal Law investigation arising out of the same facts.  The involvement of a Criminal Law Investigation is often not information that is disclosed or volunteered to the Director.  Enquiry needs to be made on behalf of the Director.

Great care needs to be taken by the Director in such circumstances, in responding to each Claimant, to ensure, for example:

  • Consistency of response to the quite separate Claimants.
  • That responses to one agency do not give information that might be useful to another agency (they do talk to each other).
  • That responses do not give rise to yet further, wider ranging claims, for example a parallel Criminal Law Investigation.
  • Settlements cover as many bases as possible.

SETTLING WITH MORE THAN ONE PARTY – A REAL LIFE EXAMPLE

  • NDP currently represent a Director who is being sued by a Litigator Funder for Misfeasance, arising out of investments by the liquidated company into EBTs back in 2012 – 2015. The Liquidator of the company seeks recovery from the Director of £20m, being the total value of the EBT investments.
  • At the same time, HMRC are also pursuing the Director personally, under the Loan Charge regime for recovery, arising out of the same company investments (about £7m claimed).
  • The financial claims overlap, arise out of the same facts are competing and involve 2 other Directors that NDP does not represent. We are working with their Solicitors,

NDP are currently trying to negotiate a Mediated settlement of all claims, as between the 2 competing claims and with the 2 co-Directors.  All of the above considerations (and other, fact sensitive ones) are in play in that negotiation.

TREND 4: CLAIMS AGAINST DE FACTO DIRECTORS. WHO/WHAT IS A DIRECTOR?

Misfeasance and Breach of Duty claims are brought against a Director or persons involved in the management of the company.     Who or what is a Director?

NDP’s current case load includes a number of cases (including a case where the Liquidator is seeking a £2 million recovery, where we were instructed last week) where claims are intimated against persons who are not registered at Companies House as Directors of the company.

Such claims rely upon the Liquidator being able to demonstrate to the Court’s satisfaction, that the targeted person acted as a De Facto Director of the company.

A De Facto Director (meaning a Director in fact or in reality) is a person who has not been formally appointed at Companies House as a Director, but who nonetheless acts as a Director.

Examples of conduct relied upon by the Liquidator to try and demonstrate De Facto Directorship:

  • Assuming a role analogous to that of a CEO of the company.
  • Holding out as a Director of the company.
  • Assuming decision making rights within the company.
  • Negotiating with creditors on behalf of the company.
  • Being involved in the hiring and firing of staff.
  • Adopting a day-to-day management role.
  • Instructing Solicitors on behalf of the company.

The issue is one of fact to be determined in every case.  The very recent High Court decision of His Honour Judge Paul Matthews in Secretary of State for Business, Energy and Industrial Strategy v Rahman [2020] EWHC 2213 (Ch) provides a useful review of the legal principles.  In Rahman, the Court found that the Director had not acted as a De Facto Defendant of the company.

TREND 5: ALLEGATIONS OF MISUSE OF LOCKDOWN GRANTS, LOANS AND FURLOUGH FUNDS

Hardly a trend yet…but we predict it soon will be. We have in recent days seen our first allegations by a Liquidator against a Director, alleging misuse of a £50,000 lockdown loan.

We expect to see many such cases in 2021, once liquidations happen of companies that have taken such funds.

3. Why such Misfeasance Claims are pursued – what is the motivation of the claimant liquidator/litigation funder?

  • Liquidators will have done their homework. They will have identified likely assets to pursue recovery of, from the targeted Director(s). It is no surprise or coincidence that Directors with no obvious assets, are rarely pursued.  Liquidators are commercial animals.
  • To make a financial recovery for the benefit of the insolvent company, which may or may not (often not) involve recovery of the full amount claimed from the Director(s). The Liquidator has a statutory duty to recover assets, one such asset being sums the Liquidator considers is owing from Directors (and other third party recipients of company assets).
  • Drawing a line under matters. Threats of recovery action may have rumbled on, in correspondence, for some time between the Liquidator and the Director. The relevant Limitation period may be drawing near. Forcing a financial resolution of a claim can (counter-intuitively) be advantageous for both Director and Liquidator depending, of course, on the terms of settlement. It brings certainty. It allows the Director to move on.
  • Recovering fees and time costs incurred by the Liquidator in the insolvency that might otherwise go unrecovered and have to be written off, unless a recovery is made from the Director personally.  Forcing a financial settlement with the Director(s) can help achieve this.

 4. How should the Director react to such a threat of legal proceedings

  • The first the Director is likely to know of such a claim is when a 10-page letter from the Liquidator, or his Solicitor, lands on the Director’s doormat or in the inbox.
  • Experience shows that there is much to commend an immediate engagement by the Director with the Liquidator, no matter how angry and disgusted the Director may be by the claims that are alleged.
  • A failure by the Director to engage with the Liquidator at the earliest point, risks the Director losing valuable settlement/response time and may result in the commencement of Court proceedings by the Liquidator against the Director. The involvement of the Court is to be avoided where possible.   The issue of Court proceedings has the effect of increasing the amount claimed against the Director, to reflect additional claims for Interest, Court issue fees and legal fees.
  • Court proceedings also lock the Director into a process that requires the Director to spend (otherwise avoidable) significant sums on defending claims, to meet expensive procedural obligations in the Court process.

LITIGATION PRE-ACTION PROTOCOLS – DIRECTORS SHOULD USE THE TIME WISELY

  • The relevant litigation protocol that governs Misfeasance claims and Breach of Duty claims intimated against Directors, requires both the Liquidator and the Director to try and settle claims before Court proceedings are issued. The protocol  provides a window of negotiating time to both sides.  Such a negotiating period can last for 3 or 4 months.  This is certainly a time for the Director and Liquidator to try and resolve matters without the rigid procedural constraints and obligations imposed by an issued Court case.  This opportunity should almost always be taken by the Director.
  • This engagement may involve, for example, the Liquidator and Director entering into a form of Alternative Dispute Resolution (‘ADR’), which may involve a formal Mediation meeting or a good, old fashioned meeting with the Claimant with (or without) Solicitors present. ADR is a topic that justifies an article on its own.  Experience shows Mediation can and does work to settle matters in such claims.

SETTLEMENT OFFERS – PART 36 OF THE CIVIL PROCEDURE RULES (‘CPR’)

  • Even where settlement does not prove possible and litigation proves inevitable, the Director should consider making a Part 36 Settlement Offer to give him/her some protection on future legal costs issues. Part 36 Offers are an important weapon in the Director’s toolbox.  The precise detail of Part 36 Offers are beyond the scope of this article.

WHAT IS A PART 36 OFFER?

In summary a Part 36 Offer is a method of attempting to settle a case which has the advantage that if the offer from the Director is not accepted by the opponent, there are legal costs consequences for the opponent, should the amount of the offer not be beaten at Trial.

5. What factors can (and do) influence the outcome of a misfeasance claim

a. THE MERITS OF THE CASE

Is there a legitimate and strong case to be answered by the Director? A robust and focused response to the Liquidator’s letter of claim needs to be constructed and sent by/on behalf of the Director.

The Liquidator needs from that response letter to be given reasons to abandon his claims or at least take a more realistic view of the value and scope of them, in terms of the amounts that the Liquidator seeks to recover.

The Director needs to ask himself why would a Liquidator settle on anything other than full payment terms, if the Liquidator believes that there is (and remains) a strong case to pursue against a Director who has identifiable assets.  The letter from the Director in response needs to provide that justification (factual, legal and evidential) for the Liquidator lowering or abandoning his recovery expectations.

There is a cost to the Director of employing specialist Solicitors to help write that response letter. The cost/benefit analysis of using a specialist Solicitor here is likely to be attractive and of financial benefit to the Director under attack.

b. ABILITY OF THE DIRECTOR TO PAY THE SUMS CLAIMED

Even if the Liquidator has a great case, he cannot get blood out of a stone. That is inevitably understood by the Liquidator. The Liquidator will have done his research before targeting the Director.  The Liquidator will have identified assets owned by the Director (often the family home) from which the Liquidator can look to be paid or against which the Liquidator might hope to enforce any Judgment that may be obtained in Court proceedings against the Director.

Liquidators regularly do deals with the well advised Directors that reflect the ability of the Director to pay, often on extended payment terms.

c. OTHER DEBTS OWED BY THE DIRECTOR APART FROM THE CURRENT CLAIM – THE WIDER FINANCIAL PICTURE

Explaining and evidencing to a Liquidator that the Director:

  • Has insufficient assets to pay all of his creditors (to include the unproven claim of the Liquidator);
  • Will have to use and deplete his/her available assets to fund opposition to the Liquidator’s claims;

Are powerful negotiating tools for the Director.

The Liquidator is usually not after blood (no matter what the Director might think).  The Liquidator wants paying. The negotiation of settlements for Directors on the most favourable terms requires skill and experience and an understanding of what the Liquidator needs to be satisfied about, before a settlement can be reached.

Bankruptcy of the Director is unlikely to be what the Liquidator wants to see.  Bankruptcy of the Director may mean that the Liquidator never receives a penny from his claim.  Bankruptcy may however (on the specific facts of the case) be the right and best option for the Director.

d. THE UNCERTAINTY, WORRY AND COST OF LITIGATION

Litigation is expensive, time consuming and risky for the Director (and for the Liquidator and his Solicitors). All roads often (but not always) point to sensible compromise on affordable terms for both sides, in such claims.

Often, the Liquidator and his Solicitor will run litigation with the benefit of After the Event Insurance (‘ATE’), so that even if the Liquidator loses in a Court case and is ordered to pay the Director’s legal costs, an Insurer will pick up the Liquidator’s costs liability to the Director.  The Liquidator with ATE thus litigates with little or no adverse  costs risk.

The Director who does not settle and who is successfully sued by a Liquidator runs the very real risk of:-

  • Paying his /her own legal fees to oppose the claims.
  • Having salt rubbed into the open wound, by being ordered to also pay the successful Liquidator’s legal costs (the nightmare scenario).
  • Losing at final hearing and being ordered to pay some or all of the sums claimed by the Liquidator.

Against that background, settling early on, for modest, manageable sums can be very attractive to the Director and to the Liquidator.  No Claimant wants to unnecessarily incur legal fees in pursuing a Director that then become a competing claim to funds that might be recovered from the Director.

e. GIVING EVIDENCE

The Liquidator will, despite bringing the claim, often be reluctant to go to Court and be cross examined by the Director’s Barrister  in Court.  The Liquidator will in most cases want to settle.  Even the strongest of cases can ‘melt’ once in Court.

f. THE WIDER FACTUAL PICTURE

  • There are sometimes factors that mean settlement of Misfeasance claims cannot be entered into by the Director, at a particular point in time. For example, a Director may also be subject to a parallel Criminal Law Investigation or a DDI arising out of the same subject matter, that the Liquidator relies upon. Careful negotiation and management of all claims is key here.  The timing and terms of a settlement, (which may involve negotiations with more than one opponent), can be crucial for the Director.
  • A wish to settle – Terms of settlement

The careful wording of settlement terms with the Liquidator is crucially important.   Is the Director trying to settle just this claim or other potential claims?   Does the Director need extended time to pay?   How long a deferred payment period can be expected to negotiate? Will the Director need to give security for the deferred element of the settlement?

 6. The director losing at trial

This  outcome after contested Court proceedings for the Director can add many tens of thousands of pounds to a settlement sum that could have been negotiated out at a much lower price in the pre-Court issue period, on time to pay terms (e.g. allowing payment of an agreed sum over time).

The Director who chooses to fight in Court rather than settle, must do so knowing that:

  • Court proceedings will not reach final hearing for 18 to 36 months from the time the claim is issued.
  • During that time, the Director’s Solicitors will be asking him/her for significant sums of money to draft his Defence, instruct specialist Barristers and run the Defence case.
  • The time demands of running litigation during that period will inevitably distract the Director from his home and business life.
  • What we call ‘the last thought at night and first thought in the morning’ factor will kick in. Litigation is stressful. Is this the best use of the Director’s time and energy?

SUMMARY

Defending proceedings is however sometimes a reality and needs to happen. We are well used to defending proceedings for Directors. Click here to see some of our testimonials.

7. Is anybody else liable to pay part or all of the sums claimed by the Liquidator?

a. A co-Director may for example be liable for some part of the sums claimed. Negotiating a contribution from that co-Director towards a settlement with the Liquidator may need to happen quickly and in parallel with settlement discussions with the Liquidator.

b. Often overlooked, but a professional advisor may need to be put on notice of the Liquidators claim, so that the Director can look to that professional advisor for a contribution or indemnity, if (for example) the claim arises out of professional advice given to the Director that the Director reasonably relied upon. A current hot topic (outside of the scope of this article) is the potential liability of Accountants, for advice given to Directors about the drawing of Dividends that are then attacked by the Liquidator.

CONCLUSIONS

The Director should respond early to the Liquidator.  Engage with the Liquidator and if an offer is to be made, make it sooner rather than later before legal costs rack up on both sides.  Do so on the basis of and with the benefit of good and experienced legal advice to achieve the best possible deal on the best possible payment terms.

Talk to us for help and advice on defending a Misfeasance Claim

In our experience, If the Director wishes or needs to defend the Misfeasance claim, then the Director must do so with his/her eyes wide open as to the risks and consequences of litigation.

Our Insolvency Litigation Solicitors and the wider Team have had a great deal of success in defending (and negotiating settlements of) Misfeasance claims and breach of statutory Director duty claims by Liquidators. It always comes down to the facts of the case and using the available evidence to build a strong defence case and communicating that to the Liquidator.  We have the experience and expertise to use that evidence to best advantage. Click here to see 5 tips for directors facing misfeasance claims.

Contact us or call us on 0121 200 7040 for a free initial chat if you are facing a Misfeasance claim.

Important: COVID-19 Debt Recovery Guidance

Important: COVID-19 Debt Recovery Guidance

Our Insolvency Solicitors Advise that the Temporary Suspension of Winding Up Petitions and Statutory Demands is NOT a Universal Charter for Refusing to Pay Debts

In this article, our Insolvency Solicitors explain why the Government’s proposed emergency insolvency legislation, as a result of COVID-19, to ensure the survival of some companies is not a universal charter for refusing to pay debts. This was emphasised in the judgement of the High Court in April 2020, in the case of Shorts Gardens LLB v London Borough of Camden Council, when it ruled that the Winding Up Petition in that case could go ahead, despite their ‘temporary banning’ by the Government.

The message we want Directors to take from this article is that if you are facing cash-flow issues from COVID-19, or you are a troubled limited company, then you must be very careful how you explain your position to your creditors when seeking to buy time to make payment.  You should be able to explain clearly how COVID-19 has impacted your business, if that is the case.

There is a route through debt hurdles in these difficult COVID-19 times, though it is not guaranteed, and specialist insolvency advice from our experienced Solicitors is valuable and effective.

Context – Emergency Insolvency Legislation

In a Press Release on 23rd April 2020, under the heading New Measures to Protect the UK High Street from Aggressive Rent Collection Closure, the Ministry of Housing, Communities & Local Government plus the Department for Business, Energy & Industrial Strategy announced that the Government was bringing forward emergency insolvency legislation.That relates to the use of Statutory Demands and/or the presentation of Winding-Up Petitions as debt recovery tools.

The Press Release said:

High street shops and other companies under strain will be protected from aggressive rent collection and asked to pay what they can during the coronavirus pandemic, the Business Secretary has set out today (23 April 2020).

The majority of landlords and tenants are working well together to reach agreements on debt obligations, but some landlords have been putting tenants under undue pressure by using aggressive debt recovery tactics.

To stop these unfair practices, the Government will temporarily ban the use of Statutory Demands (made between 1 March 2020 and 30 June 2020) and Winding-Up Petitions presented from Monday 27 April, through to 30 June, where a company cannot pay its bills due to Coronavirus. This will help ensure these companies do not fall into deeper financial strain.”

The Government indicated that it is going to produce a Corporate Insolvency and Governance Bill. The exact details are still awaited, but the Business Secretary Alok Sharma indicated he would publish draft legislation shortly.

Practical Impact – A Recent High Court Judgement Decided Winding Up Petition Can Go Ahead

The issues from the Press Release were considered by the High Court judgement in Shorts Gardens LLB v London Borough of Camden Council. In Shorts, the Court was asked to restrain two Winding-Up Petitions because of the prospective insolvency legislation and the comments in the Press Release.

The Court decided that the Petitions could go ahead.  This was because there was no compelling evidence that the companies facing the winding up petitions faced liquidity or operational challenges from circumstances related to COVID-19.  The debtor companies were ordered to pay costs.

 Helpful Lessons – Take Early Advice from Insolvency Solicitors

Shorts is one of the first cases to consider COVID-19 issues against a background of hostile debt recovery action.   Plainly, the debtor firms in Shorts did not have the evidence to persuade the Court that COVID-19 was the main cause of the delays in paying the relevant creditors.

Anyone facing such challenges should provide specific evidence about:

  • The company being unable to pay debts which are the subject of any Statutory Demand/Winding-Up Petition as a direct result of the effects of the Coronavirus (e.g. on staff or logistics);
  • Giving credible details to support any such conclusions;
  • With a focus upon debts, which were incurred after the impact of the Coronavirus – in say February and March 2020 – onwards.
  • Also a focus upon the type of liabilities which the proposed legislation intends to protect e.g. retail and other businesses facing recovery action from landlords.

In Shorts, the Court felt that any further arguments about Covid-19, could be decided upon written evidence after the Winding-Up Petitions were served, advertised and then heard. That, however, ignores the impact of a firm’s bankers learning that petition has been presented.

Accordingly, early expert advice from our Insolvency Solicitors is critical.

This is because the  Court expressly said in Shorts that allowing a petition to be presented, would protect the position of creditors. The issue of a petition triggers provisions, which allow later challenges to antecedent transactions – for example transactions at an undervalue or preferences, if a winding-up order is made.

A Recent COVID-19 Success for our Insolvency Solicitors

COVID-19 has presented quite several legal challenges in the insolvency arena. Here at NDP, we are very proud that during early April 2020,  we used the company  Winding-up regime to maximum advantage for our company client (a key logistics supplier in the chain fighting COVID-19 and itself on the wrong end of a Winding-up petition) by using the current, flexible approach of the Courts to avoid a Winding-up order being made.

That action preserved employees’ jobs and enabled the company to get back up on its trading feet, delivering vital product in the fight against COVID-19.

Free Initial Advice from our Insolvency Solicitors

If you are a Director reading this and are concerned about your business or any future liability, as a result of COVID-19 or otherwise, then please do not hesitate to call us on 0121 200 7040 or contact a member of the Team. The initial discussion is FREE.

Click here to see our full list of contact numbers during the current Covid-19 lockdown.

We have significant experience in advising and defending directors during or after insolvency. Please click here to see some of our testimonials.

Directors Must Remain Vigilant Despite Wrongful Trading Suspension

Directors Must Remain Vigilant Despite Wrongful Trading Suspension

Covid-19 – Wrongful Trading Rules Suspended. But, Our Insolvency Solicitors Advise that Directors of Failing Companies Still Need to Tread Very Carefully

The message we want Directors to take from this article is that Directors of failing or troubled limited companies still need to tread very carefully, even though the Wrongful Trading Rules have been temporarily suspended due to Covid-19. Our Insolvency Solicitors explain why Director Disqualification investigations and Misfeasance Claims remain a significant risk for Directors of failing companies.

What is Wrongful Trading?

Once a Director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors.

If, after the company has gone into insolvent administration or liquidation, it appears to the Court that a Director has failed to comply with this duty, the Court can order the Director to make such contribution to the company’s assets as it thinks proper. In other words, personal liability for the director can be the result. This usually happens on application to the Court by the Liquidator of the company.

Our Insolvency Solicitors Explain What has Changed, and Why

In response to the COVID-19 Pandemic, the Business Secretary announced, on 28th March, the temporary suspension of the wrongful trading provisions for three months with retrospective effect beginning on 1st March 2020. This measure has been taken to help remove the threat to Directors of incurring personal liability for company debts, during the Pandemic. It is a step intended to incentivise businesses not to fail and to give some – very limited -protection to Directors.

These measures may (our emphasis added) assist company Directors in making business decisions to continue trading – and potentially incurring creditor liabilities – without the imminent threat of personal liability in respect of the wrongful trading rules, should a company become insolvent and fall into a formal insolvency process.

What are the Likely Consequences of the Suspension?

In our view, the changes will affect very little. Further details are awaited on this, but the measures being implemented will form part of a new regime that looks to assist struggling businesses through a difficult period. The Government’s stated objective remains to assist businesses and ensuring they are provided with the necessary time and space to ride out the wave that is the COVID-19 Pandemic.

The Business Secretary has reiterated that ‘all of the other checks and balances that help directors fulfil their duties properly will remain in force’. This is of course subject to change.

What Can and Should the Well-Advised Director Do?

On first read, such changes appear to provide welcome news to many Directors whose companies are suffering right now. However, it is important that Directors do not become complacent bearing in mind the plethora of other statutory obligations that they are subject to, with the obligations they are still under. The priority should remain the mitigation of risk of breaching any obligation and obtaining restructuring advice now, during the storm.

Directors should continue to have in mind, in particular, the following areas of risk:

  • Director Disqualification (‘DD’) under the Company Directors Disqualification Act 1986 (‘CDDA’). If post liquidation, the Director is deemed to have engaged in Unfit Conduct, which is very widely interpreted, the Director is likely to face an expensive and time consuming DD investigation by the Insolvency Service. Examples of Unfit Conduct include:
      • Non-payment of Crown debt.
      • Trading the company for too long.
      • Not keeping or delivering up the company books or records.
  • Misfeasance claims against them and their assets personally, by Liquidators, alleging the mis-application or misuse of company money or assets, under section 212 of the Insolvency Act 1986.

Advice from our Insolvency Solicitors

Here at NDP, our 9 Insolvency Law Solicitors and the Team behind them are well placed to advise our clients and contacts, free of charge in the first instance.

Licensed Insolvency Practitioner (‘LIP’) Advice

Due to our extensive LIP contacts, we can arrange immediate consultations for you and your clients, with the right LIP for your business, usually on a free of charge basis in the first instance.  Choosing the ‘right’ LIP for you and your business, is critically important.

Why Bother Getting that Legal or ‘LIP’ Advice?

Apart from the obvious benefit of talking to experienced professionals, taking advice now can be a useful ‘insurance policy’ for the Director, if he/she follows the advice given, but is then subsequently challenged by a LIP.  What’s to lose?  There is much to gain in taking that advice at an early stage.

Free Initial Advice from our Insolvency Solicitors

If you are a Director reading this and are concerned about your business or any future liability, or would like to discuss anything that is on your mind then please do not hesitate to contact a member of the Team. Click here to see our full list of contact numbers during the current Covid-19 lockdown.

We have significant experience in advising and defending directors facing Director Disqualification and/or misfeasance claims. Please click here to see some of our testimonials.