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Insolvency Solicitors and Advising Directors

Adding Value. Who Advises the Director, leading up to Formal Insolvency? Eyes Wide Shut!

The position of the Director is all too often overlooked or comes a poor second to that of the company, when insolvency looms. You wouldn’t take an exam without first preparing properly. Why then would the Director liquidate his company without first checking his/her own personal position? In this article, our insolvency solicitors look at the threats that directors face at insolvency and who advises the director at this crucial time.

The Insolvency Practitioner’s Responsibilities are not Towards the Director

Let’s immediately dispel the myth that the Insolvency Practitioner who is brought in to advise the company, has any obligations or duties to the Director. The Insolvency Practitioner’s role is to look after the company and its creditors, not the Director.

Experience tells us that to overlook the position of the Director at this crucial time before formal insolvency is a recipe for impending disaster for the Director, who may as a consequence face misfeasance claims post administration/liquidation from, amongst others:

The Liquidator/Administrator, seeking financial recompense from the Director personally, for:

Illegal Dividends.
Mis-use of company assets or company property.
Overdrawn Directors Loan Account (‘DLA’).
Repayment of sums paid to third parties in the period up to formal insolvency.

The Insolvency Service, who will investigate the conduct of the Director with the possibility (if ‘Unfit Conduct’ is suspected) that they will seek the disqualification of the Director or a Director Disqualification Compensation Order.
Company creditors, pursuant to Personal Guarantees given by the Director in better financial times, to support the company’s position. These are most commonly given by the Director to suppliers, bankers, finance houses, landlords and others.
The Department for Business, Innovation and Skills, or other Criminal Law Investigators, arising from the Director, for example:

Failing to maintain/preserve/deliver up company books and records.
Allowing the company to become involved (often unwittingly) in MTIC Fraud.
Breaching an existing Director Disqualification Order/Undertaking and/or aiding and abetting such breaches (NDP is currently instructed on 4 such cases).
Committing fraud in anticipation of company winding up (section 206 of the Insolvency Act 1986 (‘the IA 1986’)). This includes:
- Concealing the company’s property or concealing debts due to or from the company.
- Fraudulently removing the company’s property.
- Pawning, pledging or disposing of company property obtained on credit that has not been paid for.
Committing transactions in fraud of creditors (section 207 of the IA 1986) to include:
- Causing or making a gift or transfer from company property.
- Concealing or removing any part of the company’s property.
Committing misconduct in the course of winding-up (section 208 of the IA 1986)

Fear not however! Our Insolvency Solicitors can Help. There are Statutory and Common Law defences that can be deployed and used by the well-advised Director in answer to many of the above offences. The key is to deploy and use the Defences to the Director’s best advantage.

So What Should the Well Advised Director Do?

Whether the company is facing administration, a Compulsory Winding-Up Petition or contemplating the appointment of a voluntary liquidator, there is much that can and should be done by the Director before formal insolvency.

Surely the Proposed Liquidator/Administrator Will Look After the Director

In reality, no. The duties and obligations of the future liquidator/administrator are to the company and its creditors, not to the Directors. The Director who sleep walks his/her company into formal insolvency will likely face personal claims.

What are the Director’s Objectives?

Whether the objective is to re-start the business of the failed company, mitigate guarantee liabilities or simply to effect an orderly wind down, the time before liquidation must be used by the Director to best advantage. That may include the Director taking advice from insolvency solicitors and other specialists in relation to:

Property issues

For example, negotiating with landlords to agree the terms of future property occupation (if required) or perhaps existing guarantee obligations.

Funding

Negotiating with finance companies and key creditors as to pre-liquidation liabilities and future trading terms (and possibly with new bankers or asset-based lenders (‘ABL’s’)).

Directors loan accounts (DLAs)

Addressing the position in relation to overdrawn DLA’s is a pre-liquidation must for the Director. Are the numbers accurate? Can/should those numbers be re-allocated?

Dividends

Is the Director going to come under attack from the Liquidator because there are insufficient reserves to justify dividends drawn? It is important to address and try and resolve such matters as soon as possible.

Professional advice

Does the company and the Director need new/better professional accountancy or legal assistance? If so, get that help on board now, not only to address future trading issues but also to assist in addressing potential problems arising from OldCo. The Director must always be aware of the potential for existing company advisers to get very defensive, at and around the time of insolvency.

Trading vehicle

New incorporation/trading documents, if NewCo is required, whether to acquire the business or assets of OldCo or otherwise. What is the best trading style? Limited Company or LLP or sole trader?

The Statement of Affairs and the Director Questionnaire

The former will be required to be signed off by a Director of the company as part of the process that sees the company placed into formal insolvency. It will be prepared by the Insolvency Practitioner but will be signed off by a Director, supported by a Statement of Truth, from the Director, as to the accuracy of the document.

The well-advised Director will always run that Statement of Affairs past an Insolvency Solicitor before signing it. The content of that document (like the Director’s Questionnaire, to be completed by the Director post insolvency) often come back to haunt Directors. It is important to ensure they are completed correctly and accurately.

Insolvency Solicitors – NDP’s Role

Our Insolvency Solicitors can and do regularly assist Directors with all of the above issues and many more besides. Over and above our involvement in legal issues, we have excellent and trusted contacts in the banking, ABL, accounting and Insolvency Practitioner markets. The involvement of the correct and appropriate professionals, from those sectors, is often crucial in achieving the best possible outcomes. Click here to see some of our testimonials.

If you are the director of a company threatened with insolvency, it is well worth taking advice from experienced insolvency solicitors such as those here at NDP. It could save you a lot in the long run, so please contact us or call us on 0121 200 7040. Our Insolvency Solicitors will be happy to discuss and advise on your problems, and the initial conversation is free.

Case Studies

How to deal with the Insolvency Service Criminal Investigation Team

29th April 2019

This case study explains how our experienced director disqualification solicitors worked to get the Insolvency Service to drop its case against our client. This was a criminal investigation and could have resulted in a custodial sentence. Read More »

Testimonials

31st March 2020

High Court Commercial Litigation, Freezing Orders and an NDP Inspired Solution – A Testimonial.

Our Commercial Litigation Solicitors successfully represent a client with a Freezing Order over a potentially ruinous £5 million claim. Read More »

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Insolvency Solicitors and Equity of Exoneration

by Craig | Wednesday, September 12th, 2018 | Insolvency Litigation News and Comments, News about NDP

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A Recent Court Decision – Our Insolvency Solicitors Comment on its Impact on Claims Brought by Trustees in Bankruptcy

This article by our insolvency solicitors looks at a recent Court of Appeal Decision and its impact on claims brought by Trustees in Bankruptcy. The decision, made in the case of Williams v Onyearu ([2017] EWCA Civ 268), provides a new insight for both bankrupts and Trustees in bankruptcy as to the factors the court will consider when considering Equity of Exoneration arguments.

The Law of Equity of Exoneration – An Overview

The principle of Equity of Exoneration applies where, prior to the making of the bankruptcy order, the bankrupt charges a jointly owned asset for their own personal benefit and advantage. This most commonly occurs when dealing with the family/matrimonial home.

For Example:

Mr and Mrs Smith jointly own their matrimonial home which has equity of £100,000. Mr Smith then takes out a second mortgage on the property for the sum of £50,000 to pay for his personal debts.

Unfortunately, Mr Smith incurs further debts and is made bankrupt meaning that his 50% share in the matrimonial home vest in his Trustee. The Trustee in Bankruptcy would therefore be entitled and required to realise Mr Smith’s notional 50% interest in the property in the sum of £50,000 for the benefit of the creditors.

However, Mrs Smith may argue that her husband has already taken his 50% share out of the property by virtue of the earlier £50,000 remortgage and that she is therefore entitled to 100% of the equity.

The above is a commonly used defence to possession and sale applications, brought by Trustees in Bankruptcy in respect of matrimonial property. Until Williams v Onyearu, there has been little judicial guidance from the higher courts.

The Factors the Courts Have Traditionally Looked at

The courts, faced with such arguments, have traditionally looked at the following factors when considering Equity of Exoneration arguments:

Whether husband and wife were financially independent from one another (e.g. whether they operated separate bank accounts);
Whether the non-bankrupt spouse has been exclusively maintaining the mortgage and other household expenses;
Whether the non-bankrupt spouse indirectly benefited from the bankrupt’s further borrowing (e.g. did the bankrupt invest the money into a business which improved the spouse’s lifestyle).

If (for example) the court decides that the bankrupt has had the exclusive benefit of the further borrowing then the general rule is that the bankrupt’s borrowing will be taken from their share of the equity in the property, with the following consequences:

The Trustee in Bankruptcy will only be entitled to receive a much-reduced sum representing his interest in the property;
The Bankrupt and his family will have to raise the lesser sum to buy out the Trustee’s interest in the property than would otherwise be the case.

The Finding in Williams v Onyearu

Williams v Onyearu was an appeal by Mr Onyearu’s trustee in bankruptcy from a High Court decision which held that the Equity of Exoneration applied in favour of Mrs Onyearu even though she had received an indirect benefit from her husband’s borrowing.

In his Judgement, Richards LJ made several remarks which are useful to understanding the operation of the Equity of Exoneration, as summarised below:

Richards LJ clarified that the principle of Equity of Exoneration is not limited to cohabiting couples. It can arise in any case where there is jointly owned property and one party borrows against the whole of the equity.
Where the conditions at (1.) above are met, it is to be inferred that Equity of Exoneration applies, unless rebutted by evidence.
Equity of Exoneration can apply even where the non-bankrupt spouse has received an indirect benefit, although this may not be the case if the couple’s finances were intertwined.

Our Insolvency Solicitors Summarise

This finding appears to favour a non-bankrupt spouse who is seeking to safeguard the family home as it provides greater scope to argue that that Equity of Exoneration should apply. However, the finding will likely prove frustrating for Trustees as it may result in a greater number of possession and sale applications being defended.

Dealing with, and Defenses to, Possession Claims brought by Trustees in Bankruptcy

Quite separate from ‘equity of exoneration’ arguments there are a number of other tools available to the Bankrupt to reduce or eliminate the extent of the Trustee in bankruptcy’s Claims.

Our Insolvency Solicitors are well-used to dealing with such claims on behalf of both Trustees and the Bankrupt/His Family. Contact us or call us on 0121 200 7040 for help and advice in this area. The initial discussion is FREE.