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Directors under continued attack by insolvency claims from Liquidators

This blog post is about insolvency claims commenced by Liquidators against company directors and how NDP can help.

Here at NDP, we regularly represent directors faced with the threat of Court action from liquidators, often years after the original events were complained of, which threaten financial ruin to the director, his family and perhaps his new business.

More and more, we are seeing directors threatened with Misfeasance proceedings, brought under section 212 of the Insolvency Act 1986, which provides a method by which certain insolvency claims can be commenced by the Liquidator, including claims for breach of duty by the company’s directors and persons who have managed the company.

In this article we touch briefly on some of the key elements of the law in this area that directors are under threat from, specifically: misfeasance, statutory duties owed by the director under the Companies Act 2006 and breach of directors’ duties. It finishes with some advice on how we can help directors threatened with such insolvency claims.

What does SECTION 212 of the Insolvency Act 1986 mean?

Section 212 is, in essence, a summary remedy against delinquent directors, and states: “This section applies if in the course of the winding up of a company it appears that a person who:

– is or has been an officer of the company, or – has acted as liquidator or administrative receiver of the company, or

– not being a person falling within either of the above two categories is or has been concerned, or

– has taken part, in the promotion, formation or management of the company…. …..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.”

So, what statutory duties are owed by a director to a company he or she works for?

A company director owes the company the statutory duties that are set out in sections 171 to 177 of the Companies Act 2006.  In considering how to act, the director is required to have regard to various matters which include:

– The duty to exercise director’s powers in accordance with and for the purposes conferred by the company’s constitution.

– The duty to promote the success of the company in good faith: section 172.

– The duty to exercise reasonable care, skill and diligence: section 174(1).

– The duty to further the company’s business relationships with suppliers, customers and others.

– The duty to avoid direct or indirect conflicts of interest between his position and that of the company: section 175.

– The desirability of the company maintaining a reputation for high standards of business conduct.

– The duty to consider the impact of the company’s operations on the community and the environment.

Other duties imposed, by (for example) the Companies Act 2006, on the director include the duty to maintain, preserve and keep proper and adequate books and records of the company.

The Insolvency Act 1986 imposes additional obligations on directors, to include obligations not to enter into Transactions at an Undervalue or make Preferences.

In times of financial difficulty the focus of the duty of directors under section 172 (i.e. to promote the success of the company) shifts to the interests of creditors.  Section 172(3) provides that:

‘The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors (emphasis added) of the company.’

What does all this mean for a director threatened with insolvency claims?

A Court will, at or after the point of insolvency, examine the director’s conduct with particular care and will not necessarily accept all that is said about the reasons and the motivation for the transaction in question, particularly if it is not obviously in the interests of creditors and is for the benefit of the director or persons connected to him or the company.

What type of conduct in insolvency claim cases is regularly complained of as Misfeasance or a Breach of Duty?

Recently, we have seen the following actual examples of the type of conduct that is alleged by administrators and liquidators to be breaches of duty by directors, all of which are coupled with a claim for repayment to the liquidator plus interest on the sums claimed (and said to result from the breach) plus legal costs:

– Non-payment of Crown debt by the company, in the period leading up to formal insolvency, with those funds being used for the benefit of other connected persons or companies.   This is said to amount on the facts of that particular case to wrongful trading, as defined by section 214 of the Insolvency Act 1986 (there is a statutory defence to such a claim in section 214(3) of the Insolvency Act 1986).

– Repayment of directors loans in the period leading up to formal insolvency.

– Payment of so-called ‘illegal dividends’.

– Sale of company assets, often to parties associated to the director, at an alleged undervalue or in a manner prejudicial to the interests of all creditors of the company.

– Payments and transfers of the company’s property to the director (and a quite separate company controlled by him) after the date of presentation of a Winding-Up Petition against the company, where it is said that those transfers were void, pursuant to section 127 of the Insolvency Act 1986 and misfeasant pursuant to section 212 of the Insolvency Act 1986.

So what is the director under attack with an insolvency claim to do?

As you will have gathered, the law in the area of insolvency claims brought against directors by liquidators is detailed and complex, which is where NDP come in. The key is to identify the director’s objectives, as early as possible.

– For example, is that objective to defeat the proceedings?

Or – Admit the liability but pay as little as possible, perhaps over time to be negotiated with the liquidator.

How should a director respond to an Insolvency Claim?

Whatever the director’s objective, urgent evidence gathering and urgent, coherent responses to the liquidator are inevitably required in order to achieve the desired and agreed in advance objective. Timescales for the director to respond are often limited, whether by the need to respond to a letter of claim or respond to Court proceedings that have been served on him.

NDP’S role in helping directors face insolvency claims

Whatever the objective and whatever the problem, it is highly likely that the experienced and expert team here at NDP have encountered the problem before and are well placed to deal with it for the director who is under threat of an insolvency claim. The director has a number of practical and legal tools in his armoury that he can deploy in successfully opposing such claims against him.

One such tool is found in section 1157(1) of the Companies Act 2006 which provides:

1157: Power of court to grant relief in certain cases

(1) If in proceedings for negligence, default, breach of duty or breach of trust against:  

(a) an officer of a company, or    

(b) a person employed by a company as auditor (whether he is or is not an officer of the company),

it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (emphasis added) (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit(emphasis added).”

Put plainly, this statutory provision is a powerful weapon in the armoury of the director if used properly. We are well used to dealing with such matters in negotiations with Liquidators and Administrators.

What should directors threatened with insolvency claims do?

Contact NDP. Our team of solicitors have a combined 120 years of experience acting for and against Insolvency Practitioners. We know the solutions and how best to achieve them for our clients. No hole is too deep for us to make a difference, but the earlier you contact us, the more we can do. For a confidential, free of charge first chat, contact us, or telephone us on 0121 200 7040.

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