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Post Liquidation Claims Against Directors – How to Prepare

What’s that coming over the hill? A bunch of post liquidation claims against directors.

What can a Director do when the strident music of liquidation kicks in? Liquidation is stressful. It often ends with liquidation claims against directors. This article by our expert insolvency solicitors here in Birmingham, looks at the positive steps that a director who is having to liquidate his/her company can take to protect their position, both pre and post liquidation. It follows on from our earlier article that looked at the duties of directors and the claims a director is likely to face after liquidation.

Some points to assist the Director, pre and post liquidation.

You wouldn’t (or at least probably shouldn’t) run a marathon without proper preparation. Why then would a Director liquidate his company without preparing properly?

Quite often when formal insolvency for the company looms large, the Director has little or no say about the timing of that liquidation.

The Director may only have a matter of weeks to prepare. Much can be done by and for the well advised Director in that time window.  Time may be short because there is an imminent Winding-Up Petition hearing or the threat of presentation of one (often by HMRC or a trade creditor) which results in either a Compulsory Winding-Up Order being made by the Court, or a Creditors Voluntary Liquidation proceeding in its place. In both of these cases, a stranger to the affairs of the company steps in and takes control – the Liquidator.

The challenges and concerns faced by the Director of a liquidating company – including the possibility of liquidation claims against directors – are far too often ignored or underestimated not only by the Director, but also by his professional advisors, to include advising Accountants, Insolvency Solicitors and Insolvency Practitioners.

Directors of liquidating companies should always assume the worst. This means assuming the Liquidator or the Secretary of State (or others) might attack, post liquidation, with liquidation claims against directors.

Some of the Steps the well advised Director should take in the lead up to liquidation

  1. Computer Server. Take a mirror image of the company’s computer server before handing the server over to the Liquidator. Emails, cash flows and other material contained on it may prove a very useful tool to successfully opposing claims against the Director, when those claims are intimated, perhaps years down the line. Remember the Liquidator has 6 years or sometimes longer, from the point of liquidation, to commence claims.
  2. HMRC. Keep copies of all the company’s exchanges with HMRC (where for example Time To Pay plans are being negotiated) and with key creditors.
  3. Written Records. Keep a diary/written records of the Director’s day to day dealings, with the company and its creditors, in the weeks and months prior to liquidation, justifying and recording decision making. If, for example, refinancing has been sought, keep a full note of all the steps taken.
  4. Take Advice. Seek and obtain advice from regulated, external professionals such as experienced Insolvency Solicitors, Licensed Insolvency Practitioners and Accountants. Do so when trouble first appears on the horizon to maximise available options.
  5. Keep Records. Keep copies of professional advice sought and received by the Director and by the company. Make and keep a full note of every single meeting by reference to:
    • Attendees
    • The Venue
    • Matters Discussed
    • Outcomes
  6. Follow Advice. This means following the professional advice given or if the Director departs from it, make a careful note of why.
  7. Receipts from Liquidator. Get a written receipt from the Liquidator in respect of any and all company books and records delivered up or made available to the Liquidator.  If the Liquidator does not collect all of the company’s records, then email the Liquidator and record precisely that.  It is amazing how often Liquidators ‘lose’ records or fail to collect them, only then to complain about missing books and records, leaving the Director high and dry.
  8. Record Discussions. Keep a careful record of all your pre-liquidation discussions with the Liquidator. He is not the Director’s friend. That is nothing personal. The Liquidator represents the interests of creditors of the company, not the Directors.
  9. The Director’s Questionnaire. Post liquidation get help from an experienced Insolvency Solicitor in completing the Director’s Questionnaire that the Liquidator will send to the Director. Its content may be relied upon against the Director in due course.  Completing the Director’s Questionnaire fully and completely is a ‘must do’.Do not fail to complete the Director’s Questionnaire.  Ensure it is documented and verifiable before returning to the Liquidator.
  10. Engage with the Liquidator. Engage, co-operate and do so in a timely manner with your Liquidator. Failure to do so often ends in tears.  Get help from a Solicitor experienced in dealing with insolvency work in dealing with queries and questions from the Liquidator.  Quite often, there is a credible explanation available to the Director, that he may be unaware of, to most issues.
  11. Choose your Liquidator carefully. Rely upon recommendations from your Solicitor or Accountant but do your own homework also. Invariably the cheapest Liquidator is not always the best option.
  12. Do not seek or rely on advice from unregulated advisors. They may be uninsured, their advice may be incorrect and their advice will inevitably carry much less weight than that of regulated, licensed professionals. It can make the difference between winning and losing a case.
  13. Leases. Before liquidation, directors should consider any liability that they may have   under a lease guarantee.  If so, it is worth trying to negotiate an exit with the Landlord.  That may even involve the Director in lending funds to the company to allow it to keep trading in the short term.

Considerations for the well advised Director after liquidation

  1. Be ‘heads up’ in dealing with financial claims intimated against Directors by a Liquidator or creditor of the company

Directors should take a commercial view taken financial claims, from the very beginning. The well advised Director needs to understand that whatever his opinions are, of allegations made against him, there may be (even if the Director defeats the claim) a significant, irrecoverable financial cost to the Director even if he wins a fight.  The Director must always consider an early commercial financial settlement, if only to be rid of the claim. Often the Liquidator litigates with an After The Event (‘ATE’) Insurance Policy.  Put bluntly, he litigates with little or no financial risk to himself.

  • ‘Doing the deal with the Liquidator’ (and negotiating the terms of any payment) is itself an art, not a science. Experience shows that the terms of such a settlement will often depend upon legal and practical  factors such as:
  • The extent of the Director’s share of the equity in the matrimonial home (and what the Liquidator knows about that matter) and the wider ability of the Director to pay. The Liquidator is (in most cases!) after money, not blood.
  • The extent of the Director’s other creditors (a powerful negotiating tool when used to best advantage by the Director).
  • The legal and factual arguments available to the Director to oppose the claim intimated against him.
  • The willingness and ability of the Liquidator to accept a sum less than the full amount claimed and how to achieve that scenario with the Liquidator.
  • Knowing how best to communicate with and do deals with the Liquidator.

3. The Threat of Director Disqualification proceedings

  • Once threatened, the Director (and Director Disqualification proceedings can be commenced up to 3 years after the date of the insolvency), has a time window of opportunity to respond in writing to the Insolvency Service, with written representations as to why: A) it is not expedient in the Public Interest (i.e. the legal test) for Director Disqualification proceedings to be commenced against the Director; or…. B) In the alternative, why the Insolvency Service should accept a lower period of disqualification against the Director, then that sought. The Director should bite the bullet and grasp that opportunity with experienced Insolvency Solicitors on board, immediately.
  • Such a targeted and carefully crafted written response from the Director may need to be followed up by a meeting with the Insolvency Service perhaps alongside a Permission to Act application. The shorter the period of disqualification, the greater the prospect of the Director obtaining Permission from the Court to act as a Director of specific named companies, despite a ban.
  • Using that time short window to best advantage is critical for the Director. The Director may need, on the facts of the particular case, to quickly obtain third party Witness Statements to make out his defence, most obviously from the company Accountant or the company Bookkeeper or from Solicitors (e.g. to evidence advice given and followed by the Director).

4. Criminal investigations and criminal proceedings

Talk to a Solicitor familiar with such matters before saying another word. Such investigations/proceedings need very careful and precise handling. They can and do often threaten the liberty of the Director (nobody wants to go to prison) and will often impact upon how the Director should respond to parallel civil law proceedings (whether from a Liquidator or the Secretary of State).

Preparing for Liquidation Claims Against Directors – A Summary

The above tips are precisely that, a few tips and examples as to what the Director can do to protect his/her position, pre and post liquidation, when insolvency strikes.

Every case will turn on its own unique facts and circumstances. The trick is to know how best to approach each case, to identify the Director’s objectives, decide on a strategy and implement it. This is where our Insolvency Solicitors come in, preparing for liquidation claims against directors. Based at our Birmingham headquarters, but operating nationally, we have a strong track record in acting successfully for Directors of insolvent companies, both pre and post liquidation.

Click this link to see some testimonials and click this link to see some case studies of our work.

Acting quickly always helps. The sooner we are instructed when there are post liquidation claims against directors, the more we can do to help. Contact us or call us on 0121 200 7040.

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