After Insolvency – Claims Against Directors and Reviewable Transactions
After the dust has settled on the repatriation of the 150,000 holiday makers left stranded in the wake of the collapse of Thomas Cook, the focus of the liquidators, the government Business & Insolvency Service (BIS) and the media is likely to shift to the conduct of the company’s directors in the lead up to the collapse.
There are 1.9 million limited companies in the UK. One of the key features of a limited company is that, except in very limited circumstances, the directors of the company are not liable for the debts of a company. In a simple case therefore, if a company becomes insolvent with thousands, or even millions owed to creditors, the directors can walk away with no liability to the company’s creditors. It is for this reason that people in business should always carefully assess a company’s financial position before extending credit to them.
However, there are circumstances in which directors can face claims against them personally arising from the running of the company prior to its insolvency, or where specific transactions can be set aside.
CLAIMS UNDER THE INSOLVENCY ACT
Claims arising in connection with a company’s insolvency often include:
- Claims for wrongful trading under section 214 of the Insolvency Act 1986;
- Claims under section 238 of the Insolvency Act 1986 where a company has transferred assets to another person or company at an undervalue;
- Claims under section 239 of the Insolvency Act 198 Claims where a company has made a preferential payment to a creditor of the company which puts that creditor in a better position than other creditors of the company;
- Claims under section 216 of the Insolvency Act 1986 where a director re-uses the name of a company which has gone into insolvent liquidation within the last 5 years and of which he was a director.
SECTION 214 INSOLVENCY ACT 1986 – WRONGFUL TRADING
If the directors of a company know, or ought to know that the company was likely to become insolvent then they are under a duty to take every step to minimise the potential loss to creditors. If they do not do so the liquidator may bring a claim against the directors seeking an order that they pay money into the company to represent the loss caused to the company’s creditors by directors’ conduct.
Common examples of wrongful trading cases are instances where a company has been insolvent, or on the brink of an insolvency, but the directors have continued to accept deposits or payments in respect of future work.
SECTION 238 INSOLVENCY ACT 1986 – TRANSACTIONS AT AN UNDERVALUE
Transactions at an undervalue occur where a company which later becomes insolvent transfers its assets to a third party either for no payment at all or for a price which is considerably lower than its true value. In these circumstances, the court can make an order to set aside (reverse) the transaction. The court can make orders in respect of any transaction at undervalue which took place within 2 years of the date of insolvency. In the case of transactions which were carried out with an intention to defraud creditors, the court can go back 6 years.
These cases often arise where there are common directors and shareholders of “sister companies” and the directors either habitually transfer assets between the two companies or do so in order to safeguard assets when one company is facing insolvency.
Asset transfers which may be examined include:
- Transfers of land and buildings;
- Transfers of valuable contracts;
- Transfers of intellectual property; and
- Transfers of valuable fixed assets.
SECTION 239 INSOLVENCY ACT 1986 – PREFERENCES
A preferential payment takes place where a company which is unable to pay its debts on time, makes a payment to one of its creditors where the intention and effect of that payment was to put that creditor in a better position than the company’s other creditors.
The court can set aside preferential payments which took place within the 6 months’ prior to insolvency , or in cases where the creditor is connected with the company (such as a director) which took place up to 2 years before insolvency.
Common examples of preferential payments are repayment of director’s loans in the lead up to insolvency.
SECTION 216 INSOLVENCY ACT 1986 – RE-USING COMPANY NAMES
Companies using the same name as a company which has gone into liquidation are often referred to a “Phoenix Companies”. There are restrictions on doing so in order to prevent directors allowing their companies to go into liquidation, and then carrying on “business as usual” with a new company.
In summary, a person who was a director of a company at any time within 12 months before it went into liquidation cannot become involved with another business using an identical or similar name or trading name of the insolvent company within the next 5 years.
Breaching those restrictions can result in:
- Criminal prosecution;
- The directors being held personally liable for debts incurred during the period of the breach; and
- The directors being disqualified from acting as a director of any company.
There are certain exceptions to the restrictions, including whether the company using the prohibited name has been trading using that name for at least 12 months before the other companies’ insolvency.
If a director of an insolvent company, wishes to use a prohibited name in the course of his new business then he may apply to the court for permission to do so.
HOW WE CAN HELP
Bartons’ dispute resolution team understand that when a company is facing insolvency its directors will come under immense pressure. Most directors will do everything they can to protect their employees, their creditors and the business. However, sometimes mistakes are made which result in liquidators conducting investigations or bringing claims relating to the conduct of the directors.
If this happens, we are experienced in defending claims for wrongful trading, preferential payments, transactions at an undervalue. We can also advise upon the re-use of prohibited names.
ABOUT THE AUTHOR
James Field is a solicitor advocate with 7 years’ experience of advising in commercial disputes. He has defended clients against claims by liquidators under the Insolvency Act for over £2m.
James can be contacted by email or on 01548 854 926.
Photo by Drew Beamer on Unsplash
