Defending Liquidator Claims [2024 Guide]

Unpaid or overdrawn directors loan account

Void / unlawful dividends

Void and unlawful dividends

When running a company, the main purpose of directors is to ensure the company is successful. The primary aim is to deliver distributable profit to the company’s shareholders, which for a majority of companies are also its directors. But great care needs to be taken when drawing dividends. Failure to do so properly might lead to a number of claims.

Whilst a company could be successful when selling its products and services, generating large amounts of turnover, it is the balance remaining after deduction of all costs, i.e. the net profit, which is the true mark of success.
Where a company is unprofitable and is then profitable (as occurs with a lot of start-ups, who need a high degree of investment in the early stages of their life) it may be that the company remains unprofitable on a balance sheet basis, as the loss and profit each year accumulates in a reserve account, as a retained profit of loss.

However, for most profitable companies and their owner-managers, it remains the case that it is more tax efficient to draw a majority of your remuneration as dividends (although, as of writing, the tax difference is slowly closing).

Income and paying dividends

Directors and employees of a company are entitled to be rewarded for their involvement in a company, which for employees is usually by way of their salary. Directors likewise are entitled to a salary, or remuneration, for the provision of their services.

Shareholders, alternatively, are usually only permitted to draw funds from a company by way of dividends, which can only be paid out of available “distributable profit”, which in summary is the retained profit described above.
Such dividends cannot exceed the amount of retained profit, as this is the only distributable income that the company has, and it must be “available”.

Formalities for a dividend

A dividend cannot simply be drawn by a director (who may also be a shareholder) unless it is on an interim basis. Generally, for full year accounts, dividends are required to be recommended by directors and then shareholders must agree that such dividends be paid.

Some of the steps required to declare a dividend on either an interim or final basis include:

having available management accounts (for interim dividends) or year-end detailed accounts (for final dividends) showing a retained distributable profit;
for interim dividends, a requirement for directors to meet and agree the payment of a dividend;
for final dividends, the requirement for shareholders to approve the distribution;
the requirement for dividends to be paid equally to all shareholders, in accordance with the classification of their shareholding; and
the requirement for the funds to be available.

For small companies it is not unusual for the above steps not to be followed, although there is provision in certain circumstances for some steps to be retrospectively amended.

Issues for directors

Issues arise where the directors and shareholders are the same individuals, or substantially the same, in the following circumstances

where retained profits exist but the physical funds are not available; or
the company is having trading or solvency difficulties, but the last set of accounts provide sufficient distributable profits to declare and pay a dividend and there are available funds; or
where directors draw monies as directors loans and intend to convert this to a dividend at the year-end (between which the company may be placed into insolvency proceedings).

Whilst the above circumstances are not always likely to lead to a finding of misconduct in disqualification proceedings, they may cause severe problems for directors who may have to repay any dividends drawn in the event the company is wound-up and a liquidator appointed.

Misconduct

Misconduct leading to the disqualification of a director may arise where dividends are declared and paid but where there are insufficient distributable, insufficient available funds (see above) or where the formalities are not followed.

We commonly see directors drawing monies from a company as a loan and then seeking to avoid payment by stating they are dividends (and recording them as such either during the company’s trading life or shortly afterwards).

For the above reasons, these may be void dividends and therefore the director considered to have abused his/her position by declaring them as such (presumably to avoid having to repay such sums).

Dependent on your background and circumstances, there are a number of defences to any of the above allegations and at Francis Wilks & Jones we have considerable experience of dealing with the minutiae of any allegation that a dividend was illegal or constitutes misconduct by a director. Contact the experts today.

What constitutes wrongful trading?

A liquidator can pursue a wrongful trading claim, under section 214 Insolvency Act 1986, where they hold the view that at some time before the company’s liquidation, the director knew or ought to have known that there was no reasonable prospect of company rescue and that the company would avoid entering insolvent liquidation. The liquidator will need to say when the “insolvency point” was and what losses arose because the director allowed the company to continue to trade past the “insolvency point”.

The purpose of this provision is to hold directors accountable for their actions when a company is insolvent, and it aims to prevent them from taking unreasonable risks that could harm creditors.

Key elements of wrongful trading are set out under Section 214 of the Insolvency Act 1986, particularly in paragraphs 1 and 2 of that section.

Knowledge or ought to have known

Directors must have known or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. This involves an objective standard, considering what a reasonably diligent person with the knowledge, skill, and experience of that director would have known.

Continuation of trading

The wrongful trading offense arises when a director allows the company to continue trading while insolvent. This involves incurring further debts and liabilities without a reasonable expectation of being able to pay them.

Reasonable steps

The legislation allows directors to escape liability if they can demonstrate that they took every reasonable step to minimise potential losses to creditors. This involves proper monitoring of the company’s financial position and seeking professional advice if necessary.

Reference to key paragraphs in Section 214 of the Insolvency Act 1986

Paragraph 1 provides the general provision for wrongful trading.
Paragraph 2 sets out the defense that a director can raise by showing that they took every reasonable step to minimize potential losses to the company’s creditors.

Directors found guilty of wrongful trading may be held personally liable to contribute to the company’s assets for the benefit of its creditors. This is part of the broader framework of insolvency law aimed at ensuring fairness and accountability in the management of financially distressed companies.

S214 of the Insolvency Act explained

Section 214 of the Insolvency Act 1986 states:

“214 Wrongful trading.

(1)Subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.”

(2)This subsection applies in relation to a person if—

(a)the company has gone into insolvent liquidation,

(b)at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation [F1or entering insolvent administration], and

(c)that person was a director of the company at that time;”

(3) The court shall not make a declaration under this section with respect to any person if it is satisfied that after the condition specified in subsection (2)(b) was first satisfied in relation to him that person took every step with a view to minimising the potential loss to the company’s creditors as (on the assumption that he had knowledge of the matter mentioned in subsection (2)(b)] ) he ought to have taken.

What does this mean for you?

A section 214 Insolvency Act claim by a liquidator, against a director of a company, will seek an order that the director make a financial contribution to the company. This is on the basis that the director caused financial loss to the Company by allowing the Company to trade past the insolvency point.

To succeed with a claim against a director, a Liquidator will need to set out when the insolvency point was and that the director knew, or ought to have concluded, that there was no reasonable prospect of the Company avoiding insolvent liquidation.

How we can help

Our expert director defence team has been successfully defending directors since 2002 and regularly deals with s214 Insolvency Act claims. We can help you too. Just call one of our team today for a free initial consultation. We regularly defend claims by liquidators or administrators.

How to defend a liquidator wrongful trading claim

A director responding to a s214 Insolvency Act wrongful trading claim cannot rely on the statutory defence under Section 1157 Companies Act 2006; namely that they acted with honesty and integrity. This is because directors have a joint responsibility for decisions made by the Company and therefore, they need to ensure supervision of their fellow directors.

A director will however be able to consider a defence on the basis that:

He or she did not trade past the insolvency point:
He or she did not know, or ought not to have concluded, that there was no reasonable prospect of the Company avoiding insolvent liquidation (an example might be where a director was reasonably expecting a customer to pay a large bill or where the Company was in the process of re-financing and the director reasonably expected the funds to enable the Company to avoid insolvent liquidation).
That the director took reasonable steps to minimise the loss to Company creditors (see section 214(3) Insolvency Act 1986).
That the loss claimed was not because of wrongful trading.

It is often difficult to establish when the “insolvency point” was and at what point the Company’s Creditors’ interest became paramount. Careful consideration of this is required when facing a claim for Wrongful Trading.

Careful consideration of what the director knew at the time, or ought to have known, is also key.

A director’s records (emails, messages, accounts, minutes of meetings, books and records) will be helpful to assess what decisions were made and upon what available information.
The Court will consider a directors mental states at the time decisions were made and whether, those decisions, or the steps taken, were reached or taken by a reasonably diligent person.

Other important factors

It’s important to note that the burden of proof rests on the director to establish these defences. That is why directors need to provide evidence to support their claims that they took appropriate steps or genuinely believed in the company’s prospects.

Additionally, directors should be aware that while these defences exist, they are not absolute safeguards.
The court will assess the facts and circumstances of each case to determine the validity of the defences raised. If a director is found liable for wrongful trading, they may be required to contribute to the company’s assets to satisfy its outstanding debts.

Understanding and documenting the steps taken by directors in response to financial difficulties is crucial in establishing a valid defence against the charge of wrongful trading under Section 214 of the Insolvency Act 1986.

How we can help

Our expert director defence team has been successfully defending directors since 2002. We can help you too. Just call one of our team today for a free initial consultation. We regularly defend claims by liquidators or administrators.

Common examples of wrongful trading

Damages for wrongful trading

Fraudulent trading explained

How to defend a liquidator fraudulent trading claim

To succeed in a s213 Insolvency Act fraudulent trading claim, a liquidator will need to demonstrate that

a defendant was knowingly acting with an intent to defraud and therefore, that the defendant knew of the fraud.
it is not enough for a liquidator to simply argue that a defendant acted negligently or carelessly.
The liquidator needs to demonstrate that the defendant was in fact dishonest. This is often difficult for a liquidator to prove on the facts.

Review the evidence

When faced with a Fraudulent Trading claim, a defendant will need to consider what evidence there is regarding what he / she knew regarding the alleged Fraudulent Trading. They will want to review their books and records, which might include accounts, emails, messages, minutes.etc, to see what evidence there is surrounding their knowledge at the time of the Fraudulent Trading.

There will need to be a proper assessment regarding whether the trading was in fact fraudulent.
for example, simply showing that a company accrued debts when the directors knew it was insolvent, is not enough to show Fraudulent Trading under s213 of the Insolvency Act . This may however be enough to evidence Wrongful Trading on the part of a director under s214 of the Insolvency Act.

What happens when there is more than one defendant being chased by the liquidator?

Where there are multiple defendants to a Fraudulent Trading claim, the Court will apportion liability by reference to each defendant’s degree of control over the Company and its finances / assets.

When faced with a Fraudulent Trading claim under s213 of the Insolvency Act, careful regard should therefore be given to

the defendant’s own role in the Company,
their degree of control over the Company’s affairs / finances and also,
what benefit each defendant received from the Company.

Other matters to bear in mind when defending fraudulent trading claims

It’s important to note that the defences set out above are not absolute safeguards, and the burden of proof rests on the director to establish them. The court will examine the circumstances surrounding the alleged fraudulent trading and assess the director’s actions and intent.

Directors should be cautious about relying solely on these defences, as fraudulent trading is a serious offense, and the court will carefully scrutinise the evidence presented. Legal advice is crucial for directors facing allegations of fraudulent trading to navigate the complexities of the law and build a robust defence.

That is why our expert team is the perfect place to start – call us for a no obligation free consultation today. Defending liquidator claims is our expertise.

Common examples of fraudulent trading

Facing a Freezing Order following a Fraudulent trading claim

How much will someone pay if found liable for fraudulent trading?

Transactions to defraud FAQ

1. What is a transaction to defraud creditors?

A transaction to defraud creditors is a transaction which puts an asset beyond the reach of the company’s creditors.

For example, if a company sells its only property valued at £100,000 to its sister company for £20,000 then it could be said that is a transaction to defraud creditors because it has been sold for less than its value with the intention of moving the asset out of the company.

2. What is a transaction to defraud creditors under the Insolvency Act 1986?

Section 423(1) of the Insolvency Act 1986 states that they are “transactions entered into at an undervalue; and a person enters into such a transaction with another person if — (a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; (b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or (c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself”.

Section 423(3) of the Insolvency Act 1986 states that it needs to be satisfied that the company’s purpose was “putting assets beyond the reach of a person who is making, or may at some time make, a claim against him” or “of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make”.

3. Who can pursue a transaction to defraud creditors claim?

A transaction to defraud creditors claim can be pursued by any of the following:

official receiver, liquidator or administrator; or
supervisor of a voluntary arrangement; or
victim of the transaction (section 424(1) of the Insolvency Act 1986).

With regard to the last pint above, the victim is required to obtain the court’s permission to bring a claim if the company is insolvent.

4. What needs to be proved for a transaction to defraud creditors claim?

They key requirements for a transaction to defraud creditors claim are:

transfer for no consideration or less than its value; and
intention of put assets beyond the reach of creditors or otherwise prejudice the interests of creditors.

5. What is the limitation period for a transaction to defraud creditors claim?

A transaction to defraud creditors claim must be made within:

6 years from the date of insolvency (to recover money)
12 years from the date of insolvency (to recover property)

6. What is the remedy for a transaction to defraud creditors claim?

The Court will make such order as it thinks fit for restoring the position to what it would have been if the company had not undertaken the transaction and for protecting the interests of the victim of the transaction (section 423(2) of the Insolvency Act 1986).

Relief normally includes setting aside the transaction, seeking repayment of the sum of the transaction and/or seeking damages for any financial loss suffered.

7. What defence is available for a transaction to defraud creditors claim?

The Court will not make an order, as set out above, if it is satisfied as to both of the following:

the company entered into the transaction in good faith and for the purpose of carrying on its business; and
at the time it did so there were reasonable grounds for believing that the transaction would benefit the company (section 238(5) of the Insolvency Act 1986).

Misfeasance explained

S212 of the Insolvency Act explained

Defending misfeasance claims by liquidators

Creditor claims for misfeasance

Misfeasance – 10 Common FAQ’s answered

1. What is misfeasance?

In exchange for the protection of a limited liability, company law requires that directors adhere to their fiduciary duties when directing a company and do not act in breach of the public interest, do not prejudice a stakeholders’ interests (including employees, shareholders and creditors) or in any way devalue or diminish company assets that would otherwise be available to the company in circumstances where third parties may have an interest.

A director’s obligations in the course of trading should be focused on the company’s success, usually in the form of a profitable enterprise or (as for not-for-profit organisations) by fulfilling its objectives.
Such duties are generally referred to as fiduciary duties or non-fiduciary duties, the former relating to duties which directors have in respect of specific parties for whom a specific duty of care and trust already exists, and the latter referring to the general duty of care that directors have to the public generally.

Where a company is placed into liquidation, any breaches of such duties may form the basis of a claim by the company, acting via its appointed liquidator, against third parties or alternatively the liquidator may seek a remedy against the director personally. This is generally referred to as misfeasance.

2. What transactions are subject to a misfeasance claim?

Any misconduct by a director which leads to a loss to the company or its creditors as a whole can form the basis of a claim for misfeasance against that director personally. The claim is one which lies with the company and is brought by its appointed liquidator.

For example, paying a creditor off in priority to other creditors (commonly referred to as a “preference claim”) or selling assets to associated parties for less than their market value or even giving them away (commonly referred to as a “transaction at an undervalue”) can lead to claims against both the receiving parties under the Insolvency Act 1986 and against directors for misfeasance.
In addition directors can be liable for misfeasance where they conceal or remove company assets or do business on behalf of the company which causes losses to third parties (e.g. creditors).

3. Who can bring a misfeasance claim?

Misfeasance claims are generally brought by liquidators. They are only available where the company has been placed into liquidation and such a claim does not exist where the company is placed into administration (although that does not preclude a claim for breach of fiduciary duties by the company via its appointed administrators).

However, misfeasance claims may also be brought by the official receiver (who is an officer of the court appointed by the Secretary of State to deal with compulsory liquidations), a creditor or a shareholder.
Misfeasance claims are occasionally brought by the official receiver where there may be no assets within a company to fund any legal proceedings brought by an appointed liquidator. This is becoming more prevalent by reason of the current emphasis by government of the need for corporate transparency and accountability.

Creditors do occasionally issue such proceedings, as may a shareholder, although these are rare because any award will be made in favour of the company, and therefore payable to all creditors pari passu via the liquidation proceedings.

However, this may be a solution where there is otherwise no opportunity to penalise a director and a creditor or shareholder is in a position to fund such litigation (the legal costs of which will be repayable to them in the event they are successful).

4. Can past directors be liable for misfeasance?

This is a question that is obviously concerning to directors who retire or depart the company and fear they may be later penalised personally for matters which have arose out of events or circumstances that preceded their departure.

The simple answer to this question is yes. Accordingly, upon exit, a director should have a strategy in place to ensure their departure is free of any risk.

Any person who has been a director, either appointed and registered at Companies House or even a person who has instructed directors (generally referred to as shadow directors) or held themselves out as a director (De Facto directors), can be liable personally for misfeasance where they are shown to have caused loss or damage to the company through their decisions or actions.

If a director departing a company truly wants to be protected from such matters, the easiest way is to seek an indemnity from incoming shareholders or the company itself (although there are statutory restrictions on such indemnities). Ideally, if a company is solvent, the director should seek an orderly winding-up of the company so as to put to rest any such risks.

5. Who else can be liable for misfeasance?

Any person who has been an “officer of the company” can be liable for misfeasance. Thus, in addition to directors,

the company secretary can also be personally liable for losses caused to the company.
any person who is involved in the promotion, formation or management of a company may be liable for misfeasance.
accordingly, any person who has taken an active role in decision-making for the company is at risk – which can including shareholders in small companies, where they take part in decision-making.

Indeed, administrators and liquidators of the company can also be liable for misfeasance where their decisions have jeopardised or reduced the assets available to creditors. It is not unusual for an appointed liquidator to consider such proceedings against a previously appointed administrator, although such claims are extremely rare.

6. What are the common defences to misfeasance?

The answer to this question will often depend on the allegation that supports the remedy sought.

Where an insolvency claim exists, for example preferring a creditor or causing or allowing the company to be involved in a transaction at an undervalue, then there are various statutory defences to such claims.

Generally, there may also be counter claims to consider.
for example, where a simultaneous claim exists in favour of the director against the company. However, caution must be taken when considering such claims as set-off is generally not available to counter a claim for misfeasance.

Reliance on professional advice could be a defence to any such claim, but this will be largely dependent on the individual circumstances.

7. Is honesty a sufficient defence?

In addition, there is a provision under the Companies Act 2006 that provides for a statutory defence where it can be demonstrated that a director acted with honesty and integrity in such matters and was innocent to the losses being caused or suffered as a result of his/her actions.

However, honesty alone will not provide a defence where the decisions or actions of the director were not reasonable.

In addition, the court will take account of the standards expected of a director generally, and the standard expected of a director with the qualification, skills and experience of the individual subject to the proceedings.

8. What is the extent of my liability for misfeasance?

Misfeasance is a remedy for a claim made on behalf of the company. The amount that can be repayable is defined by the legislation as follows:

To repay, restore or account for the money or property or any part of it, with interest…; or
To contribute such sum to the company’s assets by way of compensation in respect of the misfeasance or breach of fiduciary duty…

Accordingly, the sum repayable can either be the amount that the company lost as a result of the matters referred to in the misfeasance claim (plus interest, generally at the rate of 8% per annum, and legal costs) OR by way of compensation to the loss suffered by the company (which generally applies for circumstances where the loss is difficult to define).

This can be a substantial sum of money.

9. Can a creditor sue a liquidator / administrator for misfeasance?

It is possible under the legislation for a creditor to take such action against a liquidator or an administrator where s/he considers that they have made decisions on behalf of the company which have caused losses and for which is can be shown that such decisions caused them personal benefit or acted to misapply company assets.

However, such proceedings are rare and can only occur subject to the following circumstances:

The liquidator or administrator has vacated their office; and
The court has granted leave to bring such an application.

The purpose of the above is to ensure that creditors’ interests overall are not interfered with by a perhaps irate creditor.

Accordingly there will be a two stage process where, once an administrator or liquidator has vacated their office, a creditor could issue an application for misfeasance but firstly the claimant would have to prove to the court that they had a reasonable prospect of success, rather than the application just being issued without good reason.

10. What strategy should I take when faced with a misfeasance claim?

Of course, as with all litigation claims faced by a potential defendant, the strength of the claim is key to assessing what your defence is and whether it is worth considering.

It is not unusual for a claim to be threatened as part of negotiations, and it is at this point that proper consideration of the strengths of the proposed claim will determine whether any offer should be made to the proposed claimant.
legal advice is key to the success of such considerations and negotiations.

Of course you should also consider the cost v benefit of defending such a claim. This will depend on the type of defence available against the risk of facing such proceedings. This review can be a two- stage process.

Firstly you should review whether the legal cost incurred in assessing the strength of a proposed claim is worth it – we often find that a little spent early on will avoid a lot spent later in either defending or agreeing settlement without advice.
Secondly, if proceedings are to be issued, then the defendant should be aware that the claimant will seek additional sums in respect of interest (which at 8% per annum can quite easily double the sum claimed if the transaction occurred a few years in the past) and legal costs, which can be a considerable additional expensive – especially as current regulations allow such proceedings to proceed on the basis of funding arrangements which can substantially increase legal costs.

Director duties – an overview

Director Duties – an overview

Directors’ duties and how decision making takes place is vital for any director to properly understand. Otherwise claims may follow – some of which could be personal money claims.

Introduction

Limited liability companies have many benefits, one of the main being that directors and shareholders are generally only personally liable up to the value of their shareholding in the company.

However, the privilege of trading under limited liability comes with certain responsibilities. Directors are under duties to the company, its shareholders and its creditors. These duties permeate throughout all of the director’s actions and decision-making, and apply not only to registered directors, but to a variety of people who may act as directors.

Directors’ decision-making

Directors will be faced with numerous decisions during the course of their directorship.

The power given to directors to make decisions derive from

the company’s Articles of Association;
through any service level agreement the company and the director may have entered into; and
through various provisions of company legislation.

For more detail on what decisions directors can make, read our pages on directors powers and responsibilities.

Directors fiduciary duties

Directors are subject to many duties as directors. These duties are set out under company legislation and insolvency legislation, or have arisen by way of common law over the years. Directors duties are in place in order to ensure that directors don’t abuse the privilege of limited liability, and to protect the company, those who deal with the company, and the general public.

For full details of these duties, read our pages on

directors fiduciary duties; and
non-fiduciary public interest duties.

Who is classed as a director?

It isn’t necessary for a director to be registered at Companies House to be considered a director. Other people may act as a director and if they do, then they bear the same responsibilities and duties as a registered director. This can be a surprise to some who might act as a directors but believe that they have no legislative responsibilities because they are not registered as such. However, the personal liability potential, and the potential to be disqualified as a company director is the same for shadow and de facto directors as for registered directors.

Similarly, there is a general misconception that non-executive directors have less risk and responsibility than registered directors who manage the company on a day to day basis. This is not the case. Non-executive directors bear the same duties and responsibilities as registered directors and can be held accountable in the same way. They can also be disqualified as acting as a director.

Personal liability

Breach of directors’ duties can have significant consequences for a director, including shadow and de facto directors and non-executive directors.

If a director has been found to be in breach of their duties, they may be subject to a claim against them, depending on the type of misconduct. The consequences and the ramifications for directors can be severe, and they may bear personal financial liability for the misconduct as appropriate. This can mean significant financial compensation will be requested of that director.

Further advice about Director Duties

Even though the effects of Covid have mainly now passed, the pressure on directors remains. Trading conditions remain tough.

Directors duties are vital for protecting a company and its creditors, and the public. Breach of these duties can have severe ramifications for directors, and cannot to be taken lightly. If you have any concerns regarding your company or your own personal position, then speak to one of our expert team today. The team at Francis Wilks & Jones are experts in this area and can talk you through all the issues.

At Francis Wilks & Jones we have many years of assisting directors, shareholders and SMEs (as well as some PLCs) with regard to all corporate governance and commercial matters. The most common areas for you to be concerned with are likely to be the following:

Let us help you today

At Francis Wilks & Jones you will always speak to someone at a senior level who will respond to any query you have immediately. Please call any member of our team for your consultation now and we can help. Alternatively email us with your enquiry or complete a contact form and we will call you back at a time convenient to you.

What is a Fiduciary duty?

What is a fiduciary duty?

When a person acts as a director of a company, they are subject to a number of duties to ensure that they act properly. These are set out in legislation, common law and in various corporate governance codes. Our superb team can advise on all aspects of these duties.

Directors have a range of duties, most of which are now set out under company legislation.

When a company nears or enters insolvency, these duties shift from duties to the company itself, to the duty to protect the company’s creditors.

What is a fiduciary duty?

Fiduciary duties cover the duty of trust and confidence between parties, and stem from the common law duties of skill and care and good faith. These duties evolved over the years, and most of these are now codified under company legislation.

Who owes these duties?

Duties are owed by any director, or person occupying the position of the director by whatever name called. This includes:

directors registered at Companies House (executive and non-executive);
de facto directors – a person that, on the face of it, acts as and is treated as a director of the company, but has not been registered as such at Companies House; and
shadow directors – defined in company legislation as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. They are not registered at Companies House.

Directors’ roles within a company can vary widely, and not all directors act in the same capacity. Despite this, all directors are subject to the same duties under company and insolvency legislation. This includes non-executive directors brought in to oversee maybe just one aspect of the company.

What are the fiduciary duties?

Most fiduciary duties have now been set out under company legislation. However, the common law duties still exist in a slightly different form. They establish trust and confidence, bringing in the wider principles of no conflict and no profit.

The main fiduciary duties are:-

to act within the powers conferred by the company’s Memorandum and Articles of Association;
to avoid a conflict of interest;
to act in the best interests of the company;
not to fetter one’s own discretion; and
not to make unauthorised profit.

To a large extent these duties are self-explanatory. However, it is common for directors who are also shareholders to find that the edges can be blurred when they are acting in both capacities, particularly in times of high pressure.

Directors duties are wide and cover all aspects of running a company, including when dealing with employees or creditors.

Other examples include

when considering the appropriateness of delegating responsibilities to other non-directors, or
when considering the position of shareholders with different interests.
these duties apply too, for example, to the duty of confidentiality to avoid disclosure of company information contrary to the company’s interests, and extend as far as other statutory duties such as health and safety legislation, anti-bribery law and insolvency law.

The duties overlap into group company situations. For example, with the ‘no conflict’ principal directors must take care not to act in a way that competes between companies.

It is vital that all directors are fully aware of their duties and responsibilities, to avoid breaching these.

Remedies for breach

The court has wide powers to set aside or to restore a transaction made contrary to a fiduciary duty. The company, or an aggrieved individual director or shareholder may apply to the court.

There are some obvious remedies available, depending on what the breach is. For example

if the director has profited from the breach, they might be required to account for that profit to the company by way of repayment;
an injunction might be granted if appropriate, or damages for breach of duty by the director.

If the company enters into an insolvency event in due course, then there are other remedies and penalties for breaches of directors’ duties under insolvency legislation. An insolvency office holder may take recovery action against a director or a connected party following a breach of duty. Read more in our pages on defending claims by liquidators or administrators.

It is also likely that any breach of fiduciary duty found by a liquidator will be reported to the Insolvency Service, who may take proceedings to disqualify the director, depending on the severity of the breach.

A director of any company, be it a small family run private company, up to a large Plc, must be very mindful of all of their duties both under company legislation and their fiduciary duties or they may face financial or disqualification penalties in the future. It is in everybody’s interests, including the company and the shareholders that a set of principles of good dealing such are set out in the fiduciary duties and legislation are adhered to ensure that mis-practice does not take place.

How we can help you

At Francis Wilks & Jones we frequently defend directors from claims by liquidators or administrators. please contact one of our expert team at Francis Wilks & Jones who will be happy to help you.

Breach of fiduciary duty

The concept of fiduciary duties for directors is very important. It can lead to personal claims if those duties have been breached. Our superb team has advised 100s directors on their responsibilities and defended all manner of claims since it was founded in 2002. Let us help you too.

Overview

While a director of a limited company may be perceived to some sense to be protected from personal liability, this does not protect a director from irresponsible, negligent or fraudulent behaviour.

For this reason, over many years legal cases have developed what are referred to as “fiduciary duties” which a director owes in the performance of his/her duties. These duties, developed over a number of years, were codified in Sections 171-177 of the Companies Act 2006.

Breaches of public interest duties in director disqualification proceedings

Director disqualification proceedings following insolvency are issued by the Secretary of State (in the absence of a voluntary disqualification undertaking). Their purpose is to protect the public interest and prevent a repetition of such misconduct.

The grounds for issuing such proceedings, and the court making a finding that the director has been liable for misconduct, are numerous but most commonly found in a small amount of circumstances. Read about some of the most common grounds for an allegation and finding of misconduct.

Unfitness for the purpose of director disqualification proceedings is focused solely on the public interest, for example

misleading potential customers;
discriminating against certain categories of creditor; or
defrauding members of the public.

This purpose of the legislation is focused solely on maintaining the integrity of the UK economy and market place.

The concept of fiduciary duties

Breaches of public interest duties in director disqualification proceedings following insolvency are issued by the Secretary of State with the purpose of protecting the public interest and preventing a repetition of such misconduct.

Some of the most common allegations of misconduct can include:

implementing a policy to discriminate against HMRC;
acting while disqualified;
misusing a directors’ loan account (usually for personal benefit);
carrying out a business or otherwise acting contrary to the public interest;
drawing illegal dividends; and
breaches of Financial Service regulations.

The purpose of such allegations is to prevent any repetition of such misbehaviour and accordingly protect the public interest. However, it provides no opportunity for creditors or third parties to seek redress to recover their losses as a result of such misconduct.

Breaches of fiduciary duties

A fiduciary is an individual or entity which holds a position of trust, confidence and fidelity to other parties in a specified capacity or role.

Accordingly, as custodians of a company’s assets and business interests, a director as a fiduciary holds duties to

act in the interest of the company;
act solely for the purpose s/he is entrusted with this role;
act with loyalty and fidelity; and
not to prioritise his/her personal interests over that of the company or its shareholders.

The fiduciary duties of directors were historically set down as a result of a number of legal cases which set out the interests which the directors serve, together with the need for independence, the need to act objectively, the need to adhere to the original purpose of the company and the need to ensure good company management.

Following the introduction of the Companies Act 2006, these duties were codified into the following (summarised for the purpose of this article):

section 171 of the Companies Act 2006 – to act within his/her powers, as governed usually by the company’s constitution and any other agreement;
section 172 of the Companies Act 2006 – duty to promote the success of the company;
section 173 of the Companies Act 2006 – duty to exercise independent judgment;
section 174 of the Companies Act 2006 – duty to exercise reasonable care, skill and diligence;
section 175 of the Companies Act 2006 – duty to avoid a conflict of interest;
section 176 of the Companies Act 2006 – duty not to accept benefits from 3rd parties;
section 177 of the Companies Act 2006 – duty to declare an interest in a proposed transaction or arrangement entered into by the company.

There are of course other duties imposed on all limited companies, which a director should ensure are adhered to – for example the requirement to file accounts and the requirement to record beneficial owners of the company.

Difference between the two sets of duties

The difference between the two above sets of duties is to ensure a balance between the stakeholders in a company (which can include lenders, creditors, customers, employees and third parties) and the need to maintain a legitimate transparent economy.

Any breach of the above duties can mean that the limited liability status of a company is stripped away and the directors then become personally liable for their decisions.
This can include disqualification as a director.

There are many other legal areas where a personal financial liability can be imposed for debts or losses as a result of any such breach of a director’s fiduciary duties.

How we can help you

At Francis Wilks & Jones, our team has considerable experience in advising directors on the difference between their fiduciary duties and their public interest duties, and defending directors through to trial on such issues. Contact a team member today and we can help.

Statutory duties

Non fiduciary and Public Interest duties

Non fiduciary and public interest duties

Understanding the wide range of director duties – including public interest duties – is vital for any director. Failure to do so can lead to unexpected consequences. Our brilliant team is here to help.

Directors are subject to various fiduciary and non-fiduciary duties when acting as a director of a company.
Most of these duties are quite specific and relate to decision making and the general management of a company by a director, whether as a shadow, de facto or registered director.

Breach of these duties can lead to personal liability for the director via proceedings brought either by other directors, shareholders, relevant persons, or an office holder following an insolvency event. Proceedings brought against a director in these circumstances might be taken either to prevent them from doing something (by injuncting them), or to provide recompense to the company for losses occurred following a breach of duty.

Breach of public interest duties

All directors are also subject to duties to act in the public interest.

The term ‘public interest’ covers many areas of corporate law, and within the UK public interest proceedings may be brought for a variety of different reasons (see below).

The overall theme behind public interest proceedings is to protect the public from risks that individuals or companies pose to the public.
For example, if a company or an individual commits financial fraud, then public interest proceedings may be necessary to stop the fraud in order to protect the general public as customers or potential customers of that company, both now and in the future.

Public interest winding up

If a complaint is made about a company by a member of the public to the Secretary of State for Business Energy and Industrial Strategy, then the Insolvency Service may start an investigation into the company to see whether the complaint is founded. They are specifically looking to see whether the company is trading contrary to the public interest. The Secretary of State could then issue a public interest winding up petition.

Who takes these proceedings and investigates?

The Secretary of State for Business Energy and Industrial Strategy via the Insolvency Service will appoint an inspector from the company investigations team to investigate allegations made about the company or individual.

these inspectors have very wide powers to require cooperation by any relevant person, including the directors, shareholders and employees of the company;
the inspectors can request information and verbal meetings with relevant parties and if any parties fail to co-operate with an inspector’s demands, then they could be found in contempt of court, the penalties of which are a fine or committal to prison. Companies Investigations are very serious.

The exception to this is that there is no requirement to provide information that has no relevance to the company’s dealings, or which has legal professional privilege protection.

What happens following a report?

If the inspector finds that public interest has been breached, then the Secretary of State may commence legal proceedings against the company to be wound up in the public interest. See: Winding up petitions/orders. A director may also be subject to disqualification for their part in the misconduct.

Directors’ disqualification proceedings

A consequence of a negative finding by inspectors is that a director may be personally prosecuted for disqualification based on misconduct.

All director disqualification proceedings are brought in the public interests for the purpose of protecting the public, providing a deterrent and preventing further misconduct.

Any director who is found to have been involved in misconduct, can be disqualified as a director for anywhere between 2 and 15 years, depending on the misconduct found.

The list of what is defined as ‘misconduct’ from a public interest and disqualification prosecution point of view is non-exhaustive. Whilst there are examples of misconduct set out under the company directors’ disqualification legislation, these are deliberately kept wide so that specific misconduct may be alleged where appropriate. For more information see: Common allegations of misconduct.

Examples of misconduct most often seen in directors’ disqualification proceedings however are:-

This is only a small sample of the types of misconduct that can be alleged in directors’ disqualification proceedings.

Compensation orders

Recent changes in the law mean that if a director is found guilty of misconduct in directors’ disqualification proceedings, they now may also face the risk of being subject to a compensation order. This may mean that they will have to personally provide monetary recompense to the company (for the benefit of the creditors) for the misconduct found.

How we can help you

As can be seen from the above, the consequences of breach of public interest can be severe both for a company and its directors. At Francis Wilks & Jones we have extensive experience in these matters and can advise and assist if you are facing a threat of either public interest winding up proceedings or directors’ disqualification proceedings. If you are concerned about any of these issues or would like further information, contact our friendly team of experts today.

How to defend a fiduciary duty claim

A liquidator will need to establish that there has, in fact, been a breach of a duty owed by a director to the Company. In some instances, whether there has been a breach, will appear obvious.

However, in some instances, there will need to be a careful analysis of what the director knew, at the time their decision was made, to establish whether their decision did in fact constitute a breach of their duties.

There will also need to be a careful analysis of what advice the director took from advisers at the time (e.g. accountants and lawyers) and whether that advice was followed.
Where a director relied on professional advice in making his / her decision, it may well be that the director has not breached their fiduciary duties.

A liquidator will also need to establish that the breach by the director, caused financial loss to the company. The liquidator will need to say how much the loss is and how this has been calculated.

The Court will need to be satisfied that loss does directly arise from a director’s breach of duty, to order that a director pay to the Company, a sum equal to the loss claimed.

Statutory defence for directors

It is important to note that if a director has breached a fiduciary duty owed, section 1157 Companies Act 2006, provides a statutory defence to directors.

This section allows a Court to excuse a director from liability (either entirely or in part), where a director has acted honestly and reasonably.
The Court will need to consider whether when, having regard to all the circumstances, the director ought to be excused from personal liability.

To succeed with a defence under section 1157 Companies Act 2006, the director will need to present evidence that demonstrates that the Court should excuse liability.

We can help you

Let out brilliant team help today. We understand what evidence will need to be presented to succeed with a defence under section 1157 Companies Act 2006.

Antecedent Transactions explained

What is a preference claim?

S239 of the Insolvency Act explained

Section 239(2) of the Insolvency Act 1986 states:

“Where the company has at a relevant time … given a preference to any person, the office-holder may apply to the court for an order…’

What does this mean?

In simple terms, using our example in the section above, if this preference (payment to creditor A) took place at the ‘relevant time’, a liquidator can apply for a Court order.

What does ‘relevant time’ mean?

The relevant time will be either 2 years or 6 months prior to the onset of insolvency.

Simply, whether the relevant time is 2 years or 6 months, will depend on whether the creditor receiving the payment is connected with the company or not.
In this context, connected means that the creditor (whether an individual or an entity [such as a limited company]) has some relationship or connection to the company.
Where the creditor is a limited company, the creditor would be connected where the same individuals are directors of both the insolvent company and the creditor company. In the case of individuals, the parties might be connected through personal or family ties. If a connection can be established, then the relevant time will be a period of 2 years. If no connection can be established, the relevant time will be a period of 6 months.
If the longer two year period applies, it is often the case that a liquidator can challenge more transactions and claim a higher amount for the benefit of creditors. In most cases, it is clear whether a party is “connected” or not. However, this is not always the case and given the significant impact it can have on the value of a liquidator’s claim, this aspect should be considered carefully.
The relevant time period will look back from the onset of the company’s insolvency. When the onset of insolvency commences is set out in section 240(3) Insolvency Act 1986. In the case of voluntarily liquidation, this will be the date when the Company resolved to appoint a Liquidator. In the case of a compulsory liquidation, this will be the date of presentation of the winding up petition.

A liquidator must also establish:

That there has been a desire by the company to prefer. Using our example above, that the company intended to prefer creditor A over creditor B. Where creditor A is “connected” to the Company, the desire to prefer is presumed. This presumption is, however, capable of being rebutted.
That the company was insolvent at the time of transaction or became insolvent as a result of the transaction.

Review of books and records

The liquidator will conduct a review of the company’s books, records, bank statements.etc to establish if there was evidence of the company’s insolvency at the date of the alleged preference payments.

How we can help you

Our director defence team has been defending all types of preference claim since 2002. Call us today. Defending liquidator claims is our expertise.

Preference payments in liquidation

Common defences to preference claims

A defendant to a Section 239 Insolvency Act 1986 preference claim should carefully consider whether the liquidator can establish all of the conditions described above and whether:

They were a creditor of the company, or surety or guarantor for the company’s debts, at the time of the payment(s) in question. If they were not, the payment cannot have followed a desire to prefer them over other creditors.

The preference must have occurred during the relevant time – 6 months or 2 years depending on whether there is a connection. If the transaction does not fall within this period, it cannot be a preference.

The company was insolvent at the time of the transaction or became insolvent because of the transaction.

There was a desire to prefer the creditor or some other commercial reason for payment.

How our team can help

Our experienced legal team can help defend against Section 239 Insolvency Act 1986 preference claims and have done so successfully for over 20 years. Our team offers

Legal expertise. We have experienced lawyers have a deep understanding of insolvency laws, including the intricacies of Section 239 Insolvency Act 1986 preference claims. They can navigate complex legal issues and build strong defenses tailored to the specific circumstances of the case.

Case strategy. Our team can put together the right strategy for you and the best defense by analysing the facts, identifying relevant legal precedents, and presenting compelling arguments to counter the liquidators claims.

Negotiation skills. In some cases, negotiations may be possible to reach a settlement or compromise. Our skilled team of lawyers can negotiate on your behalf to achieve the best possible outcome, whether through settlement or litigation.

Court representation. If the preference claim case goes to court, having skilled advocates can make a significant difference. They can present a robust defense, cross-examine witnesses, and handle legal proceedings effectively. Our team has brilliant contacts with the right barristers who will represent you in court.

In summary, preference claims under Section 239 Insolvency Act 1986 are serious matters, and having an experienced team like the one at FWJ on your side is crucial for navigating the legal complexities of these cases – and minimising the chances of a claim succeeding against you.

Our director defence team has been defending all types of preference claim since 2002. Call us today. Defending liquidator claims is our expertise.

Preference Claims – Frequently Asked Questions

What is a preference?

A preference is a transaction which leaves an entity in a better position.

For example, if a company owes two creditors (A and B) £100 each and the company decides to pay creditor A but not pay creditor B then it could be said that creditor A was preferred.

What is a preference under the Insolvency Act 1986?

Section 239(2) of the Insolvency Act 1986 states that “Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.”.

A relevant time is defined, in section 240(1) of the Insolvency Act 1986, as “…a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below)…” and “…a preference which is not such a transaction and is not so given, at a time in the period of 6 months ending with the onset of insolvency…”. Further to section 240(2) of the Insolvency Act 1986, it is not a relevant time “…unless the company — (a) is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or (b) becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference…”.

Section 239(4) of the Insolvency Act 1986, states “…a company gives a preference to a person if — (a) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.”.

Who can pursue a preference claim?

A preference claim can be pursued by an administrator or liquidator of a company (section 239(1) of the Insolvency Act 1986).

What needs to be proved for a preference claim?

They key requirements for a preference claim are:

transaction involves a creditor, surety or guarantor;
transaction which puts the entity in a better position;
transaction within 2 years (for a connected entity) or 6 months (for an unconnected entity) of the onset of insolvency of the company;
transaction at a time when the company was insolvent or the company became insolvent as a result of the transaction; and
the company was influenced in deciding to undertake the transaction by a desire to put the entity in a better position.

With regard to 5., if the transaction is to a connected entity, there is a presumption that the company was influenced in deciding to undertake the transaction by a desire to put the entity in a better position (section 239(6) of the Insolvency Act 1986).

Who is a connected person under the Insolvency Act?

Section 249 of the Insolvency Act 1986 states that “…a person is connected with a company if — (a) he is a director or shadow director of the company or an associate of such a director or shadow director, or (b) he is an associate of the company…”.

An associate is defined in section 435 of the Insolvency Act 1986 and contains an exhaustive list of people and companies. Common examples of an associate are the husband or wife of the director, a relative of the director or another company under the director’s control.

What is the limitation period for a preference claim?

A preference claim must be made within:

6 years from the date of insolvency (to recover money)
12 years from the date of insolvency (to recover property)

What is the remedy for a preference claim?

The Court will make such order as it thinks fit for restoring the position to what it would have been if the company had not given the preference (section 239(3) of the Insolvency Act 1986). Restoration normally includes setting aside the preference, seeking repayment of the sum of the preference and/or seeking damages for any financial loss suffered.

What defence is available for a preference claim?

The Court will not make an order, as set out above, if it is satisfied that the company was not influenced in deciding to undertake the transaction by a desire to put the entity in a better position (section 239(5) of the Insolvency Act 1986).

What is a transaction at an undervalue?

S238 of the Insolvency Act explained

Section 238 of the Insolvency Act 1986 states:

This section applies in the case of a company where—

(a)the company enters administration,

(b)the company goes into liquidation;

and “the office-holder” means the administrator or the liquidator, as the case may be.

Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—

(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or

(b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.

The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—

(a)that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b)that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

A liquidator is empowered to bring their claim by this section of the Insolvency Act 1986. If successful, the court can make any order it deems appropriate to restore the company to the position it would have been in, had there not been a transaction at an undervalue.

Who can the claim be made against?

A transaction at an undervalue claim can also be pursued against a party (whether an individual or company) that has received an asset from an insolvency company. In other words, a defendant is not always the director of an insolvent company.

How we can help you

Our director defence team has been defending all types of TUV claim since 2002. Call us today. Defending liquidator claims is our expertise.

Transactions at an undervalue time limit

Common defences to TUV claims

The Court will not make an order to restore the Company’s position where it is satisfied that:

The director, in carrying out the transaction, did so in good faith and with the purpose of carrying on its business; and
At the time of the transaction, there were reasonable grounds for believing the transaction would benefit the company.

Records are crucial

Was the director acting honestly at the time of the transfer? Did the director hold a genuine belief that the company would be better off as a result of the transaction? It is advisable for directors to keep a log or journal of their decision making, because this might prove useful later on for determining their state of mind at the time of the transfer.

How do you measure if something was sold at an “undervalue”?

Another point to consider, which can often give rise to a defence, is whether the transaction was in fact at an undervalue. It is not always easy to determine the market value for an asset and often, where there is a value, there is a price range linked to condition, available purchasers, speed of purchase.etc. The burden is on the liquidator to evidence that the sum paid was less than the market value.

By way of example,

where a director transfers a plot of land, owned by the Company, to one of his associates for £50,000, will this be a transaction at an undervalue where records show that the original purchase price was £100,000?
Whilst on face of it, it appears to be a transaction at an undervalue, what if the director can evidence that there were substantial issues with the land that impact value?
Or that the plot price has reduced since the purchase?
Or there was a purchaser willing to pay £60,000 but they could not complete the transaction for six months whereas the associate could complete within two weeks.
To assess the viability of the liquidator’s claim, it is likely that an independent valuer would need to be instructed to determine the true value of the plot having regard to the aspects raised by the director, on the issue of value.

What orders can the court make?

Where the Court is satisfied that there is a Transfer at an Undervalue under Section 238 of the Insolvency Act 1986 , it has a wide discretion in terms of the Order it can give.

The Court will seek to make an order that restores the position to what it would have been, had the transaction not taken place. This will often be a monetary award but can also be an order requiring property to be transferred back to the company.
The Court can also order that the defendant pay interest and costs.

How we can help you

Our director defence team has been defending all types of TUV claims since 2002. Call us today. Defending liquidator claims is our expertise.

TUV claims – 7 commonly asked questions

1. What is a transaction at an undervalue?

A transaction at an undervalue, also known as TUV, is a transaction which is entered into for no consideration or for consideration less than its worth.

For example, if a company sells its shares valued at £100 to another company for £20 then it could be said that is a transaction at an undervalue because it has been sold for less than its value.

2. What is a transaction at an undervalue under the Insolvency Act 1986?

Section 238(2) of the Insolvency Act 1986 states that “Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.”.

A relevant time is defined, in section 240(1)(a) of the Insolvency Act 1986, as “…at a time in the period of 2 years ending with the onset of insolvency…”. Further to section 240(2) of the Insolvency Act 1986, it is not a relevant time “…unless the company — (a) is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or (b)becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference…”.

Undervalue is defined, in section 238(4) of the Insolvency Act 1986, as when “(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration or (b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.”.

3. Who can pursue a transaction at an undervalue claim?

A transaction at an undervalue claim can be pursued by an administrator or liquidator of a company (section 238(1) of the Insolvency Act 1986).

4. What needs to be proved for a transaction at an undervalue claim?

They key requirements for a transaction at an undervalue claim are:

transfer of an asset for no consideration or less than the asset’s value
transfer within 2 years of the onset of insolvency of the company
transfer at a time when the company was insolvent or the company became insolvent as a result of the transfer

With regard to 3., there is a presumption that the company was insolvent at the time of the transfer if the asset was transferred to a person connected with the company (section 240(2) of the Insolvency Act 1986).

4. Who is a connected person under the Insolvency Act?

Section 249 of the Insolvency Act 1986 states that “…a person is connected with a company if — (a) he is a director or shadow director of the company or an associate of such a director or shadow director, or (b) he is an associate of the company…”.

An associate is defined in section 435 of the Insolvency Act 1986 and contains an exhaustive list of people and companies. Common examples of an associate are the husband or wife of the director, a relative of the director or another company under the director’s control.

5. What is the limitation period for a transaction at an undervalue claim?

A transaction at an undervalue claim must be made within:

6 years from the date of insolvency (to recover money)
12 years from the date of insolvency (to recover property)

6. What is the remedy for a transaction at an undervalue claim?

The Court will make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into the transaction (section 238(3) of the Insolvency Act 1986).

Restoration normally includes setting aside the transaction, seeking repayment of the sum of the transaction and/or seeking damages for any financial loss suffered.

7. What defences are available for a transaction at an undervalue claim?

The Court will not make an order, as set out above, if it is satisfied as to both of the following:

the company entered into the transaction in good faith and for the purpose of carrying on its business; and
at the time it did so there were reasonable grounds for believing that the transaction would benefit the company (section 238(5) of the Insolvency Act 1986).

What is a Transaction to Defraud creditors claim

S423 of the Insolvency Act explained

Common defences to Transactions to Defraud claims

Personal liability of directors

There are many advantages to running a business by way of a limited company or a limited liability partnership. But also significant risks – which can ultimately lead to personal claims against directors. Our brilliant team has helped many 100’s of directors since 2002. Let us help you too.

Overview

The main benefit of running a company is that it is a separate legal entity from the business owners, so that apart from specific circumstances, directors and shareholders are only personally liable up to the value of their investment in the company.

However, the privilege of limited liability brings with it responsibilities for those who are tasked with running the company, namely the directors.

Directors are subject to a range of duties under various legislation and governance codes. If they fail in these duties then the corporate veil may be pierced, and the directors can be subject to personal liability.

Solvent company duties

Directors’ primary duties when a company is solvent are to the shareholders of the company as a group, although there are other parties that directors also have a responsibility to, for example Her Majesty’s Revenue & Customs for tax returns and payment, and Companies House for Annual Returns.

When a company is solvent, because the duties are generally to the company it follows that the company can enforce any breach.

the company therefore might bring a civil action against a director for a breach of duty, and the court has a wide discretion on the relief or compensation that can be granted, depending on what the breach is;
a director might be ordered to personally pay damages or compensation if the company has suffered loss, restoration of the company’s property, a rescission of a contract, or an account of profit made by the director. It very much depends on the breach.

What can a director do if in breach of duty in a solvent company?

It may be possible for a director to take out insurance against breach to protect their personal position, or to have the protection of an indemnity from a third party for specific transactions. It is also possible for a director to ask the company to ratify a breach if they are willing.

Alternatively, a director may wish to defend a claim against them.
Professional advice should be taken by a director wishing to avail themselves of any of these options.
If you are in this position, contact our team at Francis Wilks & Jones for a discussion on your options. We have many years of experience defending company directors in these sorts of claim, and can help.

Personal liability in an insolvent company situation

When a company reaches insolvency, which is defined in insolvency legislation as either being balance sheet insolvent or being unable to pay its debts as and when they fall due, then the duties are owed not to the company but to the company’s creditors.

Once a company goes into liquidation or administration or faces another insolvency event, then the insolvency office holder appointed over the company may wish to take action against a director for breach of duties with the aim of recovering monies back into the company for the benefit of creditors.

There are a wide variety of claims that an office holder may make against a director, depending on the extent of the misconduct. For example,

if a director continued to trade the company and increase damage to creditors knowing that there was no reasonable prospect of avoiding insolvency, then they may be personally liable for the increase in damages to the creditors during that period. This can be quite significant.
if property is transferred to another party for significantly less in value than its worth, this can lead to a claim. This is classed as a transaction at an undervalue, and the director and/or the beneficiary may have to repay the undervalue amount to be used for the benefit of the company’s creditors.

These are just two of the many claims that a liquidator or administrator may bring against a director.

A court has wide powers in these proceedings to restore the position and compensate the company’s creditors, depending on the misconduct found.

Professional advice should be taken as soon as a claim is received, or there may be severe consequences for a director. If you are in this position, contact our team at Francis Wilks & Jones for a discussion on your options. We have many years of experience defending company directors in these sorts of claim, and can help you.

Directors’ disqualification proceedings

As well as being held personally responsible for financial recompense for particular allegations brought by an insolvency office holder in an insolvent company situation, a director may also be subject to director’s disqualification proceedings for that misconduct. If found guilty a director can be disqualified as a company director for anywhere between 2 and 15 years, depending on the misconduct.

Traditionally in directors’ disqualification proceedings, directors were not asked to repay any monies lost as a result of the allegations brought against them.
However, the law changed a number of years ago so that directors who are disqualified may face a compensation order claim at the same time. The amount of the compensation order will depend on the allegation. For example, if one of the allegations is a failure to pay taxes, it is likely that some or all of the lost tax revenue may be reclaimed from the director personally.

How we can help

At Francis Wilks & Jones we act for director on all aspects of breach of duties and have many years of success defending claims against directors for personal liability and disqualification. If you find yourself subject to a claim either by your company, or an insolvency office holder, or by the Insolvency Service for directors’ disqualification, it is essential that you act quickly in taking advice as soon as possible. One of our senior team members at Francis Wilks & Jones will get back to you as soon by return to discuss your options and the next steps available to you.

Liability of past directors

Directors of a limited company face many risks of being personally liable for alleged breaches of their legal duties to the company (which, where the company has solvency issues, includes the company’s creditors and other stakeholders).

Such liabilities can arise from claims by

co-directors,
shareholders or even
the public (via public interest winding up proceedings)

This can arise after a director departs a company and are sued by the company for past wrongs

Common types of claims

The claims against directors can refer to what they have done for or against the company – from agreeing contracts with third parties they have an association with to setting up competing businesses, unless agreed by the company then the director could be liable for any losses (including lost business) by the company.

Such claims can extend to non-executive directors, either in terms of management or strategic decision-making through to a failure to oversee a director who has caused such losses (often referred to as passive misconduct).

How can these claims follow you after you have left?

But if you have left the company – whether that is by way of a sale of your shareholding or a termination of your employment – do you not also leave behind this risk? Well, no.

A director is liable for any claims that arise because of their conduct at a given time and a director continues to be at risk of such liability after the date they cease to be appointed as a director of the company.
For example,
- a director could enter into a contract which is considerably prejudicial to the company, then retire or terminate their appointment as director.
- In such circumstances they could face a future claim for losses continuing to arise after their departure because of the contract wrongfully entered by the company.

How to get protection from claims after you have left the company

There are of course mechanisms to protect a director against such risk upon departure.

often (where there is a sale of their shareholding on exit) the sale agreement incorporates such protections.
alternatively, a director may choose to protect themselves from the outset and insure against their personal risk whilst a director. Such insurance is a well-considered step, as the insurance will pervade after the director departs, provided such cover was in place during the period of the alleged breach of duty.
The claim might be time barred. There are circumstances where limitation will restrict the liability of a director. Case law has provided that a director’s obligations or liability to the company arises from the date of the breach of his/her fiduciary duties. If the breach has led to losses over a consequential period, then it may be that such period is so long such as to make any claim for a breach of fiduciary duties subject to exclusion under the Limitation Act 1980.

It is always recommended that in the event you face any such claim you seek advice on such matters, particularly as any responses provided without legal advice may lead to a worsening of your liability and potentially proceedings being brought against you.

Claims against directors

Directors can be liable for a number of different personal claims relating to their company activities – especially if the business is facing or has gone in to liquidation. Our experts regularly deal with claims against directors, including director disqualification claims, claims by shareholders and claims by liquidators and administrators. Let us help. Call today.

Overview

Whilst it is true that directors of limited companies normally benefit from a limited liability status, there are circumstances where that protection can be removed and directors may become subject to personal claims against them – either following the insolvency of a company or arising from general breaches of their duties.

In such circumstances it is vitally important to take legal advice in order to protect your position.

the law relating to personal claims against directors can be complex, but with proper advice, many of those claims can be defeated;
failure to deal with such claims could result in proceedings being issued and court orders being made against you personally, ultimately leading to a loss of your personal property and perhaps even bankruptcy.

Personal claims against directors come from all different sources, including government, creditors, liquidators or administrators, co-shareholders or even the company itself. Please see our shareholder and director advice page for more information on company and shareholder claims. However, experience tells us that the two biggest factors for a director to consider, when assessing such risk and an claims threatened or received, are as follows:

Grounds which give rise to director claims

There are many grounds which give rise to disqualification as a director, the most common of which relates to non payment of taxes to HM Revenue & Customs by the company. We have acted for 100’s directors since 2002 and successfully defended all types of claims based on a wide range of misconduct allegations. Let us help you too.

Whether it is a claim by disgruntled shareholders or co-directors, one commenced by the Secretary of State seeking a director disqualification order or you are being pursued by a liquidator or an administrator, many claims against directors have common themes running through them

Set out below are some of the most common, all of which we can provide specialist advice on:

1. Payment or transfer of assets of company

Where a company enters into formal insolvency proceedings – for example liquidation or administration – any company payments or company assets transferred pre-insolvency may be recovered through what is called an antecedent transaction claim.

in these circumstances a liquidator or administrator can unpick company transactions for a period of up to 2 years prior to the date of insolvency;
if they find any wrongdoing, this can lead to a personal claim against a director ( whether s/he received the company payments/assets or not );
for more information relating to these types of claims, please visit our claims against directors by liquidators or administrators page.

2. Overdrawn director’s loan account

It is quite common for any benefits provided to directors by the company, or any drawings by directors, to be classified as loans to directors (“Directors Loans”). Such transactions or payments may be later claimed from directors personally as a debt due to the company, or by an appointed liquidator or administrator.

There are also tax consequences of director’s loans, which are subject to tax if not repaid by the year-end. HRMC has taken recent steps to increase its enforcement measures against directors who have received directors loans.

Where a company enters into formal insolvency proceedings – for example liquidation or administration – such debts can be recovered as a commercial debt or, where unpaid for some time, an antecedent transaction. Please see

our page on claims against directors by liquidators or administrators for further information;
our director disqualification page also refers to the potential non-financial consequences of drawing such monies without repayment to the company.

To read more about Director Loan Accounts in detail – read our superb Director Loan Account Guide dedicated to the subject.

3. Payment of specific creditors

Where creditors are deliberately selected for payment or non-payment, directors in either scenario may be in breach of their fiduciary duties to the company, especially where the company is making losses or is insolvent.

Where a company is facing insolvency and only certain creditors are repaid, then such repayments may be recovered from either the receiving party or directly from the director by a subsequently appointed liquidator or administrator as an antecedent transaction.
Additionally, such events may lead to the issue of a director disqualification claim against directors and this is extremely common where the directors have caused the company to trade to the detriment of HMRC.

4. Failure to keep accounting records

It is a statutory obligation of companies to annually file a financial statement, providing details of

assets and liabilities (balance sheet); and
income and expenditure (profit and loss account).

Accordingly, to adequately prepare such a statement (which must show and explains the company’s transactions and disclose the company’s financial position) accounting records are required to be maintained by the Companies Act 2006.

A failure to comply with these obligations can result in officers of the company (both company secretary and directors) being subject to criminal proceedings and, on conviction, a fine or imprisonment up to two years.
Our guides on directors duties and responsibilities address the requirements of all directors to ensure the company complies with its statutory obligations to file returns and maintain, deliver and preserve accounting records. This sets out the key issues when considering potential claims arising from any such failure to keep or secure accounting records.

Where a company enters into formal insolvency proceedings – for example liquidation or administration – the failure to keep such records or file such accounts can lead to director disqualification proceedings being commenced against the directors. This can extend to a failure by directors to preserve the accounting record or a failure to deliver them up – for example abandoning such records can constitute a finding of unfitness (and thus disqualification) against a director.

5. New company start-ups following insolvency

It is often the case that when a company faces insolvency this provides an opportunity for business owner/managers to start trading the same business but through a new company (i.e. one without the problems currently existing in the old company).

This is perfectly acceptable under the laws of England and Wales subject to certain restrictions on the use of the old company’s name (or a name which may suggest an association with the old company) which is governed by the insolvency legislation.

failure to adhere to these can lead to personal claims against those individuals who were directors of the old company and are also directors / involved in the management of the new company;
our booklet on re-use of a company’s name is a handy guide as how to best avoid the pitfalls associated with this area and how best to react if you are in default.

In addition, where the old company has entered into any formal Insolvency proceedings, then up to two years after insolvency director disqualification proceedings may be brought by the Secretary of State. If you are subsequently disqualified as a director (and your new company may have been trading for some time by then) then you may require leave to continue acting as a director of that company – please visit our director disqualification page for more information.

How we can help you

Our director defence team has been defending all types of TUV claim since 2002. Call us today. Defending liquidator claims is our expertise.

What is a void disposition claim?

A void transaction is a very generic description for various types of transaction which the law either declares void or voidable, depending upon the nature of the legal breach. In this section we address transactions which may be void at law in circumstances where a company is placed into insolvency, be that a liquidation or an administration.

We additionally touch upon similar types of transactions where a bankruptcy petition has been filed, although our personal insolvency webpages deal with such matters in greater detail.

What is a void disposition claim?

Generally, where a claim is made for a void disposition following a company’s insolvency, this will usually relate to the compulsory liquidation of a company. Void disposition claims do not arise where a company is being placed into a creditor’s voluntary liquidation or into administration.

A void disposition relates to a claim for recovery (or restitution) of sums paid from a company between the dates of the presentation of a winding up petition and the making of a winding up order.
The payment does not in itself have to comprise payment of funds, it can include disposition of company assets or relief of debtor liabilities.

Who can bring the claim?

A void disposition claim will normally be brought by a liquidator following their appointment over a company and will usually be made against the receiving party – although this is often a director. Often it may be that the sum paid out (or the asset disposed of) was to repay a creditor claim and this may have appeared valid at the time and reasonably entered into.

This is particularly critical when the funds/asset removed was to repay the petitioning creditor, as the petition could then be taken over by another creditor (through to winding-up) and then the void disposition claim could be made against the first petitioning creditor (unless a Validation Order had been sought and obtained).
Where a void disposition claim is in respect of assets removed by a bankrupt (or any agent of the bankrupt) then similar principles will apply.

S127 of the Insolvency Act explained

Defending liquidator claims against Creditors

Defending liquidator claims against Directors

What is an assigned claim?

Who buys claims off liquidators

Defending claims made by litigation funders

Duty to co-operate with a liquidator and administrator

Section 236 applications explained

Delivery up of documents

Attending an interview with a liquidator or administrator

Defences to a section 236 application

Liability to account for profits of a business transferred from a liquidated Company

Regulatory investigations and IP claims

Where a company is trading in a regulated industry then if that company is placed into liquidation or administration, the appointed administrator or liquidator may well have a claim against the directors of that company for a breach of powers under the delegated regulatory authority.

Most commonly these types of claims refer to claims under the Financial Services and Markets Act 2000 (“FSMA”) for regulated financial businesses, claims by the Solicitors Regulatory Authority (“SRA”) for law firms .

The types of claims that may be brought by these regulated bodies can extend, in a similar fashion to the claims directors in unregulated businesses face, to a withdrawal of licenses to practice and a period of prohibition (similar to director disqualification) or withdrawal of a practising certificate and being struck off the roll (for SRA claims).
The types of claims that arise are quite often fraudulent or mis-selling schemes and exist generally to protect the public interest.

These powers are also quite wide, and can extend to both limited companies, LLPs, unincorporated partnerships and individuals/their businesses.

What happens when insolvency occurs?

Where such a regulated business is placed into insolvency, the immediate priority of the Insolvency Practitioner appointed (quite often by the Official Receiver acting on behalf of the Secretary of State) is to mitigate the impact of failure. Such firms often hold client interests which are inherently at risk as a result of the insolvency event.

Funds held on behalf of the public can often be incredibly at risk where those funds need to be managed on an ongoing basis and, as an example, investment portfolios and pension funds are a typical example where the pension regulator and the FCA would often step in to support any appointed insolvency practitioner.
Where the breach of FCA regulations largely relates to mis-selling then the immediate risk may be less onerous, although we have seen huge losses arising from fraudulent investments sold. But by this point the emphasis of the Insolvency Practitioner will be to stem any ongoing losses and pursue the wrongdoers.

Insolvency Practitioner Claims

The Financial Conduct Authority (“the FCA”) has increasing powers to disqualify directors and restrict any regulated business activities of regulated companies and further has extensive powers under the insolvency legislation which are incorporated to ensure that the risk of failure is mitigated when it comes to considering the public interest.

Similarly other regulated bodies (such as the SRA) can impose sanctions as discussed above.

Where the regulated business was a company or LLP then the directors of that company can be pursued for losses in a similar manner to the types of claim that can be brought against any director of an insolvent company (although the claims tend to be far more serious for regulated businesses).

Where the regulated business is an unincorporated partnership or an individual, then conventionally a partnership winding-up order or bankruptcy order is sought, with claims brought under the insolvency legislation. Please see our personal insolvency webpages which address such claims.

In the event you have any interest, either as a consumer or as a regulated entity, in a business which is facing or may face insolvency then it is essential that you seek advice as soon as possible to mitigate any future risk.

What is a Freezing Order?

Freezing orders are often sought against assets owned by parties where there is a concern that such assets will be disposed of in anticipation of them being subject to legal proceedings.

A freezing order is not granted lightly and requires a High Court Judge to make such an order but the application for a freezing order can be brought silently without notifying the party to whom the freezing order applies.
This is referred to as a without notice freezing order and is quite common where there is a sense of urgency or a concern that notice of the application will accelerate the speed in which the assets are disposed of.
In the alternative a freezing order may be provided on notice to the party, particularly where HM Revenue & Customs are seeking such a freezing order, and that party will gain an opportunity to respond to the freezing order application. If this is not responded to then it is almost certain that your assets will be frozen – whether this be money in the bank of a property being sold.

Quite often the notice of the freezing order may be insufficient to enable a detailed response to be provided before the first hearing and therefore, even for on notice freezing order applications, a party may find that the asset in question is frozen for a period of time until representations can be made to the court.

What is a freezing order?

As stated above, a freezing order places a court order over assets requiring that they not be removed from the jurisdiction of the UK. A freezing order can provide for transactions, such as property sales, to continue on strict condition that solicitors instructed on such matters do not dispose of the underlying residual asset (or the equity/proceeds of sale) without an account to the court.

A freezing order has certain statutory criteria to meet when being issued including that the person or entity applying for the freezing order must provide a cross undertaking in damages as part of the freezing order application.
The court will quite often (especially where the freezing order is sought without notice to the party subject to the freezing order) have no knowledge of the circumstances or have any ability to assess the validity of the freezing order application other than by reference to the application itself.

In such circumstances this cross undertaking provides that the applicant will be personally liable for any losses suffered as a result of the freezing order. For example, if monies are sought to be transferred pursuant to a commercial transaction and that commercial transaction fails because the monies are frozen, then theoretically if the freezing order application was issued recklessly the party subject to the freezing order could seek to claim the losses because of this failed commercial transaction.

This is particularly important for liquidators and administrators of companies to understand, as recent (as of writing) case law provides that their liability is not restricted to the assets in the insolvent estate over which they are appointed.

To read more about Freezing Orders and how we can help – read our Free Freezing Order Guide – which will answer all the questions you may have. Or just call our team today.

Why would a liquidator obtain a freezing order?

How to defend a freezing order claim

How to defend a freezing order claim.

The main defence to a freezing order claim is the evidence of a likely dissipation of assets. If a freezing order is sought over your property and you do not have it for sale, or if a freezing order is made against monies which are needed for while trading, then the best method is defending that freezing order application is to demonstrate how there is no evidence of dissipation of the assets.

A court will not allow a claimant an advantage where their claim has not been validated by a final order following trial and the same applies for applications for freezing orders, where the business of the party subject to the claim may be stifled as a result of the freezing order (which in itself also serves to limit their ability to defend the underlying claim).
Legal costs are also an issue when seeking to defend a freezing order application or (if the freezing order remains in place) seeking to defend the substantive claim. However, the Order will almost always provide for sufficient funds to be released to cover such legal costs.
At Francis Wilks & Jones we have extensive experience dealing with such issues, particularly where there is a claim by a liquidator or HMRC.

Options available to defendants

Obviously, as with all litigation claims, the circumstances of the case is subjective and their may well be many other grounds to defend a freezing order claim. Alternatively, if the evidence is insufficient to demonstrate dissipation or otherwise (or meet the criteria under the related case law which relates to freezing orders) then the court will discharge the freezing order and further make the applicant subject to legal costs (which may in itself be enough of a deterrent to prevent the underlying claim being continued).

A without notice freezing order is impossible to defend from its initial instigation but return dates provided by the court will provide ample opportunity to seek the dismissal of the freezing order and the undertaking in damages will be pervasive throughout these proceedings until the freezing order is either retained, discharged or withdrawn.

Should you require any advice or assistance in respect of defending a freezing order then please contact Francis Wilks & Jones. Or read our free Freezing Order Guide today – it answers many questions.

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Recovering debts successfully – pitfalls for law firms to avoid

How to defend a bankruptcy petition

What is a bankruptcy order?

Unpaid or overdrawn directors loan account

Unpaid or overdrawn directors loan account

Void / unlawful dividends

Void and unlawful dividends

Income and paying dividends

Formalities for a dividend

Issues for directors

Misconduct

Wrongful trading

What constitutes wrongful trading?

Knowledge or ought to have known

Continuation of trading

Reasonable steps

Reference to key paragraphs in Section 214 of the Insolvency Act 1986

S214 of the Insolvency Act explained

What does this mean for you?

How we can help

How to defend a liquidator wrongful trading claim

Other important factors

How we can help

Common examples of wrongful trading

How we can help

Damages for wrongful trading – what a director could have to pay

Fraudulent trading

Fraudulent trading explained

How we can help

How to defend a liquidator fraudulent trading claim

Review the evidence

What happens when there is more than one defendant being chased by the liquidator?

Other matters to bear in mind when defending fraudulent trading claims

Common examples of fraudulent trading

Facing a Freezing Order following a Fraudulent trading claim

How much will someone pay if found liable for fraudulent trading?

We can help

1. What is a transaction to defraud creditors?

2. What is a transaction to defraud creditors under the Insolvency Act 1986?

3. Who can pursue a transaction to defraud creditors claim?

4. What needs to be proved for a transaction to defraud creditors claim?

5. What is the limitation period for a transaction to defraud creditors claim?

6. What is the remedy for a transaction to defraud creditors claim?

7. What defence is available for a transaction to defraud creditors claim?

Misfeasance claims

Misfeasance explained

S212 of the Insolvency Act explained

We can help

Defending misfeasance claims by liquidators

We can help

Creditor claims for misfeasance

Misfeasance – 10 Common FAQ’s answered

1. What is misfeasance?

2. What transactions are subject to a misfeasance claim?

3. Who can bring a misfeasance claim?

4. Can past directors be liable for misfeasance?

5. Who else can be liable for misfeasance?

6. What are the common defences to misfeasance?

7. Is honesty a sufficient defence?

8. What is the extent of my liability for misfeasance?

9. Can a creditor sue a liquidator / administrator for misfeasance?

10. What strategy should I take when faced with a misfeasance claim?

Director duties

Director Duties – an overview

Introduction

Directors’ decision-making

Directors fiduciary duties

Who is classed as a director?

Personal liability

Further advice about Director Duties

Let us help you today

What is a fiduciary duty?

What is a fiduciary duty?

Who owes these duties?

What are the fiduciary duties?

Remedies for breach

How we can help you

Breach of fiduciary duty

Overview