Types of Claim Against Directors

There are a wide variety of claims that can be brought by Liquidators, Administrators or creditors against Directors, who are under a statutory duty at all times to assist appointed Liquidators and Administrators in fulfilling their duties. Many proceedings may be brought against directors for administrative purposes, for example with requests for information or company records to be delivered.

We refer you to our webpage entitled Claims against Directors which deals with the various claims directors can be subject to, particularly director disqualification claims.

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However, the main claims that can be made against a director personally and which arises out of insolvency proceedings are as follows:

Directors Loan Accounts Read more

This must be the most common type of claim made by a Liquidator or Administrator and directors loans have historically been something carried by companies for years without any demand for repayment. Please see our booklet on Director’s Loans which addresses this subject in more detail.

Quite often a director’s loan will be categorised as such in the absence of any evidence that it was a payment for salary under a service contract, any declaration of dividend or any evidence that such payments were for valid expenses related to company matters.

Most directors of SMEs operate a tax efficient system of awarding themselves a salary up to a certain tax threshold and then award the remaining part of their remuneration as a dividend (which is taxed at a much lower rate). However, as dividends cannot be declared until the company’s profits are known, in the meantime such payments (if, as often occurs, they are made monthly) will be categorised as loans until the end of the year (when directors can declare a dividend). If the company is placed into insolvency during that year then these payments exist as recorded loans and are repayable.

Equally, it is not uncommon for directors to claim expenses for non-company related matters, use the company for personal matters or otherwise use their influence to gain a commercial benefit, which may later be reclaimed as a debit on the director’s loan account.

In the event any such claim is made against you by an appointed Liquidator or Administrator, at Francis Wilks & Jones we have considerable experience of managing your response to such claims.

Misfeasance Read more

Misfeasance is a claim by the Company out of liquidation, and is a similar claim to a claim for breach of fiduciary duties (which can be made against directors of live trading companies).

This claim is usually based on ANY loss to the Company which occurred as a result of a director’s actions. This can include losses arising under insolvency claims against family members, associates or third parties (see below) or where s/he has disguised any transactions which the liquidator seeks to set aside.

A preference payment to a third party, family member or husband/wife can be reclaimed from directors as misfeasance, as can any sum paid out for little or no consideration in terms of the commercial benefit to the company.

Please see our Frequently Asked Questions booklet Misfeasance for more information and please contact us should you wish to discuss such matters

Breach of Fiduciary Duties Read more

This is a similar claim to misfeasance, but is a claim that exists prior to the onset of insolvency proceedings. It exists regardless of whether the company is insolvent, or the type of insolvency process (administration or liquidation). Our booklet entitled Breaches of a Director’s Fiduciary Duties addresses this area in more detail.

The claim for breach of a director’s fiduciary duties is likely to cover a wider scope of the director’s conduct and can go back further to matters which may or may not directly relate to the insolvency proceedings.

Conversely, a claim such as this is also subject to limitation issues (a liquidator has 6 years from the date of insolvency to commence misfeasance proceedings, whereas a claim for breach of fiduciary duties may be brought 6 years from when the original breach occurred). For this reason it is often the case that a Liquidator may bring joint proceedings for both misfeasance and a breach of fiduciary duties.

There is an incredible variety of claims that can be brought against a director in such circumstances, which may overlap with his position as shareholder and employee. At Francis Wilks & Jones we can advise on such matters and your response in respect of any proposed or issued claim for a breach of fiduciary duties, either out of insolvency or by shareholders or the Company.

For further information on all such claims, please see our webpage, Claims against Directors.

However, at the same time they must justify any such decision to creditors and accordingly are unlikely to accept a poorly drafted offer.

Re-Use of Company Name Read more

Where you have been registered as a director of a company which is placed into liquidation, the insolvency legislation prohibits you from acting as a director of a company with a similar name or which gives the impression to third parties that it is, in effect, the same company. Please see our booklet entitled Can I Re-use an Insolvent Company’s Name? which provides more detail on this subject.

This restriction is designed to protect the public from situations where a company is placed into liquidation and the directors then set-up a new company with an identical name and commence trading in an identical fashion (without any connected party being aware of the liquidation and therefore enabling the risk inherent in the previous company to continue). The restriction applies not only to the company’s registered name, but also the trading name of it and its predecessor company.

Directors can be liable in such circumstances to serious financial penalties extending to any losses by the subsequent company or event prosecution.

There are however a number of statutory exceptions which enable such risks to be mitigated or even avoided provided proper steps have been taken in advance. At Francis Wilks & Jones we can advise on such matters and guide you through the necessary steps to avoid any liability.

Wrongful Trading Read more

Where a director allows a company to continue trading where s/he knew (or ought to have known) that it was unlikely to avoid liquidation, they may be liable to pay the losses occurring from the date when such knowledge could have existed.

The evidence of when the director knew, or should have known, about such risks it usually a very contentious issue and will rely on evidence from various sources which can only increase the amount of legal costs that could additionally be sought against you. This claim, with interest and legal costs, could be a considerable amount of money which the director will be personally liable for.

Please see our Frequently Asked Questions booklet Wrongful and Fraudulent Trading for more information on this issue and please contact us should you wish to discuss such matters.

Fraudulent Trading Read more

Where a director is shown to have carried out the business with an intent to defraud creditors then the appointed Liquidator can seek an Order in similar terms to an Order for Wrongful Trading as described above.

However, an Order declaring that a director was liable for Fraudulent Trading (including an Order for repayment to the Liquidator of such sums lost as a result by creditors, together with interest and the Liquidator’s legal costs) is usually far more severe than in the case of Wrongful Trading.

The evidence and level of proof that the Liquidator is required to meet is also higher and thus it is very important to get legal advice on such allegations (or proposed proceedings) as early as possible to mitigate your potential liability.

Please see our Frequently Asked Questions booklet Wrongful and Fraudulent Trading for more information on this issue and please contact us should you wish to discuss such matters.

Director Disqualification and Compensation Orders Read more

The Small Business, Enterprise & Employment Act 2015 was passed on 26 March 2015 and provided for various changes to the law governing Director Disqualification. Please see our webpage which deals with Director Disqualification.

The Small Business, Enterprise & Employment Act 2015 will become law (as of writing) in respect of director disqualification matters once further legislation has been passed implementing it.

However, as a result of this Act (once implemented), there will be a longer period post-insolvency during which directors can be disqualified. In addition, once a director is disqualified (either voluntarily or by Court Order) the Secretary of State will be able to bring proceedings to seek an Order that the director do pay compensation into the liquidation amounting to the loss suffered as a result of his misconduct.

Accordingly, the historic position of offering a disqualification undertaking to avoid the legal costs of litigated proceedings may well change as this undertaking will now have far more serious consequences in terms of Compensation Orders that can be sought against directors who offer an undertaking.

Accordingly it is vital that you receive legal advice before offering any Disqualification Undertaking. At Francis Wilks & Jones we can assist you when considering such matters.

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