Francis Wilks & Jones is the country's leading firm of lawyers when it comes to defending claims from administrators or liquidators. Whatever the nature of the claim against you, our team is here to help. Often the situation is not as bleak as it might first seem, and early expert advice can make all the difference between a successful or unsuccessful outcome. We can help bring you peace of mind and allow you to get on with your business and personal life.
Where a company’s debts exceed its assets, or it cannot pay creditors as and when due then, in the absence of any rescue plan or financing option, insolvency may be unavoidable. There are a range of options available, the most common being administration and liquidation.
It is always sensible to try and seek advice before commencing any type of insolvency process as it can reduce the risk of personal claims against directors later on. Our expert company rescue team can help with that pre-insolvency advice if your company has not yet entered formal insolvency.
However, once a company has gone in to insolvency, an appointed administrator or liquidator is duty bound to consider the way in which the business was managed and whether there are any claims for damages which can be made against those who were in charge.
Common types of claim against directors
The following are the types of claims we commonly defend directors against
Unpaid or overdrawn directors loan account
Directors loans drawn, whether authorised or not, have to be repaid where the company is placed into insolvency.
- where you normally draw loans (as directors) and declare a dividend which is set off at the year-end, this strategy can be lethal where insolvency intervenes before the dividend can be declared or (where the dividend has been declared) where they are subsequently declared to be void (see below);
- demands for repayment of director’s loans are one of the most common claims brought by liquidators but such demands for repayment are not as straightforward as may at first appear, and can vulnerable to risks of evidence, limitation, set-off and many other aspects which can undermine such defences (including any unpaid earnings).
A dividend can only be paid by a company where there are sufficient distributable reserves, usually a reference to the company’s profit and loss reserve. Even if your company has made a profit this year, the losses from last year may make it impossible to declare a dividend.
- there are also numerous other requirements for a dividend to be validly approved and drawn;
- a failure to meet any one of these requirements may mean that if the company is placed into liquidation then the dividend may be repayable;
- where a dividend should not have been declared, the dividend payment can be reclaimed from the shareholder under the provisions of the Companies Act 2006.
There are defences available to directors and shareholders, including by reference to the advice received, the documents reviewed and the impact of paying back an earlier dividend on ones drawn later.
Breach of fiduciary duties and misfeasance claims
A director breaches his fiduciary duties to a company where he does not act in accordance with those statutory duties codified under the Companies Act 2006. A breach of fiduciary duties can lead to a claim for equitable compensation payable to the company / its liquidators for the losses arising as a result (plus interest and legal costs).
There are a number of defences available to directors which are largely subjective and can relate to when the breach occurred, how it is described and who has made a loss.
1. Preference claims
A preference claim is made where a creditor of the company is paid in preference to other creditors, or that creditor is put in a better position than other unsecured creditors (in the event of the company being placed into liquidation). A preference claim is made against the recipient of the preference payment, for recovery of the sum paid.
There are a complex array of statutory and common law hurdles for such a claim to be successful, in the absence of which the preference claim will not succeed. However, if the claim is successful, then the payment, interest and costs will be repayable against the individual or company preferred.
2. Transactions at an undervalue
Where pre-insolvency an asset of the company is transferred or sold, of payments made, for less than the market value of the asset or for nothing, then the loss to the company (and its creditors) as a result is recoverable in a similar way to a preference claim.
- as with a preference claim there are many statutory requirements for a claimed transaction at an undervalue to be successful, including the very important issue of the time period, the associated status and good faith requirements;
- however, as with a preference claim, if such a claim is successful then the losses suffered by the company, plus interest and legal costs, will be recoverable.
Transaction defrauding creditors
This claim is based on the former common claim for transactions undertaken to avoid future and potential creditors, and is not subject to any time limit.
There is no requirement to provide evidence of fraud and indeed the undervalue aspect plays a minor role, but it is the evidence of purpose for which such claims are brought, especially as they defeat any defence of limitation.
At Francis Wilks & Jones we advise directors on these matters regularly with the aim of providing a quality value added service where litigation is only a route to an exit of least harm and where our fees are outweighed by the benefit provided to you. Should you require any assistance, please contact our director services team who can discuss such matters with you.
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Persuading a liquidator to withdraw its claims against a director accused of misfeasance and breaching his fiduciary duties
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SMEs, directors & shareholders
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