HomeSMEs, directors & shareholdersDirector servicesClaims by liquidators or administrators

Francis Wilks & Jones is the country's leading firm of lawyers when it comes to defending claims by administrators or liquidators. Often the situation is not as bleak as it might first seem. Our expert advice has saved hundreds of directors from millions of pounds of personal claims. Let us help you too.

Sometimes insolvency is unavoidable. A company might be placed in to administration or liquidation.

Even if that seems the only way out, it is always sensible to take legal advice first and try to take steps to avoid future personal claims. But, even if the process has started, it is never too late to ask for help. Our team of experts has been successfully defending directors since 2002.

“FWJ were very hands-on, getting involved from an early stage in seeking to avert an expensive set of litigation proceedings. I am more than happy to recommend their services, particularly when it comes to considering complicated issues or complex proceedings.

A client who was facing a liquidator claim for the improper withdrawal of sums from a company. We had the claim dismissed

Common types of claims made by liquidators or administrators

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)

Void dividends

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.

Wrongful trading

Where a company has gone into liquidation a claim can be brought against a director to make a contribution to the company’s assets if at some time before the start of the winding up they knew or ought to have known as a reasonably diligent person that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

A defence is available to directors where they can show that they took every reasonable step with a view to minimising the potential loss to the company’s creditors.

As a result of the Coronavirus pandemic, between 1 March 2020 and 30 June 2021, wrongful trading was effectively suspended as it is assumed that the director was not responsible for the worsening of the financial position of the company or its creditors. Though less serious than fraudulent trading, wrongful trading can in some circumstances constitute a criminal offence.

Fraudulent trading

Fraudulent trading is a criminal offence and has greater consequences than wrongful trading. Given the higher criminal burden of proof, it is far more difficult to prove. The key difference is the intent of the director. Fraudulent trading occurs when any business of the company is carried on with intent to defraud creditors of the company, creditors of any other person or for any fraudulent purpose.

A director found to have committed such an offence can be held liable to make contributions to the company’s assets usually based on the loss suffered by the fraudulent trading.

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). You can read about the consequences of a breach of fiduciary duty here.

The main fiduciary duties include to act within the powers conferred by the company’s Memorandum and Articles of Association, to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, to avoid conflicts of interest, not to accept benefits from third parties and to declare interest in proposed transaction or arrangement

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. In practice, expert evidence may be required from an accountant to determine the level of losses.

Antecedent transactions

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

3. 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.

4. Extortionate credit transactions

This can arise where the company is party to a credit transaction with unfair or unfavourable terms, such as the requirement to pay grossly inflated interest payments which would otherwise be unfair. It will also apply if the company was in a vulnerable position at the time of the transaction.

The liquidator or administrator can seek to have the terms amended so that they reflect a fair deal. These claims are rare given the high threshold for the liquidators or administrators to prove either that the terms ‘grossly contravened ordinary principles of fair dealing’ or that payments made under the transaction are ‘grossly exorbitant’. 

5. Avoidance of floating charges

A liquidator or administrator may declare a floating charge as invalid and seek to have it set aside where the purpose of the charge was to secure old debt and it was granted within certain defined time-periods prior to the company’s insolvency and the company was insolvent at the time or became insolvent as a result of granting the charge.

6. Liability of past directors

This situation applies where the company is being wound up and it has made a payment out of capital to redeem or purchase any its own shares and the company does not have sufficient assets to repay its debts or liabilities and the expenses of the winding up. In such circumstances, the director who authorised the transaction may be held labile to contribute personally to the company’s assets to the value of the payment made by the company.

7. Void transactions

Once a company is in liquidation, any disposition of that company’s property is void if it was made after the commencement of winding up. The liquidator can pursue the recipient for repayment of property transferred, including any directors who have received assets or money from the company during that time.

If it can be shown the disposition is beneficial or did not prejudice the interests of the other unsecured creditors, it can be possible to obtain sanction from a court which can be obtained retrospectively.

“I was impressed with the quality of the service provided and with how easily accessible and approachable the team was. FWJ’s help meant that I was able to safeguard the jobs of my staff and ensure that my customers had uninterrupted access to services in what was an incredibly difficult time for me. I wish I had instructed them earlier. I cannot recommend them highly enough.”

The director of a company that had gone into administration to whom we provided insolvency and restructuring advice

At Francis Wilks & Jones, we provide advice on claims against directors 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.

Key contacts

Maria Koureas-Jones

Maria Koureas-Jones

Partner

Stephen Downie

Stephen Downie

Partner

Sue Brumby

Sue Brumby

Senior Associate

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