Claims by liquidators or administrators

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“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:

1. Unpaid or overdrawn directors loan account

Director loan claims are something we regularly deal with after a company insolvency. The normal rule is that loans which have been drawn (whether authorised or not), have to be repaid where the company is placed into insolvency.

However, it is possible to defend these claims.

• demands for repayment by liquidators are not as straightforward as may at first appear.
• they can be defeated by a close examination of the evidence, limitation, set-off and many other aspects such as any unpaid earnings.

2. 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 the previous year might still mean it is impossible to declare a dividend.

In addition it is important to consider

• whether the requirements for a dividend to be validly approved and drawn have been followed.
• what defences are available to these claims, such as advice received at the time, the documents reviewed at the time and the impact of paying back an earlier dividend on ones drawn later.

3. 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 the the director knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

We commonly defend these claims by liquidators. For example,

• the claim will fail if we can show that the director took every reasonable step to minimise the potential loss to the company’s creditors.
• we can explore this and other defences with you if you are facing a wrongful trading claim.

4. Fraudulent trading

Fraudulent trading is a criminal offence and has greater consequences than a wrongful trading claim. 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

• however, it has a higher criminal burden of proof and is therefore 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.

5. Breach of fiduciary duties and misfeasance claims

If a director does not act in accordance with those statutory duties codified under the Companies Act 2006 he/she is in breach of their fiduciary duties.  A breach of fiduciary duties can lead to a claim for compensation payable to the company / its liquidators for any losses arising as a result of the breach.

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

We regularly defend these types of claims for directors.

6. Antecedent transactions

There are a group of claims which a liquidator can bring which are referred to as “antecedent transaction” claims. These are essentially claims arising out of transactions entered into by the company before it went in to liquidation – and which the liquidator believes should be paid back personally by the directors. Examples include:

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. 
• Our team at FWJ are experts in defending these types of claim.

Transactions at an undervalue

Where an asset of the company is transferred or sold prior to insolvency then the liquidator can make a claim if it was sold for less than the market value of the asset. 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 issues of

• the time period when the goods were sold,
• the market value for the goods and
• various good faith requirements

Transaction defrauding creditors

This type of liquidator claim is often based on the claim for transactions undertaken to avoid future and potential creditors, and is not subject to any time limit. We successfully defend many directors on these types of claims.

Extortionate credit transactions

These 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. These claims can be hard for a liquidator or administrator to run and we can help defend them for you. 

Avoidance of floating charges

A liquidator or administrator may declare a floating charge as invalid and seek to have it set aside. This can happen 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.

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. If this happens, 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.

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.

At Francis Wilks & Jones, we regularly defend directors and help them achieve a successful outcome so that they can get on with their business and personal lives.

Should you require any assistance, please contact our director services team. Or speak to Partners Stephen Downie or Maria Koureas-Jones today for for immediate help today.

Francis Wilks & Jones dealt with all negotiations through to settlement for a sum which I was able to afford. This was a magnificent result and their fees paid for themselves as a result of the settlement which otherwise may have led to bankruptcy proceedings against me. I am very fortunate that I instructed this firm and would have no hesitation in recommending them to any director in similar circumstances.

A client who was facing claims by a liquidator for the improper withdrawal of sums from an insolvent company. We negotiated a settlement

I was greatly impressed with the commercial, tactical and technical ability of the team at FWJ. They quickly got to grips with a complex set of facts and, through their hard work, had the proceedings against me dropped and a significant proportion of my legal fees repaid. I couldn’t recommend them highly enough.

A director we defended against a disqualification claim and other claims brought by a liquidator