Contentious insolvency and directors: Key risks and how to respond

Pre-insolvency

A theme throughout our blogs relating to insolvency is that it is pertinent to take advice early, when a company or an individual is potentially insolvent. From the perspective of a director of a company, doing so is consistent with compliance with their statutory duties under the Company’s Act 2006. The benefits of early action not only increase the chance of a better outcome, but may also limit the director(s) potential personal liability should an insolvency event subsequently occur.

Often, directors seeking early advice find themselves speaking with an insolvency advisory firm. It is important to understand the nature of their instruction. This is because if a representative of that entity is subsequently appointed at the administrator/liquidator, which is typically the basis on which discussions begin, from this point their responsibility is to the creditors of the insolvent entity. This will essentially include consideration of the director(s) actions in the company reaching this point. If there is a potential claim, an office holder is legally required to investigate it in realising as much value as possible to the creditors. Accordingly, it is vital that potentially insolvent entities, and sometimes even directors in their personal capacities, take independent advice to allow them to make fully informed decisions.

During insolvency- common claims/considerations

Directors may face a range of investigations and claims during the insolvency process, relating to their conduct as those responsible for the insolvent entity. While some claims are definitively concern the directors, for example indebtedness pursuant to a Directors’ Loan Account or a personal guarantee, further to various provisions of the Insolvency Act 1986, directors can be found to be personally liable in respect of certain claims, resulting in them needing to make payment of damages into the insolvency. This potential liability highlights the need for directors to take independent legal advice. Some such claims include –

• Claims for information about the company in question, with the potential of incurring liability for a failure to comply.
• Wrongful trading, where directors continue to trade the company when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvency and fail to minimise losses.
• Fraudulent trading, where directors trade with the intent to defraud the company’s creditors.
• Director misfeasance, where directors are aware insolvency is a real possibility and take decisions to the detriment at creditors after that point in time.
• Directors can indirectly be found to be personally liable if they were complicit in transactions at undervalue or preferences, if the assets in question cannot be recovered or have lost value as a result.

All of the above claims depend heavily on a director’s knowledge, intent and conduct. As set out in this article, it is therefore vital that directors secure independent advice in circumstances where any of the above-mentioned claims may be considered by an office holder, or even has a director has any concerns about their conduct.

Personal consequences for directors

While their conduct is capable of being scrutinised in the ways set out above, concurrently, directors are relieved of their ability to control and run the insolvent entity once it has entered into a forma insolvency process. For many SME owners, this will be a company which they have built themselves, or may also be a shareholder in, meaning the impact of insolvency is substantial. These circumstances, once again, justify the taking of independent advice at a time which can be overwhelming and emotional.

Insolvency events can also take a long time to resolve and can at times be intensive on directors due to their proximity to the business. This is of course more so the case if any claims are brought against a director in their personal capacity.

In circumstances where directors are found to have acted improperly, there can be further ramifications beyond the requirement to pay damages. Such claims can ultimately result in directors facing disqualification, preventing them from being a registered director of a company at Companies House in the future.

Legal support for directors

As set out above, while it is almost always pertinent to be proactive and seek advice as early as possible, our expert lawyers at Ellis Jones are able to provide legal advice and, if necessary, representation at any stage before or during an insolvency event. Having experience in dealing with a range of insolvency-based disputes and parties (directors, creditors and office holders alike) means that the Ellis Jones’ team have a full understanding of the factors at play, making us well-equipped to assist you in reaching the best possible resolution.

We offer practical, strategic advice to directors navigating the legal and personal challenges of insolvency. Whether you are concerned about potential liability or facing active claims, our team of experts can guide you through your options and build a strong defence.

Get in touch with our specialists today on 01202 525333 or complete our ‘Make an Enquiry‘ form.