Insolvency claims against directors of companies
When a company is in financial difficulty, a director will be presented with conflicting interests. On the one hand, a director will wish to continue to run the business in the hope it recovers. On the other hand, once the company is in financial difficulties, a director will owe duties to the company’s creditors, which may mean the company should cease trading.
It is important to recognise when duties to a company’s creditors arise and the risks of falling short of the relevant insolvency laws and procedures.
One of the key risks is that directors may find themselves personally liable to the company’s creditors for payment of monies. Once a company is deemed to be insolvent pursuant to one of the applicable tests (cash flow or balance sheet tests), the transactions entered into during the years leading up to the date of insolvency and those entered into thereafter can become reviewable by liquidators or administrators under the Insolvency Act 1986 and Companies Act 2006.
The types of claim that a director may face include; wrongful trading, breach of duties (misfeasance), preferences and transactions at an undervalue. The main purpose of these actions is to ensure that all relevant company assets are correctly distributed to the creditors upon liquidation.
Examples of the circumstances that can give rise to the above claims include; paying a creditor (including payment of a director’s loan or salary), continuing to trade (if it results in the company being worse off), entering into a transaction where the company does not receive value for money and payment of dividends.
Many of the circumstances do not involve deliberate wrongdoing; they can relate to the seemingly innocent day to day running of a company. Nonetheless, a director who is found liable for a liquidation claim will be ordered to make a payment to the company, to pay its creditors and legal costs. These sums can be substantial and result in a director suffering personal financial difficulty.
In addition to potential financial awards, a director can be disqualified under the Company Directors Disqualification Act 1986. This prevents a person from acting as a director of a company or from participating in the promotion, formation and management of a company for between 2 and 15 years, amongst other restrictions.
Therefore, the consequences of falling foul of the insolvency laws can be severe. It is important to obtain professional advice as soon as possible so to fully understand your duties and avoid issues later.
Should you have any concerns regarding insolvency matters, please feel free to contact me at firstname.lastname@example.org or on 01202 057762.