Claims by Administrators and Liquidators

Claim:

A transaction at an undervalue occurs when a company sells or transfers an asset for significantly less than its true or market value or indeed for no consideration at all.  Such transactions are often scrutinised during an insolvency process as they can diminish the funds available to distribute to creditors.

Possible Defences:

• The transaction was for full or sufficient consideration.
• The company was not insolvent at the time of the transaction and did not become insolvent as a result of the transaction.
• The company entered into the transaction in good faith and for the purpose of carrying on its business and at the time it did so there were reasonable grounds for believing the transaction would benefit the company.
• The transaction did not take place during the relevant timeframe (i.e. within two years of the onset of the company’s insolvency).

Claim:

The company paid or otherwise preferred one or more creditors over other creditors prior to its entry into administration or liquidation. 

Possible Defences:

• There was no desire to prefer the relevant creditor.
• The payment to the creditor happened outside the relevant timeframe (two years in the case of connected creditors and just six months in the case of non-connected creditors).
• The payment to the creditor was made in exchange for value.
• The company was solvent at the time of the payment.

Claim:

The transaction was entered into at an undervalue and the purpose of the transaction was to put assets beyond the reach of creditors or to otherwise prejudice their interests.

Possible defences:

• The transaction was carried out in good faith and not for the purpose of putting assets beyond the reach of creditors.
• At the time of the transaction, there were reasonable grounds for believing the transaction would benefit the company.
• The transaction was not at an undervalue.
• The claim is statute barred pursuant to the Limitation Act 1980.

Claim:

That at some time before the company’s administration or liquidation, the company’s director(s) knew or ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation or entering insolvent administration.

Possible defences:

• The company did not continue to trade past the relevant point in time at which it became insolvent.
• The director did not know, or ought not to have concluded, that there was no reasonable prospect of the company avoiding insolvent administration or insolvent liquidation.
• The director took all reasonable steps to minimise the loss to the company’s creditors.
• The loss claimed was not incurred as a result of wrongful trading.

Claim:

The company was being run with an intent to defraud creditors or for another fraudulent purpose.

Possible defences:

• Proving you did not act with intent to defraud.
• You were not knowingly a party to the fraudulent trading.
• You took all reasonable steps to protect creditors’ interests.    

Claim:

A person has misapplied, retained or become accountable for any money or property of the company or has been guilty of misfeasance or has breached their fiduciary or other duties.

Possible defences:

• The person acted honestly and reasonably and in all the circumstances of the case ought fairly to be excused.
• The Duomatic principle (i.e. that the action taken was ratified by the company’s shareholders, except where the company was already insolvent at the time of ratification).
• The action taken was based on professional advice and it was reasonable to rely upon it.
• The financial loss did not directly follow as a result of the breach.
• The claim is statute barred pursuant to the Limitation Act 1980.

Claim:

Dividends or distributions are paid out of capital or without sufficient distributable profits.

Possible defences:

• The dividend/distribution was paid in good faith, based on proper accounts having been prepared.
• The dividend/distribution was paid based on professional advice.
• The company’s financial position supported the payment.

Claim:

Money or assets owed to the insolvent company (examples include book debts and overdrawn director’s loan accounts). 

Possible defences:

• The debt is disputed on factual or legal grounds.
• A relevant set-off applies.
• The claim is statute barred pursuant to the Limitation Act 1980.

If a transaction at an undervalue claim is successful, there are a number of orders the court may make. In particular, the court may:

• Require any property transferred as part of the transaction to be re-vested in the company;
• Require proceeds of sale from a property to be re-vested in the company;
• Release or discharge any security given by the company;
• Require any person who received a benefit from the insolvent company to pay such sums to the administrator or liquidator of the company as the court directs;
• Require a person whose obligations to the insolvent company were released or discharged as a result of the transaction to provide new or revived obligations;
• Require security to be provided relating to the discharge of any obligation; or
• Provide that a person whose property is ordered to be vested in the company or on whom obligations are imposed is to be allowed to prove in the winding up of the insolvent company.

Where a preference is established, the court may make any order it thinks fit for restoring the position to one where the company had never given the preference. In particular, the court may:

• Require any property transferred as part of the transaction to be re-vested in the company;
• Require proceeds of sale from a property to be re-vested in the company;
• Release or discharge any security given by the company;
• Require any person who received a benefit from the insolvent company to pay such sums to the administrator or liquidator of the company as the court directs;
• Require a person whose obligations to the insolvent company were released or discharged as a result of the transaction to provide new or revived obligations;
• Require security to be provided relating to the discharge of any obligation; or
• Provide that a person whose property is ordered to be vested in the company or on whom obligations are imposed is to be allowed to prove in the winding up of the insolvent company.

Normally, an application for an order requiring a director to contribute to the company’s assets due to fraudulent trading will be made either by the company’s administrator or liquidator.  However, administrators and liquidators can assign the right of action (including the proceeds of an action) for fraudulent trading.  An example of this happening is when an administrator or liquidator assigns the right of action to a creditor where a creditor wishes to pursue a claim that the administrator or liquidator does not wish to, or has no funds to, pursue. 

The liquidator or administrator has to provide evidence to the court that a director or other relevant person has acted deliberately to avoid payment of company liabilities.  The burden of proof that the liquidator or administrator has to satisfy is high and, as a result, fraudulent trading claims are less common than other types of claims brought against directors.

Normally, an application for an order requiring a director to contribute to the company’s assets due to wrongful trading will be made either by the company’s administrator or liquidator.  However, administrators and liquidators can assign the right of action (including the proceeds of an action) for wrongful trading.  An  example of this happening is when an administrator or liquidator assigns the right of action to a creditor where a creditor wishes to pursue a claim that the administrator or liquidator does not wish to, or has no funds to, pursue. 

There are a variety of ways in which directors can avoid being liable for wrongful trading, both in terms of their ongoing conduct as a director of a company facing financial difficulty and in seeking independent professional advice from a solicitor and (when relevant) a licensed insolvency practitioner on their company’s governance and the best options going forwards.

Given the above, we would recommend that you contact us as soon as possible to improve your prospects of avoiding the risk of a wrongful trading claim being brought against you should your company enter a formal insolvency process.

Pursuant to the Companies Act 2006, company directors owe the following general duties to the companies in which they are directors:

• A duty to act within their powers (i.e., only acting in accordance with the company's constitution and only exercising powers for the purposes for which they are conferred).
• A duty to promote the company's success for the benefit of its shareholders.  In doing so, a director must have regard to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with its suppliers and customers, the impact of the company's operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly as between the company's shareholders (NB: if the company becomes insolvent, then a director must consider or act in the best interests of the company's creditors). 
• A duty to exercise independent judgement (i.e. directors must exercise their powers independently and free of any influence from others). 
• A duty to exercise reasonable care, skill and diligence. 
• A duty to avoid conflicts of interest (i.e. a director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe to the company and either their personal interests or other duties to a third party). 
• A duty not to accept benefits from third parties.  Specifically, a director must not accept any benefit from a third party which is conferred because they are a director, or they agree to do or not do something as a director. 
• A duty to declare an interest in any proposed transaction or arrangement with the company. 

We acted for the joint liquidators of a company that was engaged in a number of residential construction projects. 

We advised on various claims to be brought against the former director of the company which included an overdrawn director’s loan account, a loan to a third party and illegal dividends.  We also dealt with agreeing a standstill agreement in respect of the limitation period for bringing these claims. 

We successfully settled the matter for our client prior to the preparation and issue of court proceedings. 

We acted for the directors of a failed fast-food franchise restaurant operator that ran a number of restaurant outlets in the south of England under a well-known national brand.

The joint liquidators intimated a number of claims relating to debt, misfeasance, breach of trust, transactions at an undervalue and void dispositions.  The joint liquidators engaged solicitors to send correspondence in relation to those claims.  Following exchanges of correspondence over a number of months between the parties’ solicitors, the parties agreed to mediate which ultimately led to a negotiated settlement prior to the issuing of court proceedings against our clients.

We have acted for the joint liquidators of a professional fitness training company.  Court proceedings were issued against the director of the company in respect of a misfeasance claim relating to the misapplication and retention of company monies totalling in excess of £300,000. 

Judgment was obtained against the director, which was then secured via a charging order placed on the director’s matrimonial home.  An application to the court was then made for the possession and sale of the director’s home, which was compromised by the director agreeing to pay instalments to discharge payment of the judgment.