Claims against Directors and the Liquidator's Powers
A liquidator is a person who is appointed when a company has been wound-up. The task of the liquidator is to collect and then distribute the assets of the company amongst the creditors who are owed money.
Liquidators are afforded wide powers to enable them to fulfil their duties.
As part of the liquidation process, the directors of the company are under a duty to cooperate with the liquidator. Liquidators have the following powers that they can use against directors making directors personally responsible to repay company debts.
- Fraudulent trading: A power to apply to the court where it appears that there has been fraudulent trading (s213 IA 1986). The court may then require the directors to make contributions to the company’s assets as a result.
- Wrongful trading: A power to apply to the court where it appears that a director knew or ought to have known that there was no reasonable prospect of paying creditors and avoiding liquidation (s214 IA 1986). This focuses on the mismanagement of the company.
- Inquiry into company dealings: A power to apply for an inquiry into the company’s dealings. This is akin to a witness summons with the purpose of obtaining information regarding the company, and is supported by a power of arrest, and powers of enforcement (s237 IA 1986).
- Adjustment of prior transactions: A power to apply for a court order when it appears that a transaction was entered into at an undervalue (s238 IA 1986). The court is then entitled to make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. Similar provision is made in relation to preferences (s239 IA 1986) and extortionate credit transactions (s244 IA 1986).
Preference payment claims: A person may be subject to a preference claim when a company, in accordance with s239 of the IA 1986 does not act or allow something to be done which has the effect of putting that person (whether it is a creditor, surety or guarantor) in a position which, in the event of the company going into insolvent liquidation, be better placed than the position he would have been in if that act or thing had not been done.
- Transactions defrauding creditors: A power to apply to court in cases where a gift has been made or there has been a transaction at an undervalue that has defrauded the creditors by putting the assets beyond reach of a creditor (s423 IA 1986). The liquidator can use this power before winding up has occurred, such as in voluntary arrangements. This contrasts with the power in s238, which is used after the winding up order has been made.
It should be noted that these powers are complemented by numerous criminal offences provided by the Insolvency Act 1986. These offences include:
- Fraud in anticipation of winding up;
- Misconduct in the course of winding up;
- Falsification of the company’s books;
- Material omissions from statement relating to company’s affairs; and
- False representations to creditors (s206 – s211 IA 1986).
The liquidator must inform the Secretary of State if it appears that an offence has been committed (s218 IA 1986). A person can be held liable for fraudulent and wrongful trading as well as being held criminally liable.
West London Law Solicitors assist in cases where the directors of a company require urgent advice. We are uniquely placed as we do not act for insolvency practitioners or liquidators. This ensures that there is no possible conflict of interest especially as most solicitors in this field act for insolvency practitioners and liquidators and rely on them for repeat business.
The court can disqualify a director for a minimum period of 2 years and a maximum of 15 years.
Liquidators can also look into the approval of the company shareholders. Transactions which require shareholder approval include:
- Loans to directors
- Service contracts which are more than 2 years in duration.
- Substantial property transactions defined as arrangements between the company and a director (or a person connected with the director) of the company itself or its holding company relating to non-cash assets which either:
- Exceed 10% of the company’s asset value and are worth more than £5,000; or
- Exceed £100,000
Duty to Avoid conflicts of interest
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity.
Duty to declare interest in proposed transaction or arrangement
If a director of a company is in any way, directly or indirectly, interest in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.