Potential Claims Against Directors Following Insolvency

Directors of insolvent companies may face various legal claims during or after the insolvency process. This article outlines potential claims against directors and emphasises the importance of seeking professional advice to minimise risks and liabilities.

1. Wrongful Trading: Wrongful trading occurs when directors continue trading while knowing or ought to have known that the company had no reasonable prospect of avoiding insolvency. Directors may face personal liability for any increase in the company’s net deficiency during the period of wrongful trading. They may be ordered to contribute to the company’s assets to cover the losses incurred during this period.
2. Fraudulent Trading: Fraudulent trading involves carrying on the business intending to defraud creditors or for any other fraudulent purpose. Directors may face criminal and civil liabilities if found guilty of fraudulent trading. They may be required to contribute to the company’s assets and face imprisonment, fines, or disqualification from acting as directors.
3. Misfeasance or Breach of Fiduciary Duties: Directors owe fiduciary duties to their company, including the obligation to act in the company’s best interests, the duty of loyalty, and the duty of care. Directors who breach these duties can be held personally liable for misfeasance. They may be ordered to compensate the company for any losses incurred due to their misconduct or breach of duty.
4. Preference Payments: Preference payments involve transactions that put a creditor in a better position than they would have been in during the company’s liquidation. Directors could be liable if they made preference payments to favour a particular creditor. The liquidator may seek to recover such payments from the favoured creditor to distribute the funds fairly among all creditors.
5. Transactions at an Undervalue: Transactions at an undervalue occur when a company transfers assets or enters into transactions for significantly less than their true value. If directors are found to have engaged in such transactions, the insolvency practitioner may apply to the court to reverse the transaction, and the directors may be held personally liable for any losses incurred.

Conclusion: Directors should be aware of the potential claims they may face during or after the insolvency process. These claims can result in personal liability, financial losses, and reputational damage. Seeking professional advice from solicitors and insolvency practitioners is essential to navigating the complexities of insolvency and minimising potential risks and liabilities.