Updated: 15th February 2020
On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.
Insolvency is a complex area that often brings to light contentious issues including the preferential treatment of a creditor, or wrongful trading by directors. These matters can bring serious ramifications if you are involved as a director, including personal liability and even criminal charges being brought against you.
If you continue to trade whilst suspecting that the company is insolvent, or it is judged that you should have known that insolvency was likely, you may face accusations of wrongful trading.
A liquidator/administrator will need to prove that wrongful trading occurred, and also that it caused a loss of return to creditors. It is also worth mentioning that directors who choose to resign in the face of such allegations may be viewed as attempting to minimise their responsibilities.
Fraudulent trading is a criminal offence and can result in disqualification for directors, personal liability for company debt, and a prison sentence in serious cases. The burden to prove that directors have deliberately denied creditors their due recompense, lies with the liquidator or administrator.
Misfeasance is a ‘catch all’ phrase that describes breach of fiduciary and other duties. Creditors may have incurred losses due to the incorrect actions of directors, and the courts can order those directors to repay or compensate them accordingly.
If property is involved, the courts could order it to be restored to the company. There is a time limit of six years in which to bring a claim of misfeasance, and this starts from the date the breach of duty took place.
This type of transaction generally involves ‘gifting’ an asset, or selling it at considerably less than its market value. Cases can be brought regarding transaction made up to two years before the date of insolvency if the company was unable to pay its bills at the time, or if the transaction caused the company to become insolvent.
Should a claim be successful, the court can order the restoration of the asset back to the company. Alternatively, if an asset such as property has been sold, they may require the sale proceeds to be repaid, or the amount by which a person benefited to be returned to the liquidator or administrator.
A transaction may be regarded as preferential if it was made at least six months before the date of insolvency (two years in the case of payments made to connected parties), and the company could not pay its debts when the payment was made, or the transaction caused the company’s insolvency.
Unlawful payment of dividends occurs if there are insufficient distributable profits to support the amount being paid. A director who authorises such a payment may become personally liable for the amount distributed, due to the breach of their statutory and common law duties.
Begbies Traynor has vast experience of dealing with contentious insolvency cases, and can offer advice to directors concerned about litigation and potential personal liability. Call one of the team to arrange a same-day confidential meeting.