When a company is facing potential insolvency there is a temptation for directors’ to enter into certain transactions they would not ordinarily do. In the event of formal insolvency some of these transaction may be challenged by the appointed insolvency practitioner (the office holder), who may seek to recover funds for the company’s creditors. Below is a summary of the types of matters which may be considered:
- Transaction at an undervalue. If the directors’ have allowed company assets to be given away for substantially less than their market value, then the office holder may seek to either recover the asset or seek compensation from the directors’ for breach of duty.
- Preference. If the directors’ have paid one creditor in priority to others then the office holder may seek to either recover the money paid or seek compensation from the directors’ for breach of duty.
- Wrongful trading. If the directors’ have allowed the company to continue to trade whilst they knew the company was insolvent, then the office holder may seek a contribution from the directors’ to the company’s assets.
- Fraudulent trading. If the directors’ have intended to defraud creditors, then the office holder may seek a contribution from the directors’ to the company’s assets.
- Restriction on re-use of company names. Directors’ are joint and severally liable for the debts of the company if they have acted in breach of this rule.
- Unlawful dividend. Directors are often ‘remunerated’ by the payment of dividends. In insolvency situations it is common for the company not to have sufficient distributable reserves to pay such dividends.
- Overdrawn directors’ loan accounts. The office holder will seek recovery of any overdrawn loan account.
- Compensation order. If you are disqualified from acting as a director the Insolvency Service may apply to court for a compensation order.
- Personal guarantees. Directors’ are liable for any guarantees given and therefore temptation exists to ensure such debts are repaid by the company, this could be considered a preference.
If your company is facing potential insolvency then it is essential that professional advice is sought in order to mitigate any exposure to personal liability.
Alternatively, you may be facing similar claims from an office holder already in place. We may be able to assist in negotiations with the appointed office holder to reduce or extinguish any potential liability.