What claims can an administrator or liquidator bring against a director of an insolvent company? 

1. Misfeasance

What is misfeasance?

Misfeasance relates to the mishandling of company funds, property or assets and/or a director’s breach of the general duties. It is often brought alongside other claims and applies to a range of ‘wrongdoings’ on the part of a director.

What are the consequences?

A director could be ordered to repay money to the company or restore property and assets. A court can also order the disqualification of the director. However, if a director has acted honestly and reasonably, then they may have a defence to the claim.

2. Transactions at an undervalue

What is a transaction at an undervalue?

This is a claim where the company has disposed of an asset for no value, or at a significant undervalue, which means that the person who purchased the asset has the benefit of it to the disadvantage of the creditors. The transaction must have been made in the two years preceding the insolvency. For the claim to succeed, the company must also have been unable to pay its debts at the time of the transaction or as a result of the transaction.

What are the consequences?

A successful claim will allow the administrator or liquidator to reverse the transaction and directors can face both financial and professional penalties e.g. disqualification, personal liability for debts, and fines.

What can a director do to avoid a transaction at an undervalue?

Directors should obtain consent and approval from all directors of the company prior to any sale of a company asset and obtain professional valuations.

3. Preference payments

What are preference payments?

Preference payments are made to certain creditors in the six months before liquidation (for an unconnected person), but in the last two years for a connected person, in favour of others.

What are the consequences?

A liquidator can recover these payments and directors can face personal liability for the debts. The liquidator also has the power to ask the court to set aside the transactions and to recall preference payments from the creditors who benefited from them.

4. Transactions defrauding creditors

What are transactions defrauding creditors?

These are transactions at an undervalue entered in to deliberately to put the assets out of reach of creditors.

What are the consequences?

The Court has wide powers and can restore the position of the company to what it would have been if the transaction had not been entered in to and order a director to pay compensation.

5. Outstanding director’s loan accounts/ drawings and unlawful dividends

What happens if there are outstanding director loan accounts or unlawful dividends have been paid?

If there are residual amounts on the company balance sheets showing as directors’ loans and there aren’t sufficient profits in the business to repay those loans, the loan account cannot be reduced and the director will be personally liable for paying back the drawings to a liquidator. If unlawful dividends are paid the director will be liable to repay them.

6. Insolvent trading

What is insolvent trading?

This is when a company incurs debts whilst facing insolvency.

Types of insolvent trading include:

• Wrongful trading – some examples include: trading while knowingly insolvent, taking credit when unable to pay it back, taking deposits for items that can’t be supplied.
  • A director can be ordered by the court to contribute towards the available assets for a company’s creditors, if the Court finds that the director knew or should have known that the company was insolvent or likely to be insolvent, but continued to trade anyway.
• Fraudulent trading – Similar to wrongful trading, but the director must have acted dishonestly i.e., the continued trading was done with the intent of defrauding the company’s creditors.
  • The Court can order the director to pay compensation and also a penalty sum. It’s a criminal and civil offence and can carry a long prison sentence.

What can be done to avoid insolvent trading?

Regularly review the company’s financial position and document any decision to continue trading. Ensure management accounts are kept up to date and ensure that professional advice is sought as soon as the question over possible insolvency arises.

If you think you could be facing one of the above claims or want to find out more about the ways in which you can avoid or protect yourself from these different types of claims, please contact a member of our insolvency team on 029 2082 9100.