Claims by administrators or liquidators refer to the legal process by which individuals or entities appointed to manage the affairs of an insolvent company seek to recover debts owed to the company.
When a company enters administration or goes into liquidation, the administrator or liquidator assumes the responsibility of identifying and assessing the company’s assets and liabilities.
As part of this process, they scrutinize outstanding debts and claims against the company, which may include unpaid invoices, loans, or contractual obligations.
The administrators or liquidators then take the necessary steps to pursue these claims on behalf of the company, aiming to maximize the recovery of funds and distribute them among the creditors according to a prescribed hierarchy.
This mechanism plays a crucial role in insolvency proceedings, ensuring a fair and orderly resolution for all parties involved
Common types of claims made by liquidators or administrators
Claims made by liquidators or administrators can encompass a wide range of issues and legal actions. Here are some common types of claims that they may pursue:
Unpaid or overdrawn directors loan account
Directors loans, whether authorized or not, carry significant implications when a company faces insolvency. It is crucial to consider the potential consequences of drawing loans as a director and declaring dividends that are offset at year-end.
This seemingly advantageous strategy can turn disastrous if insolvency occurs before the dividend declaration or if the declared dividends are subsequently deemed void.
Demands for repayment of director’s loans are frequently encountered by liquidators, but the complexities involved in such demands should not be underestimated.
These demands are susceptible to risks related to evidence, limitation, set-off, and various other factors that can undermine the defenses, including the consideration of any unpaid earnings.
Void dividends
The payment of dividends in a company is contingent upon the availability of distributable reserves, typically associated with the company’s profit and loss reserve. It is essential to recognize that even if your company has recorded a profit in the current year, losses from previous years may render it impracticable to declare a dividend.
Moreover, there exist several additional prerequisites for a dividend to be lawfully approved and disbursed. Our exceptional team, led by the accomplished lawyer and accountant Stephen Downie, possesses the expertise and knowledge required to skillfully defend against potential claims in this regard.
Directors and shareholders can take advantage of various defenses, such as relying on the advice received, the thorough review of relevant documents, and considering the impact of repaying an earlier dividend on subsequent ones. With our competent guidance, we can navigate these complex matters effectively and safeguard your interests.
Wrongful trading
In cases where a company enters into liquidation, directors may face claims demanding their contribution to the company’s assets if it can be established that they knew or should have known, as reasonably diligent individuals, that the company had no realistic chance of avoiding insolvency.
However, directors can assert a defense against wrongful trading claims by demonstrating that they have taken every reasonable measure to minimize potential losses for the company’s creditors. This defense recognizes the efforts made by directors to navigate difficult circumstances and mitigate harm to those involved.
By proactively acting in the best interests of the company and its stakeholders, directors can strengthen their defense against allegations of wrongful trading, showcasing their commitment to minimizing the impact of insolvency on creditors.
Fraudulent trading
Fraudulent trading represents a serious criminal offense and carries more severe consequences compared to wrongful trading. Proving fraudulent trading is considerably challenging due to the higher burden of criminal proof required. The key distinction lies in the director’s intent. Fraudulent trading occurs when any business activity of the company is conducted with the intention to deceive the company’s creditors, other individuals’ creditors, or for any fraudulent purpose.
Directors found guilty of fraudulent trading may be held accountable to contribute to the company’s assets, typically based on the losses incurred as a result of the fraudulent activities. It is important to note that defenses exist for fraudulent trading claims, and our team can provide valuable assistance in navigating these complexities and developing a robust defense strategy tailored to your specific circumstances.
Breach of fiduciary duties and misfeasance claims
Directors have a legal obligation to fulfill their fiduciary duties to the company, as outlined in the Companies Act 2006. Failure to act in accordance with these duties can result in a breach of fiduciary duty, potentially leading to a claim for compensation by the company or its liquidators to recover the resulting losses. You can find detailed information about the consequences of breaching fiduciary duties in this resource.
The primary fiduciary duties encompass several key responsibilities, including acting within the powers granted by the company’s Memorandum and Articles of Association, promoting the success of the company, exercising independent judgment, employing reasonable care, skill, and diligence, avoiding conflicts of interest, abstaining from accepting benefits from third parties, and disclosing interests in proposed transactions or arrangements.
It is important to note that directors have access to various defenses when faced with claims of breaching fiduciary duties. Our team has a successful track record in assisting directors to defend against such cases, leveraging these available defenses to protect their interests.
Antecedent transactions
Antecedent transactions claims can include any of the following:
1. Preference claims
Preference claims arise when a creditor of the company is paid ahead of other creditors or receives preferential treatment compared to unsecured creditors when the company enters liquidation. In such cases, a claim is made against the recipient of the preferential payment, seeking the recovery of the amount paid.
Successfully pursuing a preference claim involves navigating a complex web of statutory and common law requirements. Without meeting these hurdles, the preference claim may not succeed. However, if the claim proves successful, the recipient of the preferential payment may be required to repay the amount received, along with interest and associated costs.
It is important to approach preference claims with a thorough understanding of the legal landscape and engage competent legal professionals who can adeptly navigate these complexities. Our team has the expertise to analyze the intricacies of preference claims and formulate effective strategies to protect your interests.
2. Transactions at an undervalue
In situations where an asset of the company is transferred or sold for less than its market value or even without any payment at all prior to insolvency, the resulting loss to the company and its creditors can be recoverable, much like a preference claim.
Similar to preference claims, there exist numerous statutory requirements that must be met for a claim regarding a transaction at an undervalue to be successful. These requirements include crucial considerations such as the time period in question, the status of the parties involved, and the requirement of good faith.
However, if a claim for an undervalued transaction proves successful, the company can seek to recover the losses suffered, including interest and legal costs.
Navigating the complexities surrounding undervalued transactions requires comprehensive knowledge of the relevant laws and regulations
3. Transaction defrauding creditors
This claim is frequently rooted in transactions aimed at circumventing future and potential creditors, and it is not bound by any time constraints
4. Extortionate credit transactions
In certain situations, this scenario can occur when a company enters into a credit transaction with terms that are deemed unfair or unfavorable, such as exorbitant interest payments that would be considered unjust. Additionally, if the company was in a vulnerable position at the time of the transaction, these claims may arise.
Challenges may arise for liquidators or administrators when pursuing these claims, as they can be complex to navigate.
5. Avoidance of floating charges
in certain circumstances, a liquidator or administrator has the authority to challenge the validity of a floating charge and seek its nullification. This typically occurs when the purpose of the charge was to secure old debts and it was granted within specific time-periods preceding the company’s insolvency. Furthermore, the company must have been insolvent at the time the charge was granted or became insolvent as a direct consequence of it.
By undertaking this action, the liquidator or administrator aims to protect the interests of creditors and ensure a fair distribution of the company’s assets. Challenging the validity of a floating charge requires a thorough understanding of the relevant timeframes and insolvency regulations.
6. Liability of past directors
In the event of a company being wound up, a significant issue arises when the company uses its capital to redeem or purchase its own shares, but lacks adequate assets to repay its debts, liabilities, and winding-up expenses. In such cases, the director responsible for authorizing the transaction may be held personally liable to contribute to the company’s assets, equivalent to the value of the payment made by the company.
This circumstance places emphasis on the importance of prudent decision-making by directors regarding capital usage and the potential consequences that can arise if such transactions jeopardize the company’s ability to fulfill its financial obligations.
7. Void transactions
Upon the commencement of winding up, any transfer or disposal of a company’s property becomes void. In such cases, the liquidator has the authority to pursue the recipient for the repayment of the transferred property. This includes directors who may have received assets or money from the company during the liquidation process.
However, under specific circumstances where it can be demonstrated that the disposition was beneficial and did not harm the interests of other unsecured creditors, it may be possible to seek retrospective court sanction. This process involves obtaining approval from the court, which allows for the validation of the disposition even if it occurred after the commencement of winding up.
Frequently asked questions
Claims that liquidators and administrators can bring include Breaches of duty by the director – including repayment of director's loan accounts and unlawful dividends. Clawback of dissipated assets. Wrongful or fraudulent trading.
Claims that liquidators have against directors include: if they were involved in insolvent trading, uncommercial transactions, or have loans due and owing to the company. The recovery proceedings against the directors can result in personal bankruptcy. What claims can a liquidator bring?
What claims do liquidators have against directors?
Conclusion
In conclusion, claims brought by administrators or liquidators can have significant implications for directors and individuals involved in insolvent companies. These claims encompass various aspects, such as directors’ loans, dividend declarations, wrongful trading, fraudulent trading, breach of fiduciary duties, antecedent transactions, and more. Navigating the complexities of these claims requires expert legal guidance to ensure the best possible defense and protection of your interests.
If you find yourself facing a claim by a liquidator or administrator, it is crucial to take proactive steps to protect your rights. We understand the intricacies of insolvency law and have a proven track record of successfully defending directors and individuals against such claims. Our experienced team, led by legal and financial professionals, can provide tailored advice and develop robust defense strategies.
To get started, we encourage you to complete our online enquiry form. By doing so, you will initiate the process of seeking the assistance and representation you need. Our dedicated team is ready to review your case, provide expert guidance, and fight for your rights. Don’t hesitate to take action now and safeguard your interests in the face of claims brought by liquidators or administrators.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.