DIRECTOR DUTIES

When a director has reason to believe that a business is insolvent, a director must act quickly and seek advice to either (a) put in place a strategy for turnaround, or (b) to enter into a formal insolvency process. If they fail to take urgent advice, it could lead to personal claims made against them. Office holders’ (usually insolvency practitioners) are required under the Statement of Insolvency Practice 2 to investigate the circumstances leading to the insolvency which can result in claims against the directors under the Insolvency Act 1986. There are several actions that can be made by Insolvency Practitioners against individuals following formal insolvency.

  • Director Loan Account (“DLA”)

    Where there is an overdrawn DLA, a liquidator and administrator will take steps to reconcile and recover the DLA. An overdrawn DLA is a debt due to a company and is repayable on demand. In a lot of cases, a DLA is formed when directors/shareholders withdraw dividends as they look to make use of tax advantages, however, there may not be sufficient distributable reserves from which the dividends are drawn.

  • Misfeasance

    A liquidator can make a claim against a director if during the course of the winding up of thecompany, he/she has misapplied or retained, or become accountable for, any money or otherproperty of the company, or been guilty of any misfeasance or breach of any fiduciary or otherduty in relation to the company.

  • Wrongful Trading

    A liquidator or administrator can make a claim against a director if it can be shown that some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

  • Transactions at an Under Value

    A liquidator or administrator can make a claim against any person where (a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or (b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.

  • Preference Payments

    A liquidator or administrator can make a claim against any person where (a) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

  • Transactions Defrauding Creditors

    This action is not limited to liquidators or administrators, as any individual/entity can claim this if they can show that they have been prejudiced (with permission of the court). Relevant individuals/entities can make a claim to set aside a certain transaction if that transaction was entered into for the purpose of (a) putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.