When a company goes into liquidation or administration, a liquidator or administrator can bring a civil recovery claim against the directors of a defunct company, and other third parties.
Civil Recovery Claims
In cases of company administration or liquidation, the insolvency practitioner (IP) appointed to deal with the failed business is responsible for investigating the affairs of the company. This duty extends to investigating the conduct of the directors, and identifying claims that can result in the increase of the company assets.
In general, IPs will be interested in claims, such as:
- Overdrawn director’s loan accounts
- Unlawful dividends
- Transactions at undervalue (TUV)
- Preference payments
- Misfeasance, or a breach of a fiduciary or other duty owed to the company
- Transactions defrauding creditors
- Wrongful and fraudulent trading
Out of these claims, some of the more common claims IPs can bring against directors even without the aid of assets recovery agencies, include:
Transactions at Undervalue
TUVs are either a gift or transaction from which the company receives nothing in return or significantly less than the value of the item provided. In such cases, IPs can file for an order putting the company in the position when the TUV didn’t occur. To bring a claim, IPs must prove the TUV occurred within the two years after the company entered liquidation or administration.
IPs must also prove that the company was unable to pay its debts at the time the TUV occurred, or became unable as a result, even though the transaction was with a “connected person” at that time. Unless the company or directors can prove the contrary, the law presumes these conditions are present, however. For instance, if the company can prove that it entered into the transaction in good faith, the court can’t make an order to reverse the transaction.
If before going into liquidation or administration, the company performs an act that puts one or more of its creditors in a better position, it can constitute a preference payment. To bring a claim, IPs must prove this preference payment occurred within the six months after the company entered liquidation or administration. Unless the transaction was with a connected person, the court can extend this period up to two years. IPs must also prove that the company was unable to pay its debts at the time of the preference payment, or became unable as a result.
When a company goes into liquidation or administration, its directors can face civil recovery claims based on their actions. To learn more about these claims, visit this website.