When a company enters a formal insolvency process, liquidation or administration, the appointed liquidator or the Official Receiver will investigate the reasons as to why the company has failed. Part of that investigation will include a review of the transactions that were entered into by the company before the commencement of the insolvency and the Insolvency Act 1986 contains provisions allowing a liquidator to challenge those transactions. The liquidator will also investigate the directors’ conduct leading up to the demise of the company. Some of the claims that can be brought against directors are:
Transactions at Undervalue
A transaction at an undervalue, often abbreviated to a TUV, occurs when the company transferred an asset to another party for no consideration or for consideration less than the market value of that asset. The criteria for such a transaction to be classed as a TUV is:
- The company must have been insolvent at the time of the transaction or become insolvent as a result of it.
- The transaction must have taken place within the two-year period before the onset of the insolvency.
A Preference Payment is, as indicated by its name, a payment to a creditor placing it in a better position than it would otherwise have been on the company’s insolvency if all creditors had been treated equally; in other words, that creditor is being favoured by the company. Upon liquidation of the company, the liquidator can bring a claim against the favoured creditor for a refund of any monies received. The criteria for such a claim is:
- The company must have desired to prefer this particular creditor. However, note that desire can be presumed where the transaction was with a ‘connected person’.
- As with TUV’s, the company must have been insolvent at the time of the transaction or become insolvent as a result.
Wrongful trading was a hot topic during the Covid-19 pandemic but the legislation was amended to protect directors from falling foul of continuing to trade whilst insolvent particularly as the support for businesses was available to assist companies that were struggling. However, with restrictions being lifted, wrongful trading is now an offence that can be committed by directors if they continue to trade a company in the knowledge that that company could not imminently avoid insolvency. It is not just limited to directors’ actual knowledge; it extends to when the directors ought to have known that an insolvent liquidation was unavoidable. If a liquidator can establish that wrongful trading has occurred, then directors can find themselves facing a claim brought by the liquidator. If there is evidence of such conduct, then those directors can be found personally liable for the losses incurred by the company from the date they ought to have known the company could not avoid an insolvent liquidation up to the date of insolvency. In some instances, these losses can be significant, and directors should take care to review the company’s financial position when there is a question mark over its solvency. They should also look to take professional advice if they have concerns as this can form part of their defence to a claim brought by the liquidator.
Transactions Defrauding Creditors
As indicated in the name, transactions defrauding creditors is a serious offence and extends to bankruptcies as well as companies. The provisions in the Insolvency Act 1986 are similar to those of a TUV with the significant exception being that there is no time limit attached to these transactions and it must be proven that the directors intended to place assets out of reach of the creditors. This test is a subjective one and the Court must be satisfied that the transaction was intended to affect the creditors detrimentally.
The aim of the provision is to prevent companies from disposing of assets to the detriment of its creditors. If successful, the transaction will be void and the assets returned to the company.
The Insolvency and Debt Recovery Team at Ellisons are here to assist directors in defending any claims brought against them. We can provide practical advice as well as negotiate a settlement with the liquidator.