When facing a company that has entered insolvency, a commonly held view is that businesses who have supplied that company with goods or services on credit (unsecured creditors) face a total loss situation, unless the company has any assets remaining. This is because the protections afforded by ‘limited company’ status mean that the position of the company’s directors cannot be factored in when assessing the options available.
This is not necessarily correct. Under the UK’s Insolvency Act 1986, there are means by which company directors can be held personally liable for the prior activities of their companies. These include:
- Duty to act in the best interests of creditors: once a company is nearing insolvency, the directors have a duty to minimise losses to creditors, with their obligations shifting from success of the company to the best interests of creditors.
- Wrongful trading: where the directors have allowed the company to continue trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency.
- Fraudulent trading: where a director engages in business with the intent to defraud creditors or for any fraudulent purpose.
- Misfeasance: where a director misappropriated or retained monies or property of the company dishonestly or fraudulently.
- Personal guarantees: when a director has given personal guarantees for the company’s debts, they can be held personally liable for those debts.
Upon appointment, an insolvency practitioner (IP) is obliged to carry out a review of company’s trading activities prior to insolvency and assess whether any actions that could be taken for the benefit of creditors and provide a report to the Insolvency Service on the conduct of directors. The IP must also publish a comprehensive report outlining the facts regarding the corporate insolvency and the expected outcome for creditors.
Therefore, just because a company has entered into insolvency, all may not be lost and the directors may be compelled to pay compensation or may be disqualified from being directors in future. This accountability is crucial in maintaining corporate governance standards and protecting the interests of creditors.
Every corporate insolvency situation is different and needs to be assessed on its own facts. Whilst there is no certainty or guarantee about a particular outcome, in a corporate insolvency it is important to engage with the appointed insolvency practitioner at the earliest opportunity. A proof of debt must be filed to benefit from any future distributions, and any concerns or issues about director behaviour or actions can be raised too. Time is of the essence and corporate insolvency processes can be concluded in a matter of weeks.
Benefits of partnering with us
Our clients are businesses who have supplied goods or services to other businesses on credit, but may still be awaiting payment. Often the company who has been supplied something then enters a corporate insolvency process, with an insolvency practitioner (IP) appointed, meaning our clients may be unsecured creditors who need our help.
Our clients receive a comprehensive advisory and support service, often in scenarios where they are creditors in another company’s corporate insolvency. We are not an IP firm but instead we work independently on behalf of our clients in dealing with the relevant company directors and IP firms to ensure they are aware of our client’s claim in the insolvency and achieve the best possible outcome. We have detailed knowledge and understanding of the corporate insolvency process in the UK, including the jargon used and the main players involved.
Every situation is different and needs to be assessed on its facts. A sample of the typical services we provide to our clients includes:
- Credit checking: information gathering regarding overdue accounts, dates involved in corporate insolvency and company directors
- Company engagement: writing to company directors to confirm our involvement and the fact we are reviewing the case and their conduct.
- Information gathering: request and obtain completed proof of debt and letter of authority from the client.
- Submissions: submit proof of debt, letter of authority and questionnaire to the appointed IP firm. The questionnaire gathers additional information relating to their findings to date regarding the prior activities of company directors.
- IP engagement: gather further information on the insolvency situation, confirm receipt of the proof of debt or whatever else is relevant to the case.
- Raise queries: submit a report to the IP which is continuously updated with new queries specific to the case and the directors.
- Case review: review IP responses and continually review the case including any new companies associated with the directors and anything else relevant to the case.
- Engage with Government: send information direct to HM Department for Business & Trade regarding any evidence arising which constitutes wrongful and or fraudulent trading for them to review.
- Monitor: continually monitor outcome of corporate insolvency including communications and other documentation issued by the IP regarding outcomes such as dividends.
