Claims Against Company Directors
Entrepreneurs are vital to society and our aim is to help directors and business owners survive company failure so that they can continue with other business ventures.
Setting up and running a business is hard work, stressful and risky. As a director you owe various legal duties to the company. The risks that directors take have never been greater, with a concerted effort by the Government, HMRC and Insolvency Practitioners to take directors disqualification proceedings or bring financial claims against directors of failed companies.
We regularly help directors and shareholders of companies in difficulty. This includes advice prior to insolvency and help in defending financial claims. Financial claims can arise from a variety of sources including the Insolvency Practitioner (or “Office Holder”), HMRC, the company’s bank or lenders (in relation to personal guarantees), or from the company’s landlord or suppliers.
Our expert legal team can offer support with all matters relating to claims against company directors, including:
- Working with an Insolvency Practitioner
- Office Holder Claims
- Wrongful Trading and Fraudulent Trading
- Interviews with Insolvency Practitioners and the Insolvency Service
- Letters Before Action (also referred to as Letters Before Claim)
- Preferences and Transactions at an Undervalue
- Breach of Duty and Misfeasance
- Personal Guarantee Claims
- Property Issues and LPA Receivers
- HMRC Claims Against Company Directors
There will often be times when conflict of interest advice will be needed, and we can work alongside the company’s existing advisers to ensure independent legal advice is provided in a constructive manner.
If you are a director of a company that is experiencing financial difficulties or faces the threat of the same, visit one of the links on this page. If you are faced with the threat of disqualification proceedings, further information can be found here: “Directors Disqualification”.
With offices located in London, Norwich and Portsmouth you can obtain immediate expert advice on claims against company directors with ease. To arrange an appointment, please email us at info@isadoregoldman.com.
Why choose Isadore Goldman for help with claims against company directors?
Independently recognised expertise
Our expertise in guiding businesses and individuals through insolvency situations has been confirmed by high-profile client guides including Chambers & Partners and the Legal 500.
Straightforward, realistic legal advice
Claims against company directors and the circumstances surrounding them are often highly complex. We aim to cut to the heart of these matters, giving you confidence that you are fully aware of your position and the options available to you to achieve the most realistic outcome.
A tailored approach to match your goals
When facing a claim in relation to an insolvent business, exactly what you hope to achieve will depend on your situation and priorities. We work closely with you to understand what result you are looking to achieve and then guide you to the best approach to help get you there.
An excellent track record of success
We have a strong history of securing the best possible outcomes for company directors facing insolvency claims. Our team can bring their expertise to bear on your case, giving you the benefit of our years of experience on what works in these challenging situations.
Working with an Insolvency Practitioner
When companies get into difficulties, directors usually turn to the company’s accountant for help. They in turn will usually introduce an Insolvency Practitioner (IP) either from within their own firm or from an independent firm.
Whilst IPs are in a position to give good advice about the available options for the company, their involvement immediately creates a risk for the directors personally. This is because IPs can only advise the company and matters discussed with the IP cannot be kept confidential if the company subsequently goes into administration or liquidation.
IPs are in business themselves so, if the company is destined for formal insolvency, it is not surprising that they will seek to be appointed as the company’s liquidator or administrator. Once appointed, the IP has to carry out the statutory duties to investigate the company’s affairs, report on the conduct of directors to the Insolvency Service and take appropriate recovery proceedings which may put a company director at risk of claims.
It can be an uncomfortable experience for directors to find that their defence to financial claims by the IP has been undermined by information they gave to that same IP when they were advising the company. It is, therefore, a good idea for directors of distressed companies to take independent legal advice on their personal position as early as possible.
Our advice to directors includes advice on the risks that the directors face and may be personally liable for. This is dealt with in a tried and tested manner which is unique to Isadore Goldman.
Office Holder claims
Once a company has gone into administration or liquidation, the IP(or “Office Holder”) will investigate the company's financial position and look into reasons as to why the business has failed. Increasingly the focus of that investigation is to discover whether any financial claims can be made against directors and/or others. We assist directors in their response to an investigation and provide comprehensive strategic advice on any claims that are brought against them.
IPs will typically investigate three types of claims against directors:
- Breaches of duty by the director – including repayment of director’s loan accounts and unlawful dividends
- Clawback of dissipated assets
- Wrongful or fraudulent trading
Repayment of the loan account or unlawful dividends
As a matter of routine, IPs will examine the company’s records to discover what monies have been paid to the directors. It is quite common for OMBs to be operated in an informal manner which can come back to haunt the directors.
Frequently, the directors will have a low salary, dealt with through the company’s PAYE/NIC system, but will withdraw cash on a regular basis which they regard as part of their remuneration package – similar to drawings in a partnership.
Once the company has reached its financial year end, the directors expect the company’s accountant to advise how to account for those payments, typically as drawings/salary, expenses or dividends. In the meantime, the cash withdrawals are usually recorded in a director’s loan account. It can come as a complete shock to directors when the IP demands that the directors repay the loans. Alternatively, if the payments to the directors are recorded as dividends and the company had insufficient profits available for the purpose of paying those dividends, they may also be reclaimed.
Where an IP brings ‘clawback’ claims (referred to below) and the assets or benefit were received by someone else (e.g. a member of the director’s family or a company connected with the director) then the IP will often look to bring a claim against the director for misfeasance or breach of duty (i.e. breach of the director’s duty to the company to act in its best interests), as well as the recipient of the funds.
Clawback of dissipated assets
IPs will also look to see whether the company’s assets have been dissipated in the period prior to liquidation. If assets have been removed from the company without proper payment or other consideration, or if certain creditors (people who are owed money by the company) have been paid in preference to others, then the IP will look to “claw back” those assets for the benefit of the general body of creditors. These claims are often referred to as ‘transaction at an undervalue’ and ‘preference’ claims. If a director has received the assets or the benefit of the preference, he or she will be the primary target of those claims.
Wrongful trading and Fraudulent Trading
If the directors have allowed the company to continue trading, incurring further liabilities to creditors, after it ought to have been realised that the company will fail and go into an insolvency process, then the IP will consider bringing wrongful trading proceedings against the directors. Fraudulent trading occurs if the director carries on the business of the company with the intent to defraud creditors.
Funding these claims
What makes these claims different from other types of commercial claim is that the IP does not normally have to pay their lawyer’s legal costs for bringing the claim. Instead, the lawyer will usually be acting under a ‘CFA’ or ‘Conditional Fee Agreement’ (an agreement which means that they will only get paid (usually with an uplift) if they win the claim and recover monies from the director).
The Government has also changed the law to make it easier for IPs to sell the claims. An IP also has access to a wide range of insurance products to protect themselves from adverse cost orders. This means that a director facing such claims is at a considerable disadvantage, and great pressure is exerted to get the director to settle the claim early.
When faced with any of these claims, it is vital for the director to take immediate advice from an expert who can help the director form a strategy for dealing with the claim. This will involve looking beyond the merits of the claim.
Interviews with Insolvency Practitioners and the Insolvency Service
When a company becomes insolvent, the directors will likely be required to attend for interview with officials such as the IPs and representatives of the Insolvency Service.
Company directors have a duty to cooperate with these officials and to provide truthful information, but it is important to approach these interviews with caution. It is, therefore, always wise to seek specialist legal advice before an interview with an IP or representative of the Insolvency Service.
Our team are happy to advise you on preparing for interview, including helping with completing any preliminary information questionnaires. If required, we can also attend at the interview with you.
Letters Before Claim (also referred to as Letters Before Action)
Before a claim is brought against a company director, they should be notified that there is a potential claim in a formal Letter Before Claim. This letter will set out the details of the potential claim, including what actions it is alleged that the company director or directors took or failed to take.
If you are a company director who has received a Letter Before Claim, you should seek immediate legal advice as there will be a limited timeframe in which to respond. You will need to carefully consider how you wish to respond. How you respond can significantly impact your legal position, so you need to be cautious.
Our experts in claims against company directors can review the Letter Before Claim for you, advise on your legal position and how you may wish to respond. We can assist in drafting the response and any subsequent legal proceedings.
Preferences and Transactions at an Undervalue
Two issues that often arise in insolvency situations are accusations that company directors have wrongly prioritised repaying certain creditors of the company (‘preference’) or that they have sold or transferred assets from the business at less than their true value. In such situations, a director could be required to repay to the business the money that, it is alleged, has been wrongly taken out of the business.
An example of a preference would be where a director lent money to the business in an attempt to keep it going, then repaid themselves shortly before the business become insolvent, ahead of repaying other creditors.
An example of a transaction at an undervalue might be where a director gifted a family member a vehicle bought by the business or sold it to them but charged them significantly below market value for it.
Our team can advise company directors on both preference claims and claims for transactions at an undervalue. We can assist with demonstrating that the actions the director took were justified or, where this is not possible, negotiate with the claimant to secure the most favourable settlement terms.
Breach of Duty and Misfeasance
A company director has a duty to act for the benefit of the company rather than themselves. Sometimes, recognising the difference can be challenging, which can cause difficulties as company directors’ actions will be very closely scrutinised in an insolvency situation.
If an official dealing with a company insolvency believes that a director or directors have acted in their own interests, rather than those of the business, this could give rise to a claim against a director for breach of duty or misfeasance. Such a claim can have very serious consequences, both in terms of financial penalties and the potential for director disqualification.
We are here to advise if you are a company director facing a claim of breach of duty or misfeasance. Our team can ensure you understand the claim against you and where you stand legally, then we can assist with putting together the best possible defence.
Personal Guarantee claims
As a matter of routine, banks and other lenders providing overdraft facilities and loans to owner managed businesses will require directors’ to provide personal guarantees, sometimes backed up by security over the directors’ home by way of a charge. Similarly, if the company is the tenant of business premises, the landlord will routinely require a director’s guarantee to guarantee the payment of rent. Suppliers to the business and lessors of hiring equipment, such as plant, machinery or vehicles, will also frequently request a director’s personal guarantee.
The company’s failure can therefore cause directors huge stress especially if the guarantee is backed by a mortgage over the director’s home.
We have a team dedicated to the defence of personal guarantee proceedings. Please visit Defending Guarantee Proceedings on our Litigation & Disputes page for further information.
Property issues and LPA Receivers
The director might be the tenant, and share occupation with the company, leaving the director without an income stream to pay the rent or commercial rates. Alternatively, the director might be the landlord and the loss of the company as a tenant leaves the director without an income stream and the problem of having to pay the rates.
Where there is a fixed charge over a property, a Law of Property Act Receiver or LPA Receiver may act for the lender to seek to recover the outstanding loan balance.
We have an expert team of specialist property lawyers who have extensive experience advising on insolvency related property issues such as these. As such, we can help you to negotiate with the relevant parties and find the most appropriate way forward to protect your financial and legal position.
HMRC claims against company directors
Increasingly, HMRC are looking to see whether direct claims can be brought by them against company directors (including shadow and de-facto directors) where taxes, national insurance contributions (NICs), and penalties are left unpaid by the company.
HMRC have a dedicated unit that can issue a Personal Liability Notice against a director where the company has not paid NICs and where the evidence shows the company’s failure to pay was the result of neglect or fraud.
HMRC also have the power to claim a ‘Loan Charge’ that directors will be required to pay in respect of the use of certain tax schemes such as Employee Benefit Schemes (EBTs), Employer Financed Retirement Benefit Schemes (EFURBs) and ‘Loan Note’ schemes.
We have a dedicated team experienced in advising directors in relation to such claims by HMRC, which are often complex. Very often, where direct claims are brought by HMRC, directors may also be the subject of concurrent claims by Office Holders – such as for breach of duty. It is therefore critical that directors have advice that takes into account all their potential liabilities.
Factsheets
Contact our expert lawyers today for help with claims against company directors
For transparent, pragmatic advice about dealing with claims against company directors, please speak to our expert lawyers today. You can get in touch at one of our offices in London, Norwich or Portsmouth , or email info@isadoregoldman.com.