This is a guest blog post from Steven Mather Solicitor – The Right Lawyer for You and Your Business™
Firstly, thanks to Gary and Jamie and everyone at PBC for inviting me to guest blog on their website. I’ve worked with them a number of times and I’m impressed by how well they know their stuff, but also the commercial and pragmatic approach they take.
I’m a commercial solicitor based in Leicester and over the last 10+ years I’ve acted on both sides of insolvency disputes – acting for insolvency practitioners like PBC as well as acting for Directors personally trying to defend the claims.
When I talk about insolvency claims, the main ones that I see frequently are:
- Antecedent transactions
- Directors Loan account recovery
Misfeasance claims are quite rare, but in them an Insolvency Practitioner (IP) will seek to recover funds from directors personally where they have committed some serious misfeasance which has harmed or damaged the business.
One thing I’ve realised in all the cases I’ve dealt with is that in many small businesses, the director is the shareholder and so they think they can do what they please when they please. I mean, that’s a benefit of being self-employed, right?! Anyway, what most directors do not realise is that the Company is its own living breathing (almost) legal entity and that as director they have duties (called ‘fiduciary’ duties) many of which are also set down in statute, which they owe to the Company. When a company goes into liquidation, it is the IP who then make the decisions on behalf of the Company, and so if the Company has suffered loss, the Company doesn’t care that you, the director, was “a good mate and we go back years”. The company is entitled to take action against the director to recover its loss.
Unlawful and Wrongful Trading are two other types of claims that can be brought against Directors and is aimed at pinning liability on directors where they ought to have known the business was insolvent.
Antecedent Transactions are very common. These claims seek the reversal of payments made/received by the Company prior to the liquidation which were either:
- At an undervalue – e.g. selling a Lorry for £1000 when it was worth £65,000
- A Preference – paying a mate or director before making payments to other creditors.
Both types of claims are quite easy to succeed on acting for IP’s. All that needs to be showed is that the payments were made/received and there was a detriment to the Company/Creditors.
If you’re a director, knowing your back is against the wall, your best bet is not to try to bail out but speak to experts like PBC to get solid advice on the best steps for the Company.
Directors Loan Account claims
Most businesses operate directors loan accounts. If the director has to put some money in to support the business, their DLA will be in credit and that’s not a problem.
However, they are also used to extract money out of a business in a way which is not payroll/salary or dividends. Sometimes, it might even be unwittingly used, as accountants allocate certain expenditure of the business to the director’s loan account. Most of the time though, having an overdrawn loan account is because the directors kept taking money out of the business when there was not enough profit properly to declare a dividend at the end of the year.
The result is an overdrawn loan account. If you enter liquidation with an overdrawn loan account, you can rest assured that the IP will be asking you to repay it.
So what, as a director, should you do if you are faced with a claim in relation to your directors’ loan account? There’s actually very little you can do to dispute it. As they generally feature in the company’s accounts, which the directors sign, the Courts will say that “ignorance” of how its made up is not a defence. You might be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in your carrying out your role as director, but that requires a more forensic analysis of the account entries.
In short, your best option is to speak frankly with the IP and seek to reach an agreement on a repayment figure and potential repayment plan. Most IP’s are savvy enough to realise that many directors are broke by the time their company goes into liquidation, so doing what you can financially will usually make them go away.
Insolvency Claims are complex though and my best advice would be for any director facing any type of claim to speak to an independent and experienced insolvency litigation solicitor.
About the Author
Steven Mather is a Commercial & Business Solicitor based in Leicester. He has helped thousands of clients with legal issues worth millions of pounds. He is experienced, approachable and recommended. You can check out his website at https://www.stevenmather.co.uk