One hand in the cookie jar: Fraud and directors’ duties in insolvency
Please note that the questions and answers on this page are for general information only and must not be used as a substitute for legal advice. You should always take legal advice which is tailored to your specific circumstances.
A liquidator is an authorised practitioner or official receiver who is appointed when a company goes into liquidation and oversees the liquidation of a company. The liquidator has a wide range of powers which enables the liquidator to
An administrator is typically appointed to rescue a company so that the company can continue trading. An administrator is a qualified insolvency practitioner and has powers to do anything necessary or expedient for the management of the affairs, business and property of the company to avoid liquidation.
The difference between a liquidator and an administrator is the nature of their appointment. A liquidator is appointed once the company is insolvent and to carry out the process of selling all of the company’s assets before dissolving the company, whereas an administrator is appointed to help the company repay its’ debts to avoid insolvency.
There are two routes in which a company can be put into administration: by a court order or by certain parties lodging a series of prescribed documents (also known as the out-of-court route).
The first route is by an application to the court for an administration order. The application can be made by the company, the company’s directors or by a creditor of the company. The court will consider the application and grant an administration order and an administrator will be appointed.
The second route is the ‘out-of-court’ route in which a company can be put into administration by filing a notice of appointment. This procedure can be commenced by either the company, the company’s directors or by a party holding a floating charge against the company.
Generally, a company cannot go into administration unless it is insolvent, but this requirement does not applyif the administration is commenced by a party holding a floating charge against the company. The floating charge holder would only need to show that the company is in default of the floating charge.
A receiver is usually appointed by a floating charge holder such as a bank or other lender who holds a charge against a company. The receiver is appointed to ‘receive’ any of the assets of the company that can be liquidated and paid to the lender.
A receiver can only be appointed by a holder of a qualifying floating charge and the main duty of care is to the secured lender.
If the directors of a company allow the company to continue its operations when they knew (our ought to have concluded) that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, then the directors may be required to make a personal contribution to the company’s assets. This decision is made by the court on the application of the liquidator or administrator. Only directors can be liable for wrongful trading.
Fraudulent trading must include dishonesty. There must be either an intention to defraud creditors or the business of the company must be being carried on for some other fraudulent purpose. The liquidator or administrator can seek a court declaration that anyone who was knowingly party to carrying on the business with an intent to defraud makes a personal contribution to the company’s assets. The offence of fraudulent trading extends to anyone who was knowingly party to the fraudulent trading and it is not limited to directors.
There are additional fraud and misconduct offences under the Insolvency Act 1986, including false representations to creditors and misconduct in the course of winding up.
When a company gifts or sells an asset below its true value and subsequently goes into liquidation or administration. This can include circumstances where a director gifts a company asset to a family member or an independent third party, or where the company sells an asset significantly below its market value.
A court can argue that any transaction made at an undervalue in the 2 years before a company’s insolvency/liquidation is void if the company was (or became, as a result of the transaction) unable to pay its debts as they fell due. This order is made on the application of the liquidator or administrator. A trustee in bankruptcy has similar powers if an individual gifts or disposes of an asset for significantly less than it was worth in the 5 years before his or her bankruptcy.
We know that pressure on a company’s finances can cause a company to take steps to improve its short term position, including selling assets cheaply. However, these actions may be reviewable if the company later goes into liquidation or administration. If in doubt, seek legal advice.
Directors should seek external advice as soon as they are concerned about the financial position of the company, including advice on their specific legal duties. Directors of publicly listed companies must comply with additional stringent duties in order to avoid misleading the market. Remember that the directors of a company on the verge of insolvency owe a duty to the company to act in the best interest of its creditors, which must take precedence.
Ensure that the external advice is sought immediately. A director is at risk of liability for wrongful trading at any time after they knew or ought to have known that the company could not avoid insolvent liquidation or insolvent administration.
As a matter of good practice, directors should always ensure that regular board meetings are called and the directors’ decision making is recorded carefully, and that the financial information for the company is up to date.
This will depend on two factors: (1) the terms of the security and (2) the type of insolvency the company is in. It is important to note that a company can be “insolvent” (i.e. unable to pay its debts as they fall due) and still be trading. In those circumstances whether security can be enforced will depend on the contractual terms of the security.
However, if a company has entered an insolvency process (i.e. administration, liquidation, Company Voluntary Arrangement), the question of whether security can be enforced will also depend on the type of insolvency. For example, when a company is in administration, security cannot be enforced without leave of the administrator or the court.When a company and its creditors approve a Company Voluntary Arrangement, the right to enforce security (which again will be determined by the contractual terms) will not be affected unless the secured creditor agrees.
It is worth noting that although you will likely need the court’s permission to enforce against a company in insolvency, as a secured creditor you are in a better position than unsecured creditors. Your claims for recovery come second only to the officeholder’s fees so your security isn’t rendered worthless because there is a moratorium in place.
We can help to advise on the enforceability of security against insolvent companies.
It will be very difficult to stop someone making themselves bankrupt. Applying for bankruptcy is an independent process in which a person applies to the Insolvency Service. If there are issues about the bankrupt’s conduct, for example if they have hidden assets, obtained credit knowing they could not repay it, or favoured family members over other creditors, those issues can be complained about to the Insolvency Service or the Trustee in Bankruptcy.
If you are a creditor you may be able to appoint a new Trustee in Bankruptcy who will investigate the potential misconduct. Further, if you are not a secured creditor but have a claim against a person who has made themselves bankrupt, you may still be able to bring that claim against the bankrupt’s estate. We can advise on your options should someone who owes you money declare themselves bankrupt.
It will be very difficult to stop a company going into administration or liquidation if a company has become insolvent.
In particular, administration can take place either when an application to court for an administration order is made or the “out-of-court route” is used (see question 2 titled “How do I put a company into administration”). It will be difficult to stop either process if the relevant parties (i.e. the directors, secured lenders or shareholders, etc.) are in agreement.
Whilst it will be very difficult to stop a company going into administration, it is possible to use a court procedure to later set aside the administration order or stop the on-going administration. This can happen, for example, if the directors of the company haven’t followed due process under the Companies Act. For example, if there is a qualifying floating charge holder and the directors failed to give them the requisite notice then the whole administration appointment could later be invalidated. Or it may be found that the directors had no authority to appoint the administrator. These are some examples which can invalidate the appointment and which we can advise on.
Liquidation is a process that follows once a winding up order has been made by the court. Whilst it will be very difficult to stop a company going into liquidation, it is possible to stop a liquidation once it has commenced and return a company back to the control of its directors, or to return a company back into the control of the liquidator once a company has been liquidated and struck off the register. We can advise on your rights before and during administration/liquidation and dealing with companies that have been struck off.
Provisional liquidation takes place where there is a real risk that, between the presentation of the winding-up petition and the making of a winding-up order by the court, the company's affairs will not be properly conducted or its assets will be dissipated.
In general, a provisional liquidator does not realise the assets of the company or take any steps to wind it up; instead concentrating on the preservation of its assets. The provisional liquidator may investigate whether the company’s business has been wrongfully conducted or whether any of the company’s property has been misappropriated.
The main purpose of appointing a provisional liquidator is to preserve the company's assets and avoid the company's creditors suffering loss. The process will preserve the company's assets until the company is wound-up by the court, the winding-up petition is dismissed, or the court makes an order discharging the provisional liquidation.
Bankruptcy is a serious issue for a director of a company. It is an offence for a person to act as a director or have any involvement in the business until the bankruptcy period has ended.
If a director has been made bankrupt they must tell the other directors and resign immediately. The bankrupt co-director will need to hand over any responsibilities to their co-directors as they must not have any involvement in running the business throughout the bankruptcy period. The resignation should be registered at Companies House. It is advisable to check the company’s Articles of Association to determine the minimum number of directors and establish whether another director needs to be appointed. The bankrupt director can be reappointed as a director after the bankruptcy has been discharged.
If the bankrupt director refuses to resign or step away from the business you should seek legal advice.
It depends. If you paid a price which reflects the market value for the house then the likelihood is that you will be able to keep it and the transaction will not be able to be challenged. If, however, you received the house as a gift, or it was transferred to you at an undervalue, then the transaction could be challenged by the individual’s trustee in bankruptcy, as a transaction at an undervalue. As the transfer of the property has occurred shortly before the bankruptcy none of the time limits for such a claim are relevant. The transaction can be challenged if it occurred at any time within 5 years before the bankruptcy order was made. The solvency of the individual at the time of the transfer will not be an issue and nor will your relationship with the person who has declared themselves bankrupt. If the transfer had been made more than two years before the bankruptcy to be challenged the individual would have to have been insolvent at the time or would have to have been made insolvent by the transaction unless the bankrupt was a connected party or associate. In this case insolvency is presumed and would be for you to show that the bankrupt was not insolvent at the time of the transfer.
If the transfer was more than 5 years before a bankruptcy it could still be challenged if the intention of the transfer was put the asset out of the reach of creditors.
The very simple answer to this question is no: one person’s debt cannot automatically be passed to their spouse, even if the debtor is bankrupt. However, that isn’t necessarily the end of the story. If it appears that the assets held by the spouse have recently been acquired or have been transferred by the debtor it may be possible to challenge the transfer. That is something within the power of the trustee in bankruptcy and will very much depend on the facts of the case and the timings of transfers or acquisition of assets. We can help to advise or investigate such transactions.
Different insolvency events have a different effect.
Administration triggers an automatic moratorium or stay of legal proceedings against the company. You cannot start or continue any claim against a company in administration or its property or take any steps to enforce security over the company’s property unless you have permission from the administrator or the court. The moratorium lasts until the end of the administration.
You can pursue your claim if the administrator agrees or if the court grants leave. You may also be able to pursue your claim once the company has come out of administration and enters liquidation or begins trading again. Make sure you keep track of the limitation period of your claim.
If the company is in provisional liquidation or compulsory liquidation then it is prohibited to commence or proceed with any action against the company or its property without the court’s permission. If the company is in members’ voluntary liquidation or creditors’ voluntary liquidation then there is no automatic stay, but the court may make an order that specific claims are stayed.
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