When an Insolvency Practitioner is appointed in a liquidation or bankruptcy, he is given wide powers to look back into the past and upset 'antecedent transactions', the aim being to try to ensure a fair distribution to the creditors by holding those people to account who have acted irresponsibly or unreasonably in the lead up to formal insolvency.
While you or the company are solvent, you can to all intents and purposes do pretty much what you like in it (subject to the Companies Act 2006 issues). But when you or the company become insolvent, the interests of the creditors become paramount. The law expects people who are insolvent or whose companies are insolvent to act reasonably, and not act against the interests of innocent creditors, particularly where their action in a limited company could amount to what the courts could consider to be a breach of the 'privilege' of limited liability.
There are a number of crossovers in the Insolvency Practitioner's powers between liquidation and bankuptcy. And some, generally lesser, powers are available in others forms of insolvency too. Here are the major powers that you must bear in mind if you or your company are insolvent. But as this is not an exhaustive list, once you reach the 'point of insolvency' you would be wise to consult an Insolvency Practitioner, he will advise you of all your duties.
| | Who can take action? | Description | How far back can the Insolvency Practitioner go? | Effect |
| Wrongful trading | Liquidator | Where directors do not take all possible steps to minimise creditors' losses | No maximum time period | Director can be made to personally contribute funds into the liquidation |
| Fraudulent trading | Liquidator | Where the directors caused the company to operate with intent to defraud | No maximum time period | Director can be made to personally contribute funds into the liquidation |
| Preference | Liquidator Administrator Trustee | Where a creditor is paid preferentially | If to an 'unconnected party': maximum of 6 months of formal insolvency. If to a 'connected party': maximum of 2 years | Creditor can be made to repay the monies that were paid |
| Transaction at an undervalue | Liquidator Administrator Trustee | Where an asset is transferred from the insolvent for less than it is worth or to the insolvent for more than it is worth. | Liquidation or Administration: maximum of 2 years. Bankruptcy: maximum of 5 years | The beneficiary can be made to return the position to what it would have been or pay compensation |
| Transaction defrauding creditors | Any Insolvency Practitioner, except a Supervisor of a Voluntary Arrangement. Also any victim. | Where assets are purposely put beyond the creditors | No maximum time period - Insolvency Practitioners will even look back 10 years ago! | As for transactions at an undervalue |
| Misfeasance | Liquidator | A catch all power covering a 'miriad of sins' against any director, officer, manager for any misfeasance or breach of duty | No maximum time period | The person can be ordered to compensate the company |
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Often a particular transaction can be attacked on more than one basis as the powers set out above are not mutually exclusive. Liquidators and Trustees generally attack transactions on more than one basis where they can, making it more difficult for the 'transgressor' to defend all bases, leaving the court to decide which one 'it likes best'. Some of the above powers require the company to be insolvent at the time of the transaction for the action to succeed. Others don't, the solvency or insolvency of the company/individual can be irrelevant. A few of the powers place the burden of proof on the directors/beneficiary to show the transaction was not in breach of the Insolvency or Companies Act. Most place the burden of proof on the Insolvency Practitioner, but some are a simple matter matter of fact, for which there is no defence.
It is essential that you understand what your exposure is, where the burden of proof lies, whether solvency/insolvency is an issue, and what effective defences you may have to the above actions if you are to avoid liability. You need to consult an expert who deals with these issues on a daily basis if you are confonted with an insolvent situation so that you try to avoid tripping up the Insolvency Practitioner's powers should things go horribly wrong.
And the table above are not the only ways in which you could be attacked if you are a director of a limited company. You may have breached an number of other Acts including the Companies Act 2006, which imposes certain duties on the directors even where the company is not insolvent: these duties are over-reached by the duties owed to creditors when the company becomes insolvent, however in a near insolvency position, it can be very difficult to see where your duties lie- this is where you need the advice of an experienced insolvency lawyer or an Insolvency Practitioner.
In addition to the action that an Insolvency Practitioner can take above, you could also be at risk of being disqualified as a director. A report (the so called 'D report' or 'D Return') on your conduct has to be sent to the DTI by the Insolvency Practitioner. On the basis of that report the DTI decide whether your conduct has been so reprehensible as to justify a disqualifaction period in order to protect parties who may deal with you in the future. The decision whether to take action is solely that of the DTI, the IP has no input in the decision. If you find yourself the subject of director disqualification proceedings, you should seek advice from an Insolvency Practitioner or insolvency lawyer as often the case put together by the DTI is flimsy and, in my view, the DTI do not always seem to target the most appropriate people or if they do, they do not do so in the right way. The DTI are often looking for the director to agree to a period of disqualification rather than have the application go through the courts, with all the costs that involves. Employing an expert to assist you can help you in your discussions and negotiations with the DTI, and reduce if not eliminate any period of disqualification.
Follow the links to go to the detail of the individual powers set out above.