Is your business facing insolvency? Admins beware of misconduct complaint

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Business leaders face a heavy burden in circumstances where insolvency is looming at the door. In these circumstances, the duty of care shifts from the shareholders to the creditors of the company, and the directors must bear the burden of additional liabilities arising from the Insolvency Act 1986 (the Law). The risk of personal liability becomes real and defaulting directors may be called upon to contribute personally for not preventing damages and taking appropriate measures to protect the interests of creditors when the company is liquidated.

Directors of companies with solvency problems should be aware not only of their duties to conduct their business in such a way as to minimize creditor losses, but also to act with honesty and integrity throughout. Persons found guilty of fraudulent transactions (s213), illicit transactions (s214) and/or misdeeds (s212) under the law face heavy fines and contribution guidelines imposed by the court.

Unlike Articles 213 and 214 of the law, where the action is brought at the request of the liquidator, on the other hand, Article 212 is a powerful article giving even third parties the means to bring an action against any officer of the company found guilty of serious misconduct. , negligence, abuse of position, and breach of fiduciary or other duties in the performance of their duties in connection with the company. If the court finds the officer guilty of misconduct and breach under this section, the court may compel him to repay, restore or remit the amount which the court thinks the officer has unjustly benefited from during the period the company was in financial difficulty.

Section 212 of the Act also allows disgruntled creditors to bring a claim, although they must be able to demonstrate to the court that they personally suffered a loss as a result of the fault, rather than relying on the general loss of the insolvent company. Interestingly, the recovery under the s212 claim forms part of the general assets of the insolvent company and as such may be covered by a prior charge or assignment on the future property. Thus, if an unsecured creditor decides to sue for fault, since their interests rank second to those of a secured creditor, they may only be able to recover less than originally expected.

One should also keep in mind the discretionary nature of the remedy under section 212. At its core lies the power of the court to exercise its discretion to exonerate the offending director from liability. Even if the evidence of misconduct or dereliction of duty is overwhelming, the court can only order a limited contribution from the director, as happened in the recent case of Glam and Tan Limited – in liquidation against Ms Danielle Litras [2022] EWHC 855 (Ch). In this case, Mrs. L, operated a beauty institute which was put into liquidation. The liquidator claimed mischief of almost £150,000, alleging Ms L benefited from illegal payments of company funds to herself. Ms L argued that the majority were business expenses and that it was in fact her controlling and abusive husband who controlled her decisions. The judge indicated that in view of all the evidence, he did not consider that Ms L should be held personally liable for the sums wrongly paid, when her free will had been subject to the will of her husband under the threat of violence. Ms L was therefore only ordered to pay £70,705.82 as contribution, a much lower amount than had been claimed.

This case is a helpful reminder of the court’s broad discretionary powers when considering an s212 claim and offers a glimmer of relief to directors of corporations facing impending insolvency. It will be interesting to see how the judgment above impacts the current upward trend in non-execution claims, as the government’s temporary relief measures are rolled back and companies are left with heavily insolvent balance sheets.

For more information or to discuss further, please contact our Dispute Resolution Solicitors on 0330 175 7621 or email [email protected].

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