If a company fails, its Directors actions leading up to its failure will fall under scrutiny.
Any appointed Administrator or Liquidator is under a duty to review the events leading up to insolvency and report them to the Insolvency Service, who will then decide if disqualification proceedings are appropriate.
In addition, certain transactions that take place within a specified timeframe may be potentially recoverable or actionable, resulting in the appointed Insolvency Practitioner being obliged to pursue these for the benefit of creditors.
This means that Directors need to be extremely vigilant in terms of:
- Justifying certain decisions that were made up to the date the business is deemed to have failed; and
- Making sure that they do not undertake certain actions to which they could subsequently be brought to task.
The main considerations to which Directors need to be aware are:
- Directors Disqualification & Compensation Orders – Directors may end up disqualified as a result of their conduct. If they have caused losses to one or more creditors of an insolvent company, they may have to pay a compensatory amount to the value of the loss they have personally caused
- Wrongful Trading – This is when a company continue to incur credit whilst knowing that the company will be unable to satisfy its liabilities.
- Transactions at an Undervalue – These are transactions that were undertaken by an insolvent company where assets were transferred or sold to a third party below their market value.
- Preferences – This is when a company affords special treatment to a type of creditor, to the detriment of other creditors falling within the same group.
- Misfeasance – This is where a director misapplies, misappropriates, retains or becomes accountable for a company’s property.
- Illegal Dividends – This is when a shareholder receives payment in the form of a dividend when there were insufficient distributable reserves available.
- Overdrawn Director Loan Accounts – This is when a company provides funds to a Director which is categorised as a loan and remains due and payable.
Wrongful Trading, Transactions at an Undervalue, Preferences and Misfeasance are collectively known as Antecedent Transactions.
There are other types of Antecedent Transactions, such as Fraudulent Trading and Extortionate Credit Agreements. However, actions falling within those categories are more rare.
The sections below will help you understand the main categories in more detail.
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