Claims Against Directors | The Role of Insolvency Practitioners
KANGS has a strong and established reputation for representing company directors in investigations and claims initiated by insolvency practitioners. We specialise exclusively in ‘defence work’ within the insolvency sector, meaning we do not accept instructions to represent or provide advice to insolvency practitioners.
Insolvency practitioners are individuals who are licensed to advise on and formally act in company liquidations, administration, receiverships and company voluntary arrangements.
They may also be licensed to advise on an individual’s bankruptcy or Individual Voluntary Arrangement.
Recognised professional bodies such as the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales ensure that all licensed practitioners adhere to strict standards of performance and professional conduct.
Stuart Southall of KANGS outlines various aspects of the responsibilities and activities of insolvency practitioners and how KANGS can assist in representing company directors and other companies against insolvency practitioners.
The Relevant Law
The Insolvency Act 1986 provides:
S.388 Meaning of ‘act as insolvency practitioner’
A person acts as an insolvency practitioner in relation to a company by acting:
- as its liquidator, provisional liquidator, administrator, administrative receiver or monitor or
- where a voluntary arrangement in relation to the company is proposed or approved as nominee supervisor.
A person acts as an insolvency practitioner in relation to an individual by acting:
- as his trustee in bankruptcy or interim receiver of his property or as trustee in the sequestration of his estate or
- where a voluntary arrangement in relation to the individual is proposed or approved, as nominee or supervisor.
A person acts as an insolvency practitioner in relation to an insolvent partnership by acting:
- as its liquidator, provisional liquidator or administrator, or
- as trustee of the partnership under article 11 of the Insolvent Partnerships Order 1994 or
- where a voluntary arrangement in relation to the insolvent partnership is proposed or approved, as a nominee or supervisor.
S.390A Authorisation
A person is fully authorised to act as an insolvency practitioner:
- by virtue of being a member of a professional body recognised under section391(1) and being permitted to act as an insolvency practitioner for all purposes by or under the rules of that body or
- by holding an authorisation granted by the Department of Enterprise.
Fully authorised means authorisation to act as an insolvency practitioner in relation to companies, individuals and insolvent partnerships.
The Role of Insolvency Practitioners
Regardless of the type of insolvency appointment - be it liquidation, receivership, or another form - the insolvency practitioner will aim to understand the underlying reasons for the business's difficulties and assess its viability. This evaluation will consider the value of the business’s assets in relation to its liabilities to creditors.
Accordingly, an investigation will immediately be conducted into the company’s financial position and trading activities. Where appropriate, investigations may cover as many previous years trading as is necessary but, generally, these will be restricted to two or three years.
Amongst the many elements to be considered will be financial viability of the business as evidenced by, for example, its Order Book, its immediate solvency, the level and timing for repayment of any debt and the existence of substantial preferential creditors such as HMRC.
The Most Common Forms of Insolvency
Administrations
The intent of an administration is to navigate the business out of financial trouble and enable it to continue trading. An insolvency practitioner may be appointed by a court, the directors or an institution such as a bank.
In order to assist the administrator achieve a better outcome for creditors, a moratorium may be placed around the company stopping legal actions whilst an alternative solution is sought.
Such solution may be achieved by arranging the sale of the company as a ‘going concern’ but if the company cannot be rescued, facilitating a managed closure of the business by the sale of its assets.
A company will be placed into administration either voluntarily by its directors and/or shareholders or secured lenders may seek the appointment of an administrator through the courts.
Liquidations
Upon a liquidation, the insolvency practitioner, acting as a liquidator, will dispose of the assets, such as buildings, equipment and vehicles and pay the creditors in a defined specific order commencing with preferential creditors such as HMRC.
A liquidation will take one of the following forms:
- Creditors Voluntary Liquidation
If a company faces insolvency, it is the duty of a director to cease trading if the company is not viable and cannot be returned to profitability.
Shareholders pass a Resolution to wind the company up, as there is no requirement for a Court Order, and they will appoint a liquidator. A meeting of creditors has to be held within fourteen days, and they may select an alternative liquidator if preferred.
The liquidator will collect in the assets of the company and pay the creditors as much as is available.
- Compulsory Liquidation
This procedure usually occurs as the result of an unpaid creditor presenting a winding up petition to the Court which passes an Order for the winding up the company if satisfied that the company cannot meet its debts.
Company Voluntary Arrangement (CVA)
A CVA is a formal agreement between a company and its creditors, whereby the debt owed is to be paid in full or in part over a specific period of time.
It must be shown that the company has a viable future, the directors will remain in control of the business and the arrangement is legally binding. Once the specified period comes to an end, if the agreed payment has been made, any outstanding debts are written off.
An insolvency practitioner will act as both nominee and supervisor, firstly to compile a viable proposal for the CVA and, once passed, to oversee matters throughout the CVA.
Members’ Voluntary Liquidation
This procedure would generally be adopted by those running a solvent company:
- wishing to retire,
- wanting to step down from a family business which nobody else wishes to run,
- who do not want to run the business any further.
Having followed various steps, such as passing a Resolution for members’ voluntary liquidation and making a Declaration of Solvency, an insolvency practitioner can be appointed to take charge of the winding up of the company.
Key Powers of Insolvency Practitioners
Insolvency practitioners possess several powers that enable them to locate missing assets, reverse certain transactions made prior to insolvency and investigate any suspected wrongdoing.
Once the insolvency practitioner has developed a general understanding of the company’s trading and financial position, the directors will be asked to provide answers to any questions presented. There is a statutory duty for those questions to be answered to the full satisfaction of the insolvency practitioner.
When investigating the problems encountered by the business, the insolvency practitioner will be mindful of such matters as:
- breaches of fiduciary duty such as negligence, misfeasance or conflict of interest,
- wrongful trading which may result in the director(s) being personally responsible for the company’s debts,
- transactions under value, benefiting one or more directors or family,
- preference payments to one or more directors or family,
- unpaid Directors’ Loan Accounts
In summary, the role of insolvency practitioners includes not only asset recovery and transaction reversal but also the diligent investigation of any potential misconduct. Company directors must take these enquiries seriously and provide comprehensive responses to fulfil their statutory duties failing which they could face Director Disqualification proceedings.
How Can We Assist?
The insolvency of a business - whether it involves a company, a partnership, or an individual - often brings significant stress to all parties involved. In many cases, urgent and decisive actions are necessary to either attempt to salvage the business or to ensure that no unlawful trading occurs during this critical period.
At KANGS, we understand and have navigated many times the complexities and emotional challenges that accompany insolvency investigations and proceedings.
The team at KANGS is dedicated to providing immediate assistance, proactive strategies and positive solutions to business owners who need guidance to steer them through this difficult time.
If we can be of assistance, our team will be delighted to hear from you, contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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