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Is Your Company Facing Insolvency? Remember Your Duties to Creditors!

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

When companies hit financial trouble and are at risk of insolvency, directors owe a legal duty to consider the interests of creditors. In one case where that signally did not happen, two directors who credited their loan accounts with large sums in the months before the balloon went up were ordered to repay every penny.

The company specialised in the supply and installation of solar panels. It achieved a turnover of almost £9 million in its first two years of trading. However, the directors were aware of an imminent, and very damaging, shift in Government policy when they awarded themselves three loan account credits, totalling £750,800. After the company became insolvent, its liquidator launched proceedings against them to recover those sums.

In upholding the liquidator’s claim, the High Court found that the company’s solvency was already dubious by the time of the first credit. When the second and third were made, the company was either cash flow insolvent, balance sheet insolvent, or both. An honest and intelligent person in the position of the directors would not reasonably have viewed the credits as being for the benefit of creditors as a whole.

In ruling the directors jointly and severally liable to repay the entire sum, plus interest, the Court found that they had misapplied the company’s assets for their own benefit. Contrary to the Companies Act 2006, they had breached their fiduciary duties and failed to exercise their powers for proper purposes. They were also guilty of misfeasance within the meaning of the Insolvency Act 1986.

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