Frequently Asked Questions


"Can a Liquidator set aside previous transactions made by the company?"

Yes. When a company goes into liquidation or administration, the appointed insolvency practitioner has the power to challenge certain types of transaction that the company entered into prior to the insolvency. The Court may make any order it thinks fit for restoring the position to what it would have been if the company had not entered into the reviewable transaction. This can include:

  • Requiring any property to be returned to the company
  • Requiring any person who has received a benefit from the transaction to pay such sums to the company as the Court may direct
  • Releasing or discharging any security given by the company

Preferences

A company gives a preference to a person if that person is one of the company's creditors or a surety/guarantor for any of the company's debts or liabilities. A company will also give a preference if the company does anything which has the effect of putting the person into a position which, in the event of the company going into insolvent liquidation, will be better than the position they would have been in if that thing had not been done.

Examples of preferences include paying the whole or part of a trade debt in preference to other debts, giving security to secure an existing debt, allowing a supplier to change its terms and conditions of sale to include a retention of title clause or reducing an overdraft or loan which a director had personally guaranteed.

The preference must have been entered into at a relevant time. If the preference is to a person connected to the company, the period of time is two years ending with the onset of insolvency. If the person is not connected, the period is six months. The company must also have been insolvent at the time of the preference, or became insolvent as a result of the preference itself.

In order for the Court to set aside a preference, it must be satisfied that the company was influenced in deciding to give the preference by a desire to prefer the party. If the preference is to a person connected with the company, there will be an assumption that the company desired to prefer the party.

Transaction at an undervalue

The Court may set aside a transaction at an undervalue. This will arise if the company made a gift or otherwise entered into a transaction on terms that it received no payment or it entered into a transaction where the payment was significantly less than the value of the goods or services provided by the company.

The transaction must have been entered into within the period of two years ending with the onset of insolvency. The company must also have been insolvent at the time of the transaction, or became insolvent as a result of the transaction itself. If the transaction is to a connected party, such as a director of the company or a relative of the director, there is an assumption that the company was insolvent at the time the transaction was made.

Transactions defrauding creditors 

The Court has wide powers to set aside a transaction at an undervalue if the transaction was designed to put assets out of the reach of creditors. There is no requirement that the company had to be insolvent at the time the transaction took place, and the transaction does not have to be within the two years leading up to insolvency.


"What is wrongful trading?"

Once a director of a company knows (or ought to know) that there is no reasonable prospect that the company will avoid going into liquidation, the director is under a duty to minimise the potential loss to the company's creditors. A director breaches that duty and wrongfully trades if, for example, he continues to trade and puts creditors in a worse position as a result of that trading.

The liquidator of a company can apply to Court for an Order that the director personally reimburses the company in full or in part for the losses suffered by the company as a result of the wrongful trading.

There is no requirement that the director acted fraudulently or dishonestly.


"What is fraudulent trading?"

Fraudulent trading occurs where in the course of the winding up of a company, it appears that any business of the company has been carried out with intent to defraud creditors or for any fraudulent purposes.

If the Court finds that any person knowingly carried on fraudulent trading, it can order them to make a contribution to the company's assets. This provision is not limited to the directors of the company, and extends to any person who was engaged in that fraudulent activity.

Innocent parties may be accused of fraudulent trading if, for example, a director was unaware of a fraud perpetrated by a co-director or if an employer is accused of being vicariously liable for the fraudulent activities of its employees.

Fraudulent trading is both a civil and criminal offence. The maximum penalty is 10 years' imprisonment.


"What is misfeasance?"

Misfeasance involves the misapplication or retention of any money or other property of the company by a director, secretary or anyone concerned in the management of the company or the breach of any fiduciary or other duty in relation to the company.

The liquidator or any creditor may apply to the Court for an Order that the party involved in the misfeasance repays or accounts to the company for the money or property that has been misapplied or retained.

An allegation of misfeasance is often included within any claim brought for wrongful trading, fraudulent trading or reviewable transactions.


"What duties do Non-Executive and Shadow Directors have?"

A Non-Executive Director is a director who does not hold an executive office nor is an employee of the company. These directors will often just devote part of their time to the business of the company in some form of independent advisory role. Despite their limited role, Non-Executive Directors have the same duties and attract the same liabilities as Executive Directors.

A Shadow Director is any person on whose instructions the board of directors (or the majority of the board) are accustomed to act. For example, a majority shareholder who the board always obey without exercising its own judgement will likely by a Shadow Director. Despite not being a formally appointed Director, a Shadow Director may be liable for wrongful trading, fraudulent trading or breaches of fiduciary duty, and can be subject to disqualification under the Company Directors Disqualification Act 1986.


"Can I be disqualified from acting as a director?"

Under the Company Directors Disqualification Act 1986, a person may be disqualified from acting as a Company Director if the Court finds that their conduct (as a Director of a company that became insolvent) makes them unfit to be concerned in the future management of a company.

The period of disqualification can range from 2 to 15 years depending on the nature of the misconduct.

When considering whether a Director is unfit to be concerned in the future management of a company, the Court has particular regard to the following:

  • The reasons for the company becoming insolvent
  • Any failure by the company to supply goods or services paid for in advance
  • Any misapplication or retention of company money or property
  • Any misfeasance or breach of duty by the director
  • Any failure to comply with the provisions of the Companies Act relating to accounting records, statutory books and filings at Companies House
  • Whether the company has entered into any reviewable transactions

If a person is disqualified, they must not be a director of a company or in any way, either directly or indirectly, be involved in the management of a company. Breach of a Disqualification Order is a criminal offence. The person acting in breach is also personally liable, without limit for all the debts of the company incurred during the period when he was involved in the management.

Our specialist insolvency lawyers have significant experience of acting for Directors faced with disqualification proceedings, and can advise on all aspects including the prospect of successfully defending the disqualification proceedings, seeking to reduce the disqualification period and entering into a disqualification undertaking on the best possible terms.

Our team regularly advises disqualified directors on applications for permissions to act as a director, notwithstanding their disqualification. To discuss with our team on anything mentioned above, please contact our Dispute Resolution department on 01733 888888.


"Can I re-use the name of a company that has gone into liquidation?"

It is an offence for any person who had been a Director or Shadow Director of a company within 12 months preceding its liquidation to then in the next 5 years, be a director or involved in any way in the management of any another company or business which is using the same or similar name to the insolvent company.

There are a number of exceptions to this prohibition. If you are considering re-using a company name you should seek legal advice from our specialist insolvency lawyers. Please call us on 01733 888888.


"Can I rely upon a Retention of Title clause in the event of a company's insolvency?"

A Retention of Title Clause (often referred to as a Romalpa Clause) is a clause in a contract between a buyer and seller that provides that legal title to the goods, does not pass to the buyer until the seller has paid. On insolvency, these clauses often come under the microscope and form the basis for a dispute.

A Retention of Title Clause must be expressly set out in the contract between the buyer and seller, and the general law will not imply them into a trading relationship.

In the event of a buyer's insolvency, the seller will want to rely upon the Retention of Title Clause and be able to collect the goods. A seller should ensure that:

  • The Retention of Title Clause is valid, properly drafted and incorporated into the contract
  • The goods are identifiable and have serial or batch numbers on them
  • A right is reserved to enter onto the buyer's premises to recovery the goods

The key is to act quickly. We are able to assist in drafting effective Retention of Title Clauses and advise when a dispute arises with a buyer or an insolvency practitioner on the validity of a clause.

If you would like to speak to one of our specialist insolvency lawyers, please contact us on 01733 888888 or request a call back.