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Can A Director Be Sued By A Liquidator For Assets Overview

The answer to the question Can A Director Be Sued By A Liquidator For Assets? is yes without any doubt they can be. Indeed not only can they be but indeed with some regularity they are.

Amongst the many Liquidator’s duties is the duty to get in, realise and distribute the company’s assets. This is a Liquidator’s fundamental function for the creditors.

A common asset to appear on the balance sheet of a company that is insolvent will be an Overdrawn Director’s Loan Account that needs to be repaid by a Director to the company. If the Director does not repay it then a Liquidator will have to consider if they should bring legal proceedings to recover it.

Can A Director Be Sued By A Liquidator?

What Are Company Assets And Property?

The company’s assets are not confined to its physical assets that can be picked up by someone like an insolvency agent and sent off to auction. They include assets and property within the definitions in Section 436 of the Insolvency Act 1986:

“property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property;

That means assets which do not appear on a company’s regular balance sheet will include claims against its Directors as part of a company’s property for a Liquidator to realise. 

The Liquidator has a duty to get the best result for creditors within the scope of their powers and discretion. 

What About A Director Of A Limited Company?

Yes. A Limited liability company does not mean a company Director has some get out of jail free card which limits their liability because of the words limited liability. Those words apply only to the limits of the Shareholders’ liability to paying for their shares.

Directors’ Duties Can Mean They Can Be Sued By A Liquidator

A Director has a series of duties to a company when they are appointed as set out in Chapter 10 Part 2 of the Companies Act 2006

The existence of these Directors’ duties means in the event of a breach of those duties they can be sued, typically for any loss the company suffers as a result of the relevant breach.

What Type Of Claims Can A Director Be Sued For By A Liquidator?

The type of claims a Director can be sued by a Liquidator for depends on when the breach of duty has arisen, the type of loss that has been caused and who has benefitted.

It may be harder for example for a Liquidator to sue a Director who causes a loss without personally benefitting from it. In other words if they have simply abdicated responsibility as opposed to have profited from the breach. However, even so, Director abdication of responsibility to another Director who has caused the losses can still leave them to being exposed to being sued by a Liquidator. 

Transactions entered into by a Director in breach of duty causing a loss to creditors when the Creditor Duty has arisen because a company is insolvent might be viewed as more of a risk than those when a company is solvent. When a company is solvent under Section 239 of the Companies Act 2006 it is possible for the Shareholders to ratify a Director’s breach. In effect, this can result in the Shareholders forgiving the Director’s breach of duty.

Company Claims Against Directors

The ability for a Director to be sued by a Liquidator is often an inherited right. 

Company claims against Directors are those claims vested in a company against its Directors.

The Liquidator may bring such claims against a Director because they are at the relevant time the personality that controls the Company. In such a case it is conceivable other Directors of a company could have brought such proceedings against a negligent Director for loss caused at an earlier stage.

The typical procedure deployed by a Liquidator to sue a Director for misfeasance or breach of duty is to use Section 212 of the Insolvency Act 1986. It creates no new cause of action but it enables a Liquidator to use a procedure under the Insolvency Act 1986 instead of using what is known as Part 7 of the Civil Procedure Rules to bring the relevant claims. The advantage is such litigation may be consistent with an Insolvency Act claim as opposed to that of the requirements of commercial litigation in which pleadings and disclosure can be more involved.

Insolvency Act Claims Against Directors

Insolvency Act claims against Directors are those claims vested for example in the Liquidator which might be capable of being brought against the Directors. Such claims only arise when a company goes into a formal insolvency procedure such as Liquidation or Administration. They are claims specifically provided for by the Insolvency Act 1986.

Such Insolvency Act claims will commonly be Wrongful Trading and Antecedent Transactions.

Insolvency Act claims often have their roots in the effect of the Creditor Duty. In other words with the benefit of hindsight, once the company has entered a formal insolvency procedure, transactions entered into that were not in the best interests of the company when it become insolvent can be investigated by the Liquidator and if they are deemed to have been improper or unreasonable, then a Director can conceivably be sued as a result. 

Director Relieved By The Court

Notwithstanding the above, how can a Director avoid liability for a breach of duty if sued by a Liquidator?

Well, if the Court considered the Director had acted honestly and reasonably then it may exercise its discretion under Section 1157 of the Companies Act 2006 to waive the Director from liability. 

However, the Court will generally be more reluctant to grant this relief when the consequence of a Director’s breach of duty has been for a Director to personally benefit from it.

Oliver Elliot Comment

Oliver Elliot Comment !

Merely being sued by a Liquidator does not mean the transaction in question was necessarily improper or unreasonable. It is ultimately the decision of the Court to decide if indeed that is the case.

Even if a Director succeeds in successfully defending a legal action where they have been sued by a Liquidator or granted relief under Section 1157, nevertheless they may not necessarily recover all of their legal costs from the Liquidator. As a result, as often being sued by a Liquidator may arise from inadequacies and or misunderstandings resulting from incomplete or inadequate books and records that might have been used to enable a Liquidator to properly understand a company’s transactions, it can be particularly helpful if a company Director ensures at all times they keep proper book and records.

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: June 12, 2024

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Disclaimer: Can A Director Be Sued By A Liquidator For Assets?

This page is not legal advice and is not to be relied upon as such. This article Can A Director Be Sued By A Liquidator For Assets? is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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