Insolvency Claims Against
Company Directors

Generally speaking, company directors benefit from limited liability status.

However, in certain circumstances that protection can be removed leading to either:

• A civil claim being brought against the director personally, or
• Criminal proceedings

This can happen when a company director breaches their fiduciary duties.

Company directors have a duty to act in the best interests of the company and its shareholders at all times.

The duties of a director are known as fiduciary duties and are enshrined in statute.

A Company Director must:

• Act within the powers of the company as set out in its Articles of Association
• Promote the success of the company for the benefit of all shareholders/members
• Exercise independent judgment for the benefit of all shareholders/members
• Exercise reasonable care, skill and diligence in performing his/her duties
• Avoid conflicts of interest (and declare any such conflicts to the board of directors)
• Not accept undisclosed benefits from third parties
• Declare an interest in any transaction or arrangement proposed by the company

In addition to the above fiduciary duties of a director, there are additional obligations for a director to:

• File company accounts and associated statutory papers with Companies House
• Maintain and deliver when required the appropriate accounting records and books for the company
• Refrain from the publication of misleading information about the company and its activities
• Refrain from the publication of misleading marketing/promotional material aimed at customers

If there is a breach of fiduciary duty by a company director, there are a number of entities that can bring proceedings against that person including:

1. Liquidators/Administrators

The liquidator or administrator of an insolvent company is under an obligation to consider the financial performance of the company and investigate the conduct of the company director(s).

If any breach of fiduciary duty is discovered, the liquidator/administrator can bring a civil claim against the director in the director’s personal capacity. For the types of claims that can be brought please see ‘What are the most common types of claims against directors?’‘ below.

2. Secretary of State

The Secretary of State has the power to bring Director Disqualification Proceedings against any director of an insolvent company if considered appropriate.

3. HMRC

HMRC possesses a wide range of powers to compel company directors to comply with tax laws in relation to corporation tax, PAYE tax, personal taxation arising from director loan accounts/dividends and VAT. In addition, HMRC has extensive powers of criminal investigation and prosecution which include arrest, interview under caution, freezing of assets, criminal prosecution and forfeiture of assets under the Proceeds of Crime Act 2002. 

4. Creditors

Creditors can bring civil claims against directors for breach of their duties as well as claims for the enforcement of any personal guarantees.

5. Shareholders

Although not a common situation, shareholders are able to bring a civil claim against a company director.

6. The Company

The company is in a position to take civil action against a director. The shareholders can vote to remove a company director from the board or a court injunction can be obtained to prevent the director engaging in conduct that is detrimental to the company and in breach of the director’s fiduciary duties. The company director can also be pursued through the civil courts for any consequential financial losses that the company has suffered arising from the director’s conduct.

Criminal Prosecution by the State

Companies House can bring a criminal prosecution if a company director fails to comply with their statutory obligations in accordance with the Companies Act 2006 such as failure to file financial statements annually.

A company director can also be criminally prosecuted for Fraudulent Trading if:

1. The company is insolvent, and
2. The company director continued to trade, knowing that the company is unable to settle any of the ongoing trading invoices, and
3. The company director knew that the company had no prospect of ever being in a position to settle the invoices

1. Director Disqualification Proceedings 

A civil claim brought by the Secretary of State or an ancillary order made against a company director in criminal proceedings.

2. Misfeasance Claims

If a loss has been caused to creditors where misfeasance has occurred, the company director can be personally liable. This claim can arise due to a company director misapplying company funds or property such as ‘transactions at an undervalue’ and ‘preferences’.

3. Directors Loan Account & Dividend Payments

A claim based on the improper or unauthorised use of company funds for the personal benefit of a company director to the detriment of creditors.  A liquidator/administrator may pursue a company director for the return of such funds for the benefit of the creditors.

4. Breach of Fiduciary Duties

A claim for breaching any of the fiduciary duties detailed above.

5. Wrongful Trading

A claim that a director has continued to trade the company knowing (or where there is good reason to know) that the company will go out of business and there is no genuine way of ‘trading through’. The company director could be personally liable for the losses incurred by the company from the date that such knowledge did exist or should have existed.

6. Antecedent Transaction

Preferences: A claim based on payments being made or not being made to one creditor or group of creditors in preference to other creditors. The liquidator/administrator will usually look to recover the payment from the receiving party or from the director personally.

Transactions at an Undervalue: A claim based on company assets being disposed of for less than market value or for no consideration at all. If such transactions exist, often the liquidator/administrator will uncover that such transactions are not at arms-length and involve friends, family members or other associates of a company director.

Concealment of Company Assets & Property: A company director can be pursued personally if evidence emerges that company property or assets have been concealed or removed leading to such property or assets becoming unavailable to the company’s creditors.

Other than a company director, the liquidator/administrator can pursue claims against:

• Any director including non-executive director
• Former directors
• An inactive company director who consider themselves a director in ‘name only’ such as a spouse or family member
• Family members who have received company property, funds or assets
• Creditors
• Shareholders

All of the above categories of persons may have received property, assets or funds from the company through transactions which took place pre-insolvency. On appointment, the liquidator/administrator may look to set aside such transactions and pursue these individuals for the return of company assets.

Depending on the type of claim being pursued, the time limit for bringing such actions is usually either six years or twelve years.

The administrator/liquidator will usually look to investigate all financial transactions going back up to two years or up to five years depending on the individual case. The power to investigate matters beyond this timeframe is extended particularly where dishonesty, fraud and breach of fiduciary duties are being alleged.