What Directors need to know about fraudulent trading and the Insolvency Act
The reasons why Directors enable a company to conduct fraudulent or wrongful trading are known only to them, but of course this isn’t allowed in the eyes of the law. In the event of a Director being found to have acted in this way, an Insolvency Practitioner acts to bring claims for financial losses for the business against them. To understand the laws governing this type of Director breach and the actions of an Insolvency Practitioner, Leanne-Schneider Rose, Partner and Head of the firm’s Banking & Finance, Debt Recovery, Dispute Resolution, Insolvency at Sydney Mitchell, explains.
Wrongful Trading, Misfeasance or Fraudulent Trading
Wrongful Trading, Misfeasance or Fraudulent Trading are claims under the Insolvency Act brought by Insolvency Practitioners against Directors where it is considered that a Director’s actions were either wrongful, fraudulent or in breach of his/her duty to the company, and which caused the company to sustain a financial loss.
As a result of the Director’s actions, the Insolvency Practitioner can bring a claim against the Director to try and claim back from him/her any loss that the company sustained as result of their actions.
Claims under the Companies Act for breach of duties
Under the Companies Act 2006 directors have the following duties:
- Duty to act within powers,
- Duty to promote the success of the Company,
- Duty to exercise independent judgment,
- Duty to exercise reasonable care skill and diligence,
- Duty to avoid conflicts of interest,
- Duty not to accept benefits from third parties,
- Duty to declare an interest in a proposed transaction or arrangement with the company.
A breach of any of these duties could lead to a claim being brought against the Director by the company (whether it is in a formal insolvency arrangement or not).
Repayment of Directors overdrawn loan account
If a Director has an overdrawn loan account and the company enters into insolvency, the overdrawn loan account is a debt due to the company, which a Director is personally liable to repay.
Dividends paid
If a Director has allowed a payment to shareholders, called a distribution or a dividend, in excess of the company’s distributable reserves, the amount paid in excess of the distributable reserves is subject to being repaid by the shareholder, or, if that is not possible, by the Director themselves This is on the grounds that they authorised or allowed the payment to be made. Quite often directors are also shareholders.
Personal Guarantees
If a Director has given a personal guarantee to the company’s lender, following the insolvency of the company, the lender is likely to call upon the Director under the terms of the personal guarantee for payment.
It is not uncommon for a Director to secure the payment of the personal guarantee against their home, and when this is the case, the lender may sell the property in order to repay company debts. However, this will only be to the amount stated in the personal guarantee if this specifies a limited amount.
Help and advice
For help or advice on this or other related matters, please contact Leanne-Schneider Rose l.schneider-rose@sydneymitchell.co.uk
Disclaimer:
Information on this website is provided for general information purposes only. It is not intended to constitute and should not be relied upon as legal advice. There are a number of factors and circumstances which may be relevant to legal advice. The law may also have changed before we are able to update the information on this website.
