INSOLVENCY – crucial to obtain early legal advice

In the world of insolvency, few things are as crucial as the need to obtain legal advice as soon as possible after receiving notification of insolvency...

Actions taken by directors after this point must not make the situation worse, which without advice can easily happen. In many cases directors might move or sell assets in the mistaken belief that this is helping the company but might in fact be in direct breach of the duties owed by the director, not to embark (for example), in wrongful trading.

Breaching directors’ duties by knowing that the company was heading towards liquidation and making matters worse for any creditor can lead to personal liability and as such, this can be an expensive and devastating mistake to make.

Wrongful Trading – what is it and how can it be avoided?

When a company is no longer viable and heading for insolvency, it can be extremely tempting to continue to trade as usual in the hope of saving the company, but in fact this serves only to worsen the situation and in addition, worsen the position of the creditors.

It is crucial that directors seek early advice when they are aware that the company will wind-up and insolvency is imminent, to ensure that their continued actions do not create problems that can be considered as Wrongful Trading. It is clear that the courts can and will make orders for a director to make a personal contribution to creditors, where the director has wrongfully traded, when they knew, or should have known, that insolvency was imminent.

Directors should make every effort to call in debts owed and hold regular meetings to monitor the company’s financial situation. Good recordkeeping of all such meetings should happen as this might later provide evidence as to when the timings of various transactions took place, which would show that wrongful trading had not in fact occurred, and it might provide a timeline as to when it should have become clear that insolvency was likely.

In the case of Ralls Builders Limited (in liquidation) [2016] EWHC 243 the court made constant reference to how crucial it is for directors to take professional advice, from accountants and lawyers at the right time, and updating them if circumstances changed, in order to be able to rely on the ‘every step’ defence, being a statutory defence to Wrongful Trading. The defence, which is set out in s214 Insolvency Act 1986 states that the Court will not order a Director to personally contribute to the Company’s assets, if they have traded whilst insolvent and having worsened the position of creditors, by increasing their losses, as long as every step was taken by the Director, that ought to have been taken, in an attempt to reduce the losses of creditors. This will generally include taking financial as well as legal advice.

The steps to be taken are not prescribed and each case will differ on the facts of that specific case, and it is therefore essential that advice is taken early on to ensure that every possible step, which relates to your specific circumstances, can be anticipated, and actioned, to avoid losing the statutory defence.

For legal advice relating to Insolvency, call the Litigation & Disputes Team at Lawson-West

0116 212 1000

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