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Reclaiming debt from directors of insolvent companies

Reclaiming debt from directors of insolvent companies
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Reclaiming debt from directors of insolvent companies
Alex Lee by Alex Lee
Solictor - Buss Murton Law

Changes in the law have strengthened the hand of creditors trying to reclaim debt from directors of insolvent companies.  -  asked the advice of legal expert, Alex Lee of Buss Murton Law  and he explains that this may be good news if you are owed money, but it not so great if you find yourself innocently caught up on the wrong end of a claim.

Legal shortcomings

It is widely known that directors can be liable for a company’s debts if it becomes insolvent, if they have wrongfully or fraudulently traded; similarly, they can be liable to a clawback of assets, where there has been preferences or transactions under value.

However, administrators and liquidators have often been unwilling to pursue such claims due to their poor success rate; if there are insufficient monies, pursuing the claim simply isn’t worthwhile.  Needless to say, this situation has led to frustration among creditors. 

Changes to the law

The Small Business, Enterprise and Employment Act 2015 attempted to deal with this (among many other things).  The Act gives administrators and liquidators the ability to assign its right to pursue a director to the creditors; this effectively allows the creditors to fund the claim, with the directors powerless to stop them. 

The drawbacks

While the Act attempts to redress the situation for creditors, there is a danger that innocent directors could find themselves on the wrong end of an exuberant claim from creditors determined to get something, even if it is just a settlement to see off lengthy and expensive legal action.  

Protection for directors

Your Directors and Officers insurance policy may be sufficient to cover defending a claim of this kind. Most policies do, but some don’t cover instances where the right to pursue a claim against a director has been assigned to the company’s creditors (as opposed to being pursued by the administrator or liquidator themselves).

While you are determined to make your business a success, taking expert legal and insurance advice could protect you from expensive litigation in case the worst were to happen.

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Alex Lee is a Company & Commercial and Employment Law Partner at Buss Murton Law, which has been providing expert and trusted legal advice to individuals and businesses for generations.  With offices in Tunbridge Wells, Cranbrook, East Grinstead and Dartford, Buss Murton provide legal expertise to clients across the south east of England and around the world.  

Read our other expert business law articles:

Your legal duties to your employees

Managing poor performance

Employment contracts

Verbal contracts

Compensation for Late Payments of Commercial Debts