Knowledge Hub | Cases and deals

14 July 2014

Liquidator claim for misconduct against ex-director successfully averted

The B P Collins Litigation and dispute resolution practice group was instructed to advise and defend various claims of misconduct under section 212 of the Insolvency Act 1986 brought against a former sole-director long after the business' itself was wound-up.

Under section 212, which enables a liquidator to pursue causes of action that existed before the company enters liquidation on the company's behalf, the liquidator in this case sought to pursue claims to recover loans and dividend payments, which on the basis of its historic records appeared to be outstanding and unlawful.

In the absence of up to date documentation the case appeared difficult to fight, primarily because the provisions of the Companies Acts (here sections 330 and 363 of the 1975 Act) impose very strict criteria on how courts assess the (un)lawfulness of director loans and declared dividends.

However, through a combination of implementing a robust and tactical defence strategy and timed negotiation the team was able to avoid litigation, the associated cost liability, and achieved a favourable commercial settlement at a significant reduction to the claim value. 

Simon Carroll, associate in the litigation and dispute resolution team comments: "This case exemplifies two main issues. Firstly, the possible risks of reliance on outsourced advice - in this case there appeared to be an external provider failure which appeared to contribute to the lack of up to date documentation. 

"Secondly, the risks of declaring dividends without proper understanding of the rules on when and how to do so, particularly in relation to the not uncommon practice of declaring dividends rather than salary; such a practice may help reduce tax liabilities whilst the business trades profitably but such an arrangement may well lead to significant personal liability if, for whatever reason, liquidators are called in."

Simon Carroll

Simon Carroll

Tel: 01753 279037 | 07891 990964

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