How to Defend Claims by Administrators and Liquidators

Introduction

When a company enters insolvency its financial affairs come under close scrutiny. Insolvency practitioners are appointed to manage the company’s assets and liabilities, with a primary objective of maximising returns for creditors. This process often gives rise to claims by administrators and liquidators, aimed at recovering funds or addressing improper transactions made prior to the insolvency.

Directors, shareholders, suppliers, lenders, and other third parties can find themselves facing legal claims by administrators and liquidators that are not only financially serious, but reputationally damaging.

These claims are usually brought to recover funds or assets, challenge unlawful or improper transactions, and ensure compliance with the duties owed by company officers. If you are involved with an insolvent company, it is important to understand why these claims arise, the legal basis on which they are made, and the options available for defending yourself.

This article explores those issues and offers practical advice for anyone facing a claim brought by a liquidator or administrator.

Why might Insolvency Practitioners bring a Claim?

One of the key reasons liquidators and administrators pursue claims is to increase the available pool of funds for distribution to creditors. This often involves challenging transactions that took place prior to insolvency, such as the sale of assets at an undervalue, preferential payments to specific creditors, or mismanagement by directors.

Additionally, they have statutory duties to investigate company affairs and report on director misconduct. In some cases, they may be encouraged or funded by creditors or litigation funders to pursue claims more aggressively.

What are Common Types of Claims by Administrators and Liquidators?

There are several types of claims which are commonly brought by insolvency practitioners, namely:

1. Wrongful Trading

There are several types of claims that directors and connected parties should be aware of. One of the most common is a wrongful trading claim under section 214 of the Insolvency Act 1986. This arises where directors continue to trade at a time when they knew or ought to have known there was no reasonable prospect of the company avoiding insolvency.

If found liable, directors may be ordered by the court to make a personal contribution to the company’s assets. Defending such a claim requires evidence that you took every reasonable step to minimise losses to creditors. This may include seeking professional advice, holding regular board meetings, documenting decisions, and attempting to restructure or cease trading in a timely manner.

2. Transactions at an Undervalue

Another frequently encountered claim relates to transactions at an undervalue under section 238 of the Insolvency Act. If the company disposed of assets or provided services for significantly less than their market value in the two years before entering administration or liquidation, those transactions may be reversed.

To defend such a claim, you should be prepared to demonstrate that the transaction had a valid commercial purpose, that the value exchanged was fair in the circumstances, or that the transaction fell outside the relevant statutory period.

3. Preferences

Similarly, preference claims under section 239 of the Insolvency Act allow a liquidator or administrator to reverse payments or transfers made to certain creditors prior to insolvency where there was a desire to place that creditor in a better position.

This often involves payments to directors, connected persons, or those who were threatening legal action. The key to defending a preference claim is to argue that there was no intention to prefer the creditor in question, and that the payment was made in the ordinary course of business or under pressure. The burden of proof lies with the liquidator, who must demonstrate the existence of a desire to prefer.

4. Misfeasance and Breach of Duty

Another avenue for claims is under section 212 of the Insolvency Act, which allows liquidators to pursue directors and officers for misfeasance or breach of duty. This may involve claims that directors failed to act in the company’s best interests, misused company funds, or were negligent in their conduct.

To defend such claims, it is crucial to show that decisions were made in good faith, based on proper advice, and in line with the duties owed under the Companies Act 2006 and common law.

5. Unlawful Dividends

Unlawful dividend claims may also arise where dividends were declared and paid in contravention of the Companies Act, typically where they were paid out of capital rather than profits. Both directors and shareholders who received such dividends can potentially be held liable to repay them.

A solid defence involves demonstrating reliance on accurate financial statements and professional accounting or legal advice at the time the dividend was declared.

How do I respond to a Letter Before Action?

If you receive a letter before action or formal demand from a liquidator or administrator, it is vital not to ignore it. These letters often outline the legal grounds of the claim, summarise the alleged facts, and propose a settlement or repayment figure. Immediate legal advice should be sought.

Responding promptly and professionally, while avoiding admissions or defensive reactions, is essential. Preserving all relevant documents (i.e., such as board minutes, financial records, and correspondence) will also be important in assessing your position and preparing a response.

Can a director be personally liable?

Many directors wrongly assume that the company’s limited liability structure offers full protection. In fact, the insolvency regime is designed to hold directors personally accountable in certain circumstances. The financial consequences can be significant, and some directors may face disqualification proceedings or even bankruptcy proceedings themselves.

However, the courts recognise that not all business failures involve misconduct. If you acted honestly and responsibly in your role as a director, you may have a good chance of avoiding liability or securing a favourable settlement.

How can such a claim be settled, and could Alternative Dispute Resolution (ADR) help?

If the claim has merit or the cost of defending it outweighs the potential liability, a pragmatic commercial settlement may be preferable. However, settlement should not be rushed. It is important to fully understand the strength of your position and to negotiate effectively.

Alternative Dispute Resolution (ADR), including mediation, can often resolve claims quickly, cost-effectively, and confidentially.

What is the role of D&O Insurance in such claims?

You should check whether you have Directors’ and Officers’ (D&O) insurance. Many policies cover legal costs and liabilities arising from claims by liquidators, including those relating to misfeasance and wrongful trading.

Early notification to your insurer is also essential. Delays can jeopardise cover, especially if court proceedings are already under way.

Conclusion & How We Can Help

To conclude, facing a claim from a liquidator or administrator is a serious matter, but not one without hope. With proper advice, well-documented decision-making, and a strong legal strategy, these claims can often be successfully defended or resolved.

We can act for directors, shareholders and other stakeholders in defending insolvency-related claims. Our team combines deep legal knowledge with commercial insight to help clients protect their interests and resolve disputes efficiently, and we’re here to help.

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.