Wednesday, 18 February 2015

Administrators: Powers To Bring Fraudulent/Wrongful Trading Claims

Currently, going back to the introduction of the Insolvency Act 1986, claims for wrongful and fraudulent trading (the latter being a far more serious allegation) could be brought against company directors by liquidators appointed over the company.
The Bill proposes to amend this provision to also allow appointed Administrators to bring such claims against directors (and also shadow directors as per the changes referred to in the previous blogs), perhaps with a view to attempting to reduce the cost of two sets of insolvency proceedings.
This is an expanded power for recovery of company losses against directors and also provides for circumstances where a company faces administration and is immediately dissolved following conclusion of the administration proceedings. Ordinarily, if any such wrongful trading or fraudulent trading claim existed, the Administrator would need to convert the insolvency to a liquidation for these purposes, a potentially expensive step with no guaranteed promise of any recovery being made.
Additionally, Section 107 of the Bill provides that any recoveries on the basis of these (and other) pre-insolvency transactions would not be payable to any holder of a fixed or floating charge (which is usually the purpose of an Administrator’s appointment) and so this may ultimately lead to a scenario where an appointed liquidator may be required to investigate such matters but is unlikely to issue proceedings in light of the requirement to convert to a liquidation if monies are recovered.
A future blog will discuss the payment of prescribed part sums to unsecured creditors out of Administration, but Section 107 recoveries do not appear to relate to such sums.
Both Insolvency Practitioners, directors and banks (or any other secured creditor) should be fully aware of these changes. At Francis Wilks & Jones we can advise on such matters.