Creditors' Rights!

It seems only natural that, when companies get into financial difficulties, directors should seek to salvage what they can from the wreckage. However, the interests of creditors have to be taken into account when insolvency threatens and, in one case, a businessman’s failure to seek legal advice left him in very deep water.

The businessman and his wife ran a once highly successful property development company which was carefully managed before it came unstuck in the recession. It entered creditors’ voluntary liquidation in July 2008 with an estimated deficiency of about £1.1 million, most of which was owed to a bank.

The company’s liquidators launched proceedings against the couple, accusing them of misfeasance and breach of trust in seeking to remove capital and property assets from the company for their own benefit, and at the expense of creditors, in the months before it went bust.The High Court found that the businessman was aware that the company was at serious risk of insolvency when he took steps to extricate certain assets from it in order to preserve them for the benefit of his family. Those steps were taken without legal advice in respect of his duties as a director and at a time when the company was entirely dependent upon continuing support from the bank, which was by no means assured.

The majority of the liquidators’ claims in respect of property assets were rejected. However, the Court found that £875,000 which was credited to the directors’ loan account prior to the liquidation remained an asset of the company and was thus available to creditors. The couple had also retained some property interests which were beneficially owned by the company. The Court would hear further argument on the precise form of order arising from its decision.