Introduction
The following posts will consider a number of statutory provisions in the IA 1986 which were enacted specifically to protect the creditors of insolvent or prospectively insolvent companies.
All of the provisions relate to a situation where a company enters into a formal insolvency procedure. Their aim is to enable the restoration of funds that ought to have been available to meet the claims of the company’s creditors as a whole. Most of the statutory provisions apply when a company is either in a liquidation or administration. The provisions do not apply to a company which is in administrative receivership or other type of receivership (except for proceedings relating to transactions defrauding creditors under s.423 which can be brought whether or not the company is in an insolvent procedure).
Both a liquidator and an administrator have the power to look back to a specific period before a formal insolvency procedure begins and to bring proceedings in which they request the court to make the necessary orders with a view to restoring the company’s position to what it would have been if the company had not entered into the transaction. The orders sought may include the unwinding of the transaction and hence the transactions are called voidable transactions. That said, often the office-holders are not seeking to unwind the transactions but rather to seek compensation that the company’s position is restored in monetary terms. It is important to note that the court has the power to make such order as it thinks fit.
Liquidators and administrators have the power to bring proceedings for compensation against the directors personally (for fraudulent trading and wrongful trading and in the case of liquidators only, for misfeasance).
Liability of directors for fraudulent and wrongful trading
The provisions on fraudulent and wrongful trading were enacted to prevent the reckless and negligent conduct on the part of those running companies. The concern is that directors may continue to incur further debts at a time when the company is in financial difficulty with no reasonable prospect of turning the company’s prospects around, with the result that losses to creditors are increased.