Duties of administrators in the event of insolvency – Insolvency/Bankruptcy

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When a company is insolvent, the directors of a company are required to protect the interests of the company’s creditors. Directors can therefore be held liable for actions they take before the cessation of a company’s activities and also during insolvency. This includes:

(a) Illegal trade
If directors continue to operate a business and incur further credits and debts knowing that there was no way for the business to avoid insolvency, they can be held liable for wrongful dealings.

(b) Fraudulent trade
If the directors continue to operate a business and incur further credits and debts, despite knowing that there is no way for the business to avoid insolvency and with the intention of defrauding the creditors, they can be held responsible for fraudulent transactions.

(vs) Personal guarantees
Insolvency proceedings will likely result in the execution of any personal guarantees given by the directors for the debts of the company.

(D) Preferential payments
If insolvency is likely, a business should treat all creditors equally. If a creditor is given priority over others so that it is in a better position, the administrators could be personally liable for payments made to the preferred creditor.

(e) Undervalued transactions
If there is a transfer of assets for less than market value during the two years prior to insolvency, the administrators may be personally liable to contribute the difference in value.

If there is any question as to whether a director is at risk in the event of insolvency, immediate legal advice should be sought. Edward Beedham specializes in the legal and procedural aspects of corporate insolvency, including the duties, obligations and risks of directors.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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