Insolvency can be a challenging and stressful time for everyone involved. When a company is unable to pay its debts, disputes often arise between directors, creditors and insolvency practitioners, each with different interests and priorities. These disputes can involve significant financial risk and, in some cases, personal liability.
In this article, we explain what insolvency disputes are, why they arise and the roles played by directors and creditors. We also outline the most common types of insolvency claims and explain how to access a free 30 minute consultation with a solicitor if you need advice tailored to your situation.
What is an insolvency dispute?
An insolvency dispute is a disagreement that arises in connection with a company that is insolvent or approaching insolvency. Insolvency occurs when a company can’t pay its debts as they fall due or when its liabilities exceed its assets.
Disputes can arise during formal insolvency processes such as liquidation or administration, or in the period leading up to insolvency. They often involve questions about how the company was managed, how assets were dealt with and whether certain actions unfairly disadvantaged creditors.
Insolvency disputes are usually more complex than standard commercial disputes because they involve statutory duties, strict time limits and the interests of multiple parties.
The role of directors in insolvency disputes
Directors play a central role in many insolvency disputes. When a company is solvent, directors owe their duties primarily to the company and its shareholders. However, once a company is insolvent or at risk of insolvency, those duties shift towards protecting the interests of creditors.
If directors continue to trade when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency, they may face claims for wrongful trading. Directors can also be challenged for breach of duty if they fail to act in the best interests of creditors or don’t take appropriate steps to minimise losses.
These claims can result in personal liability, meaning directors may be required to contribute personally to the company’s assets. This makes early advice particularly important for directors facing financial difficulty.
The role of creditors in insolvency disputes
Creditors are often at the centre of insolvency disputes. They may include suppliers, lenders, landlords or other businesses owed money by the insolvent company. Creditors are usually divided into secured and unsecured categories, each with different rights and priorities.
Secured creditors may have security over specific assets and are often paid first. Unsecured creditors typically rank behind secured creditors and may receive only a small proportion of what they are owed, if anything at all.
Disputes can arise where creditors believe they have been treated unfairly, excluded from decision making or disadvantaged by actions taken before insolvency. Creditors may also challenge transactions they consider improper or seek to recover sums through legal claims.
Common types of insolvency claims
There are several types of claims commonly seen in insolvency disputes. One of the most well known is wrongful trading, where directors are accused of allowing a company to continue trading when insolvency was unavoidable.
Claims may also arise in relation to preferences, where a company is alleged to have favoured one creditor over others shortly before insolvency. Transactions at undervalue are another common issue, involving the disposal of assets for less than their true value.
These claims are often brought by insolvency practitioners, such as liquidators or administrators, acting on behalf of creditors. Understanding the nature of these claims is essential for anyone involved in an insolvency dispute.
How insolvency disputes are resolved
Insolvency disputes can be resolved in a number of ways, depending on the nature of the claim and the parties involved. In some cases, disputes are resolved through negotiation or settlement discussions, particularly where the costs and risks of court proceedings are high.
Where settlement isn’t possible, disputes may be determined through court proceedings. Insolvency claims are usually brought in the High Court or specialist insolvency courts and are subject to strict procedural rules and deadlines. These proceedings can be complex and require careful preparation of evidence.
Insolvency practitioners play a key role in resolving disputes. Liquidators and administrators have statutory powers to investigate the conduct of directors, review transactions and bring claims where appropriate. They act in the interests of creditors as a whole, rather than any individual party.
Defending or bringing insolvency claims
For directors facing insolvency claims, early legal advice is critical. Defending a claim may involve showing that reasonable steps were taken to minimise losses to creditors, that decisions were made based on professional advice or that the statutory requirements for a claim haven’t been met.
Creditors considering action should also seek advice promptly. While insolvency practitioners usually control formal claims, creditors may have options to challenge decisions, request investigations or pursue claims in certain circumstances.
Timing is particularly important in insolvency disputes, as many claims are subject to limitation periods and statutory deadlines. Delay can reduce options or weaken a party’s position.
Preventing and managing insolvency disputes
Many insolvency disputes can be avoided or reduced through early action. Directors who recognise financial difficulty at an early stage and seek professional advice from commercial property solicitors are often better placed to manage risk and avoid personal liability.
Maintaining accurate financial records, acting transparently and taking steps to protect creditors’ interests can all help reduce the likelihood of disputes. Creditors can also protect themselves by monitoring accounts, enforcing contractual rights and acting promptly when concerns arise.
Insolvency disputes involve complex legal and financial issues and can have serious consequences for directors and creditors alike. Understanding your rights and obligations and knowing when to seek advice, can make a significant difference to the outcome.
With the right approach, many insolvency disputes can be managed effectively and resolved in a way that protects your position.
Get clear advice on your situation
Please note that this article is for informational purposes only and isn’t a substitute for legal advice. We encourage readers to contact Osbourne Pinner for case specific guidance.
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