Such proceedings are not straightforward and inevitably involve significant delay, and ultimately may only result in a particular creditor receiving a small portion of their claim, known as a dividend, as a creditor in the insolvency proceedings.A liquidator may be without funds to pursue claims, and the fact that a portion only of recoveries may be recovered by an individual creditor can be a significant disincentive to creditors to put their hands in their pockets to fund litigation and risk throwing good money after bad…. Another option may be available to an unhappy creditor. Recent changes in the law mean that liquidators and administrators can sell rights of legal action against directors and others for wrongful trading. In fact, if an officeholder does not wish to pursue the claims themselves, they are under an obligation to properly consider any offer to purchase, and should sell unless there is good reason not to. Whilst it is common practice for banks to require inter-company group cross guarantees to be provided, it is not so in ordinary trading or supply relationships. Where a subsidiary is dependant on a parent company for financial support, a company’s auditors may require that the parent company issue a “financial support” letter addressed to enable them to make a going concern statement for auditing purposes. However, such letters are normally carefully drafted so as to avoid any enforceable financial obligation in the event of failure of the subsidiary. In relation to auditors themselves, the courts have held they have no direct “legal” duty of care to creditors generally, and so are not legally liable to them even when their work has been held to be seriously deficient. In particular limited circumstances, a director may become personally liable for debts of a company, for example where they are involved in successive phoenix companies which have the same or similar trading names and where relevant procedures have not been followed to allow them to gain exemptions from liability. Furthermore, if a director has made demonstrably false statements about the company’s financial position, they can be held to be directly and personally liable to a creditor for fraudulent misrepresentation or under the tort of deceit. So, in general terms, whilst it can be seen that creditors’ main route to remedy following an insolvency is as a creditor of the insolvent company, and if appropriate, this may justify the creditors giving support to the officeholder to take action against the director or parent company, there may be options available to the creditors to make direct claims themselves. Gavin Jones is a licensed insolvency practitioner and restructuring partner at Hill Dickinson LLP solicitors.
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