The Insolvency Practitioner

The Insolvency Practitioner, His Role and the Misfeasance Claims That Can Be Brought by Him Against Company Directors

Introduction

Insolvency can be a challenging and stressful time for company directors, particularly when appointing an Insolvency Practitioner (often referred to as an IP).  This article aims to provide an overview of the role of an IP, how they can be appointed and the potential claims they can bring against company directors.

By understanding the powers and responsibilities of an IP, directors can be better prepared to navigate the insolvency process and protect their interests.

What is an Insolvency Practitioner?

An Insolvency Practitioner (often referred to as an IP) is a regulated professional usually from an accountancy background.  An IP is an officer of the court, licensed and authorised by a regulatory body to accept insolvency appointments.

Who can appoint an Insolvency Practitioner?

IP’s can be appointed in a number of different ways depending on which insolvency process has been selected and/or been undertaken by an interested party.  However, most IP’s are appointed by:-

• The directors of a company.
• The shareholders of a company.
• The company itself acting through its directors.
• A creditor of the company.

Each of the above routes ultimately result in the same outcome of the IP being appointed.  However, each route can differ as to the time and cost it may take for the IP to be appointed.

Why are Insolvency Practitioners appointed?

In most cases it will be company directors (who on the advice from the company accountant) will approach an IP to assist them in dealing with the company’s financial affairs.  IP’s are usually retained when companies are facing financial difficulty or uncertainty.  An IP will then usually meet with the company director and often the company accountant in order to carry out a detailed financial reconciliation of the company, its finances and its outstanding creditor position.

After carrying out that exercise, the IP will then be in an informed position to adequately advise as to the next steps.  To include, whether the company should be placed into insolvency, whether by way of Creditors Voluntary Liquidation or Administration.

What is the role of the Insolvency Practitioner?

If it is agreed that it is no longer viable for the company to continue trading (subject to the company director completing the relevant appointment documentation) the IP will then be appointed and authorised to deal with all company affairs (to include all financial matters) in place of the Company director.  The IP’s primary roles and responsibilities will then be as follows:-

• Reviewing the financial trade of the company usually for the last 2 years prior to the company being placed into insolvency. To include reviewing any payments made out of the company account to the company’s officers, creditors or other associated individuals or companies.
• The ability to apply to Court to compel an individual or third-party to provide information, documentation or responses regarding the company’s insolvent’s affairs and dealings. (Pursuant to Section 234 to 236 of the Insolvency Act 1986).
• Protecting the interests of the company’s creditors. Whether by securing and safe keeping the assets of the company (if any) to include machinery, cash at bank and other chattels that could be realised to raise funds to pay any creditors of the company.  To include pursuing the directors of the company.  Please see below.
• Putting in place a structure to enable the company to recover any debts payable to it.
• Minimising the impact of the insolvency process on the creditors, the company’s officers and any other stakeholders whilst ensuring that any and all company assets, funds and resources are recovered, realised and distributed to the company’s creditors accordingly.
• Subject to the facts and the extensive powers available to the IP, the issue of court proceedings (to include against the company director) to recover funds and/or assets the IP considers are rightfully due to the company. Please see below.

The above is not an exhaustive list, but provides a synopsis of the roles and responsibilities the IP will undertake once appointed.

What misfeasance claims can the Insolvency Practitioner bring against a company director?

One point that company directors often overlook is that although they may have appointed the IP at the outset, the IP remains objective, is duty bound to review the company’s financial affairs as well as the conduct of the company’s directors.  If after carrying out these steps, it is not unusual for the IP then to initiate and/or pursue claims against a company director for the following:-

• A failure by the company director to adhere to his/her director duties set out at Section 170 to 177 of the Companies Act 2006.
• Misfeasance claims are usually brought against company directors pursuant to Section 212 of the Insolvency Act 1986. Claims usually pursued by an IP will be that the company director misapplied company funds or other company assets that he/she should repay to the company.  For example, the company director having an alleged overdrawn Directors Loan Account or the taking of excessive dividends at a time when the company had insufficient funds for those dividends to be taken.
• The IP’s claims for financial recovery and/or allegations usually pursued against a company director can be found at Section 213 Insolvency Act 1986 (Fraudulent trading), Section 214 Insolvency Act 1986 (Wrongful trading), Section 238 Insolvency Act 1986 (Transactions at Undervalue) and Section 239 of Insolvency Act 1986 (Preference Payments).

Once again, the above is not an exhaustive list, but provides an indication of the more regular claims pursued by IP’s against company directors once appointed.

Conclusion

Although an IP provides a critical role in the administration of a company at the time of insolvency, it should not be overlooked by a director that the same IP (regardless of whether the IP was appointed by the director) could following his appointment and having investigated the company’s financial affairs pursue the director personally for a financial contribution to be applied against the company’s outstanding liabilities.

As set out in this article, an IP has a very wide range of powers and tools at his disposal to investigate and then pursue financial claims on behalf of the company if the facts support such a cause of action. To include, compelling an individual or third-party to co-operate in his investigation by court order if the party refuses to co-operate or engage in the investigation voluntarily.  Please see our separate article on Sections 234 to 237 of the Insolvency Act 1986 that explores this further.

What can we at D & N Solicitors do to assist?

This firm is regularly instructed by company directors who find themselves subject to claims being pursued by IP’s often for hundreds of thousands of pounds.  This firm has a proven track-record of working with clients, defending and/or defeating claims being pursued by IP’s and bringing about a fair, sensible and realistic settlement for all parties.

If you have any queries arising out of the above or are being pursued by an IP, then please do not hesitate to get contact us.  We at D & N Solicitors will be more than willing to assist in any way that we can.