When a company is placed into compulsory or creditors’ voluntary liquidation, the liquidator’s statutory function is to gather in and realise the company’s assets for the benefit of creditors. A significant part of that exercise is investigating the conduct of the company’s directors and former directors, and, where appropriate, bringing proceedings against them personally. These claims can be substantial, are frequently funded by litigation funders or assigned to third parties, and expose directors to personal liability that company limited liability does not shield. If you have received a letter of claim, an application notice, or a request for information under sections 235 and 236 of the Insolvency Act 1986, you should obtain specialist legal advice without delay.

The good news is that these claims are defensible. Each cause of action has specific statutory ingredients that the liquidator must prove, each carries recognised defences, and the Companies Act 2006 provides a discretionary power for the court to relieve an honest and reasonable director from liability. This succinct guide, prepared by our insolvency litigation team, sets out the claims a liquidator can bring, the defences available to each, and the practical strategy for protecting your position.   

Why Liquidators Bring Claims Against Directors?

A liquidator owes duties to the general body of creditors and must act to maximise recoveries into the insolvent estate. Claims against directors serve two purposes: they swell the pot available for distribution, and they hold directors to account for conduct in the period before insolvency. The liquidator’s investigation typically focuses on the so-called twilight period: the months or years in which the company was insolvent, or heading towards insolvency, and in which directors’ duties shift to take account of creditors’ interests. Administrators and liquidators are also obliged to report on directors’ conduct to the Insolvency Service, which may lead to separate director disqualification proceedings under the Company Directors Disqualification Act 1986.

Importantly, it is no defence to say that a director was unaware of the company’s financial position: a director is expected to inform themselves. Non-executive directors are generally held to the same standard, and resigning once difficulties emerge will rarely assist and may be treated as aggravating. Understanding this backdrop is the first step in mounting an effective defence to post-insolvency claims.

The Claims a Liquidator Can Bring:

A liquidator (and in some cases an administrator) has a suite of statutory and common law claims. The principal ones are summarised below, with the relevant provisions of the Insolvency Act 1986.

1. Misfeasance (section 212)

Section 212 is a procedural “summary remedy” rather than a freestanding cause of action. It allows the liquidator to seek a court order requiring a director, officer or other person involved in the management of the company to restore property, account for it, or contribute compensation, where they have misapplied or retained company property or been guilty of misfeasance or breach of any fiduciary or other duty. In practice it is the vehicle used to enforce breaches of directors’ duties, including the recovery of overdrawn director’s loan accounts and unlawful dividends.

2. Wrongful Trading (section 214)

Section 214 allows the court to order a director to contribute to the company’s assets where, at some point before the start of the winding up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation, and they continued to trade. The standard combines an objective test (the general knowledge, skill and experience reasonably expected of a person carrying out that director’s functions) with a subjective uplift where the director in fact possesses greater knowledge or skill.

3. Fraudulent Trading (section 213)

Section 213 applies where the business has been carried on with intent to defraud creditors or for any fraudulent purpose. Because it requires actual dishonesty, the evidential threshold is high and the consequences serious; fraudulent trading is also a criminal offence. Claims under section 213 are far rarer than wrongful trading precisely because dishonesty must be proved.

4. Transactions at an Undervalue (section 238)

Section 238 enables the liquidator to challenge a gift, or a transaction for significantly less than the value the company provided, entered into within the relevant time (generally two years before the onset of insolvency under section 240). The company must also have been insolvent at the time or have become insolvent as a result, which is presumed where the other party is a connected person. The court may make such order as it thinks fit to restore the position. Valuation of consideration is often the battleground.

5. Preferences (section 239)

Section 239 targets the situation where a company, influenced by a desire to put a particular creditor (or surety) in a better position on insolvency than they would otherwise have occupied, does something that has that effect. The relevant time is six months before the onset of insolvency, extended to two years where the preference benefits a connected person. The requirement that the company was “influenced by a desire” to prefer is central.

6. Transactions Defrauding Creditors (section 423)

Section 423 is a powerful provision that allows a transaction at an undervalue to be unwound where it was entered into for the purpose of putting assets beyond the reach of creditors, or otherwise prejudicing their interests. Unlike sections 238 and 239 it has no fixed look-back period and can be brought by a victim of the transaction as well as by an office-holder. Limitation is fact-sensitive and depends on the relief sought.

7. Breach of Directors’ Duties (Companies Act 2006)

The general duties owed by directors are codified in sections 171 to 177 of the Companies Act 2006, including the duty to promote the success of the company, to exercise reasonable care, skill and diligence, and to avoid conflicts of interest. Where a company is insolvent or bordering on insolvency, the duty to promote success is modified so that directors must have regard to the interests of creditors. Breaches are usually enforced through section 212 misfeasance proceedings.

8. Unlawful Dividends and Overdrawn Loan Accounts

Dividends paid otherwise than out of distributable profits are unlawful and recoverable; sums drawn by directors and recorded as loans frequently crystallise into personal liabilities once the company fails. These are among the most common and most readily provable claims a liquidator pursues, and they are often combined with misfeasance allegations.

The Creditor Duty and the “Twilight Zone”

Many liquidator claims turn on when directors should have recognised the company’s predicament and adjusted their conduct. In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court confirmed the existence of a creditor duty: as a company nears insolvency, directors must consider, and at later stages give priority to, the interests of creditors as a whole. Subsequent High Court decisions, including Hunt v Singh, have applied Sequana and emphasised that directors should focus on the reality of the company’s liabilities rather than optimistic assumptions. For directors, the practical lesson is that taking prompt specialist advice and keeping a contemporaneous record of decisions is one of the strongest protections against later allegations of breach. Where financial records are deficient, courts may draw adverse inferences against the director.

Defending the Claim: The Substantive Defences

A robust defence usually combines two strands: first, putting the liquidator to proof of each statutory ingredient and challenging causation and quantum; and second, advancing the positive defences and discretionary relief available for the particular claim. The principal defences are set out below.

Put the Liquidator to Proof: Elements, Causation and Quantum

Each cause of action has defined ingredients, and the burden lies on the liquidator to establish them. A defence drafted in accordance with CPR 16.5 must respond to every allegation, admit what is properly admitted, deny what is denied with reasons, and plead the director’s own version of events. Even where some breach is established, the liquidator must still prove that the breach caused loss to the company and must justify the amount claimed. Robustly testing causation and quantum, often with expert accountancy evidence on the company’s true financial position and the counterfactual, frequently reduces or defeats the claim.        

Wrongful Trading: the “Every Step” Defence

Section 214(3) provides a complete defence where the director took every step to minimise the potential loss to the company’s creditors that they ought to have taken, once they knew or ought to have concluded that insolvent liquidation was unavoidable. Continuing to trade is not automatically wrongful: in Re Continental Assurance Co of London plc the directors successfully resisted liability because they had taken proper advice and acted responsibly. A well-evidenced narrative of board meetings, professional advice, monitoring of cash flow and steps to protect creditors is the heart of this defence. The liquidator must also prove that continued trading worsened the creditors’ position (the “net deficiency” analysis).

Preferences: No Desire to Prefer

A preference claim under section 239 fails unless the company was influenced by a positive desire to improve the creditor’s position. Where a payment was made for ordinary commercial reasons, for example to keep a critical supplier on board or under genuine pressure, the requisite desire is absent and the claim should fail. Where the preferred party is not a connected person, the desire is not presumed and must be proved by the liquidator.

Transactions at an Undervalue: Value and the Good-Faith Defence

Defences to a section 238 claim include showing that the company received consideration of equivalent value (so there was no undervalue at all), and the statutory defence in section 238(5): the court must not make an order if satisfied that the company entered the transaction in good faith and for the purpose of carrying on its business, and that at the time there were reasonable grounds for believing it would benefit the company. Valuation evidence is usually decisive.

Transactions Defrauding Creditors: the Question of Purpose

A section 423 claim requires proof that a purpose of the transaction was to put assets beyond the reach of creditors or to prejudice their interests. If the transaction had a legitimate commercial purpose and the prohibited purpose was not a real, substantial purpose of those entering into it, the claim should not succeed. Careful analysis of contemporaneous documents and the commercial rationale is essential.

Relief under section 1157 of the Companies Act 2006

Even where a breach of duty or negligence is established, section 1157 of the Companies Act 2006 gives the court a discretion to relieve a director wholly or partly from liability where they acted honestly and reasonably and ought fairly to be excused. This is a key plank of a director’s defence and is usually pleaded by way of counterclaim alongside the substantive denial of liability, supported by evidence that the director acted bona fide in the company’s interests.

Limitation

Limitation can be a complete defence and should always be checked at the outset. The applicable period under the Limitation Act 1980 depends on the nature of the claim and the relief sought. Wrongful trading claims have been held subject to a six-year period. Antecedent transaction claims may be six or, where proprietary relief is sought, potentially twelve years, and misfeasance claims take their limitation from the underlying cause of action, with no period applying in certain cases of fraud or recovery of trust property. Because the analysis is fact-sensitive, early specialist advice is essential to identify whether the claim is, in whole or part, time-barred.

Ratification, Insurance, Indemnities and Funding the Defence

Other protections may be available depending on the facts: a breach may, in limited circumstances, have been ratified by the company; the director may benefit from directors’ and officers’ (D&O) insurance or a qualifying indemnity; and a company may, on the terms permitted by sections 205 and 206 of the Companies Act 2006, fund the cost of defending proceedings or applying for relief. Note that the Companies Act 2006 generally prohibits a company from exempting or indemnifying directors against liabilities, subject to specific exceptions, so the precise terms matter. Where a director’s loss flows from negligent advice, a claim against the negligent adviser or insolvency practitioner may also be available.

Procedure and Strategy

Most liquidator claims proceed by application notice in the existing insolvency proceedings in the Insolvency and Companies List of the Business and Property Courts, supported by points of claim and a witness statement. The respondent director files a defence (and, where relief under section 1157 is sought, a counterclaim) verified by a statement of truth, complying with the Insolvency (England and Wales) Rules 2016 and the Civil Procedure Rules. Key strategic considerations include:

• Engaging early at the pre-action stage. A well-evidenced response to the letter of claim can narrow issues, defeat weak allegations, and prompt a commercial resolution before costs escalate.
  
• Scrutinising the funding behind the claim. Many claims are pursued by litigation funders or have been assigned; an adverse costs strategy, including an application for security for costs, may be available.
  
• Marshalling contemporaneous evidence: board minutes, management accounts, advice received, and correspondence. Documentary evidence created at the time carries far more weight than later reconstruction.
  
• Assessing settlement realistically. Liquidators must act in creditors’ interests and are often open to commercial settlement, particularly where causation, quantum, or limitation are genuinely in issue.
  
• Considering set-off and counterclaims, including any sums the company owed the director and relief under section 1157.

Practical Steps if You Are Served with a Liquidator’s Claim

1. Do not ignore it and do not respond off the cuff. Deadlines run quickly, and statements made informally to the liquidator or Official Receiver can be used against you.
   
2. Preserve all documents. Retain board minutes, accounts, emails and advice. Do not delete anything; document destruction is itself a serious matter.
   
3. Locate your insurance. Check for D&O cover and notify insurers promptly in accordance with the policy, as late notification can prejudice cover.
   
4. Take specialist advice before any meeting or interview. You remain under a duty to co-operate, but the manner of co-operation should be handled with legal guidance.
   
5. Instruct experienced insolvency litigation lawyers to review the merits, limitation, causation and quantum, and to formulate your defence and any counterclaim.

Where the Real Fault Lies Elsewhere: Claims Against Advisers

Directors are frequently pursued for outcomes that flowed from negligent professional advice, for example from accountants, tax advisers or insolvency practitioners. Where that is so, a director or the company may have a parallel professional negligence claim. Equally, where the company’s difficulties were driven by an HMRC enforcement or VAT dispute, or where a director faces a Personal Liability Notice, specialist tax litigation advice should run alongside the defence. Considering these counter-claims early can materially improve a director’s overall position and, in some cases, fund the defence itself. Limitation in negligence is itself fact-sensitive (see guidance on the professional negligence limitation period).

Why Instruct Experts at LEXLAW?

LEXLAW is a City of London litigation practice operating from chambers in Middle Temple, with dual-qualified solicitors and barristers who act both for office-holders bringing claims and, importantly, for directors defending them. That breadth gives us an unusual insight into how liquidators build and value their claims, which we use to your advantage in defence. We handle the full range of insolvency litigation and contentious director claims, from pre-action correspondence to trial advocacy, and we coordinate with our professional negligence and tax dispute teams where a claim has those dimensions. Time is the critical variable: the options available today narrow with every day that passes. Contact LEXLAW now for a confidential case assessment.