Following an increase in zombie companies and the recent recession, many unsecured creditors are now wondering… ‘Will I ever get my money back when a company goes pop?’

It is becoming the norm that there simply aren’t sufficient assets to repay secured creditors, let alone unsecured… so how can a liquidator swell the coffers to pay money back?

A growing segment of insolvency professionals are becoming specialists at investigation and litigation in order to recover potentially significant funds above and beyond those few remaining assets on the balance sheet when a company goes into liquidation; but why?

The Insolvency Act 1986 provides tight, stringent, rules and regulations that companies and, more importantly, company directors must abide by when a company starts to have financial troubles. The rules allow liquidators, where appropriate, to pursue directors for financial redress or overturn transactions and recover sums from them and others. Company directors include de jure directors (those registered at Companies House), together with de facto and shadow directors, who are actually involved in running and controlling the business but may not be registered as directors.

With the recession going on for so long, many companies have seen cash flow struggles become a part of daily life, a constant juggle. Creditors tend to get paid according to who shouts the loudest, but these situations can potentially lead to serious problems for directors, unless they act in the best interest of all creditors – not just themselves, or those that they hope to continue working with in the future. It can sometimes take just a few months to rack up some large debts to trade creditors and the Crown, and suddenly you are left in a position of ‘robbing Peter to pay Paul’ – a situation that ultimately leads to insolvency, but often a long time after the initial problems were conceived.

The main advantage of running a business via a limited company is limited liability; but there are a number of occasions whereby this protection can be pierced, and this is easier than you may imagine.

Through the Insolvency Act and the common law, liquidators can bring claims against directors, advisors and possibly any third party. These civil actions are brought in the Companies Court or in the Chancery Division and the claim must be proved ‘on the balance of probabilities.’ ". Directors do not have to act fraudulently, or in bad faith, in order to be a target for such actions but even fraudulent acts are pursued with the lower civil as opposed to criminal standard of proof and so actions may be taken even where criminal action is not feasible.

So when is it right to bring an action against a director or other party? Before any extensive investigation should be undertaken there are a few simple steps to consider; this is, after all, an attempt to recover funds for creditors. The most important question is: can any target afford to pay monies into the pot?

There are a number of enquiries that can be undertaken to try to establish whether a target can afford to repay the company. There is no benefit in conducting an enquiry and establishing some claim if, after successfully proving the point, the target is unable to pay. These searches include property searches and valuations. More and more information can be identified these days through simple internet research.

Having established whether someone can pay, the next step is to establish whether any claim exists and can be brought. This usually involves a detailed investigation. At all times, commerciality is a matter for the liquidator as there is little point in costs exceeding potential recoveries brought about by an action.

Deciding whether or not to investigate always involves careful consideration of the potential costs involved, but if there are potentially good claims, liquidators are more and more willing to work on risk, with their lawyers working on conditional fee arrangements (s ‘no win, no fee’ agreement).

Something for nothing, I hear you say; but often it is the only way to proceed. Creditors have already lost so much, and are unsurprisingly not willing to lose more to fund any action going forward.

On a positive note, in a world where it is presumed that the bank gets paid first and there will be nothing left for the everyday hardworking creditor, many recoveries from the type of actions described above are not caught by usual bank security, and are thus available for the general body of creditors. Sometimes the bank will agree the claims can be brought and a share of recoveries go to unsecured creditors if the bank is not funding any action itself.

About the author

Ian Robert is a partner at Kingston Smith & Partners, the corporate recovery and insolvency arm of top 20 accountancy firm Kingston Smith LLP. With over 20 years’ experience, Ian specialises in finding practical solutions to rescue businesses, whether by means of restructuring or formal insolvency procedures. He is a licensed insolvency practitioner and a fellow of the ICAEW and R3. www.kspllp.co.uk