In the complex landscape of corporate insolvency, insolvency practitioners play a pivotal role in safeguarding the interests of creditors and stakeholders. One critical aspect of this role is the identification and pursuit of director misfeasance, which has far-reaching implications for the outcomes of insolvency proceedings.

Scroll to the final part of this article if you wish to learn about the different funding and assignment options available to pursue misfeasance claims. But if you wish to learn more about these types of cases then please read on.

Director misfeasance refers to the wrongful or improper conduct of company directors, often leading to financial harm to the company or its creditors for the director’s personal gain. It is a subject of paramount importance for insolvency practitioners as they aim to clarify the complexities of corporate failures, recover assets, and ensure equitable distribution to creditors.

It is in this context that director misfeasance funding and insurance can become vital factors. Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we can assist clients by helping them secure funding and insurance for director misfeasance cases.

Directors Misfeasance in Insolvency

When a company faces insolvency, the appointed Insolvency Practitioner is obligated by law to scrutinise the conduct of directors during the period leading up to insolvency.

Insolvency Practitioners primarily focus on determining whether the company director(s) had a clear comprehension of their legal obligation to prioritise the interests of creditors once they were aware of the company’s insolvency.

Neglecting this responsibility, particularly in cases where it can be substantiated that directors acted with full knowledge to the detriment of creditors, may lead to allegations of wrongful trading and a breach of fiduciary duty.

If it is found that a director is guilty of misfeasance or breached their fiduciary duty, they can be personally liable for the limited company’s debts or losses incurred as a result of their wrongful actions. The court may disqualify directors from acting as company directors for a specified period if they are found to be unfit to manage a company. Disqualification can range from a few years to up to 15 years, depending on the severity of the misconduct.

The Insolvency Act 1986 in relation to director misfeasance

The Insolvency Act 1986 in the United Kingdom contains several provisions that relate to director misfeasance. These provisions are designed to protect the interests of creditors and ensure that directors are held accountable for their actions in situations of insolvency. Some key aspects of the Insolvency Act 1986 relating to director misfeasance include:

Wrongful Trading (Section 214): Section 214 of the Insolvency Act 1986 allows for wrongful trading claims against directors. It applies when a director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation but continued to trade, thereby worsening the position of creditors. If it is found that a director had a personal liability for wrongful trading, they may be personally responsible for the company’s debts. They will also be liable if a personal guarantee has been signed.

Fraudulent Trading (Section 213): Section 213 addresses fraudulent trading, where a director carries on the business with the intent to defraud creditors or for any other fraudulent purpose. If fraudulent trading is proven, directors may be held personally liable and potentially face criminal charges.

Preferences (Section 239): Section 239 deals with preferential payments, which occur when a company transfers company assets or pays off one creditor to the detriment of other creditors with the intent to prefer that creditor. Insolvency practitioners can challenge these transactions and seek to recover the assets for the benefit of all creditors.

These provisions within the Insolvency Act 1986 empower insolvency practitioners to challenge director misconduct, recover assets for the benefit of creditors, and hold directors accountable for their actions in insolvency situations. Understanding and utilising these provisions is crucial for insolvency practitioners in their efforts to maintain the integrity of the insolvency process and protect the rights of creditors. If, as a director, you have been wrongfuly accused of such behaviour then you may wish to instruct solicitors to represent you. If you would like guidance on who to instruct then please feel free to make contact using the details below.

How litigation funding can assist insolvency practitioners in director misfeasance claims

Assignement, litigation funding and insurance can play a significant role in assisting insolvency practitioners in director misfeasance claims by providing financial support and risk mitigation. Outlined below are some ways in which litigation funding can be beneficial:

Financial resources: Director misfeasance claims can be complex and costly to pursue. Litigation funding or Assignement of claims can help insolvency practitioners access the necessary financial resources to engage legal experts, forensic accountants, and other professionals to build a strong case. It can also cover legal fees and disbursements, which can be substantial in high-stakes litigation.

Risk sharing: Litigation funders and Assignment businesses often share the risks associated with legal proceedings. If the case is unsuccessful, the insolvency practitioner is not burdened with the financial loss, as the funding company absorbs the costs. This risk-sharing aspect provides insolvency practitioners with confidence in pursuing director misfeasance claims.

Enhanced legal expertise: With the financial support from litigation funders, insolvency practitioners can retain the best legal representation and expert witnesses, which can significantly strengthen their cases. This expertise can be critical in uncovering evidence and building a compelling argument in director misfeasance claims.

Expanded scope: Litigation funding or assigning a claim to a funder can enable insolvency practitioners to take on larger and more complex cases. They can investigate and pursue director misfeasance claims that might have otherwise been deemed too costly or risky to undertake independently.

Director misfeasance funding and insurance options

The assignment model has become a go-to for many IPs involved in insolvency litigation; however, giving up control is not always be the best option for creditors, or indeed the IP or solicitors either. The assignment model is something we might suggest for lower-value claims, and we always approach a range of potential buyers to secure a good deal and satisfy the professional duties of the IP.

Insolvency practitioners, Liquidators and Trustees in Bankruptcy may also wish to make use of the following funding and insurance methods.

After-the-event (ATE) legal insurance – ATE insurance is generally used to protect from adverse costs risk & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’.

For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss with the obligation to pay the insurer in the event of a win.

This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

ATE insurance can provide protection from adverse costs to those pursing a case for director misfeasance. Some funders will take assignments without ATE, whilst other funders might provide their own ATE or request the IP to do so. It is important to understand the different insurance products available and how they can manage:

• Adverse costs risks
• Own disbursement cover or funding, as well as own costs cover.
• Meeting any Security for Costs application, either as ATE with anti-avoidance endorsements (AAE) or in conjunction with a Deed of Indemnity.

Annecto Legal can provide insight across the options available and secure a range of options for claims of all sizes.

Third party litigation funding –Funders may be willing to provide finance for an insolvency dispute claim in exchange for a percentage of any financial settlement or damages awarded. This option can be attractive for individuals who cannot afford to pay for legal fees themselves but have a strong case. ATE insurance is often used in conjunction with this type of funding.

Alternatively, funding can be structured around the amount deployed, rather than as a percentage of recoveries. This can be attractive on claims where the level of funding required is relatively modest in relation to the potential claim value. Securing a cost-effective funding model for disbursements, counsel’s fees, solicitors fees and/or the direct investigation costs of the IP is not always straightforward. Having an independent party that has a wide view of the market and the funding products available can be invaluable.

How can Annecto Legal assist?

At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners and liquidators or administrators who are involved in dealing with director misfeasance. If you are in the process of bringing a claim or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.