UK Law and Practice Contributed by: Kate Stephenson and Zoe Stembridge, Kirkland & Ellis
Directors found guilty of breach of duty may be ordered to repay, restore or account for money or property (with interest) to the company by way of compensation. 7.4 Other Consequences for Directors and Officers A disqualification order may be made against direc - tors (including executive, non-executive and shadow directors) if the company becomes insolvent and their conduct as a director makes them unfit to be con - cerned in the management of a company. Disqualifi - cation can last for up to 15 years. Directors may vol - untarily give disqualification undertakings without the need for court proceedings. The court can make a compensation order against a director subject to a disqualification order if such director’s conduct caused quantifiable loss to credi - tors of a company that has entered into formal insol - vency proceedings or been dissolved. Compensation proceedings may also be settled by voluntary under - taking. The Finance Act 2020 introduced potential personal liability for directors for a company’s tax liabilities (including penalties) if HMRC considers that avoid - ance or evasion has taken place or there is evidence of “phoenixism”. The Insolvency Service will also bring matters of pos - sible unfit conduct to the attention of any other rel - evant regulator, for them to consider. 8. Setting Aside or Annulling a Transaction 8.1 Circumstances for Setting Aside a Transaction or Transfer Grounds for Challenge Possible grounds to challenge pre-insolvency trans - actions include: • transactions at an undervalue; • preferences;
• transactions defrauding creditors; and • property dispositions after the commencement of a winding-up. Each of these grounds essentially aims to unwind transactions that would otherwise have frustrated or allowed the company to avoid the payment of credi - tors on insolvency in accordance with the statutory priority of claims. In most cases, only administrators or liquidators may bring a claim challenging a review - able transaction (although claims for transactions at an undervalue and preferences can be assigned by the officeholder to any third party). However, where there is fraud, any party that is a victim of the transac - tion may make a challenge. The entry into of such transactions by the compa - ny may also be viewed as a breach of the directors’ duties. Look-Back Period The look-back period differs according to the relevant ground of challenge and ranges between: • two years prior to the commencement of insol - vency proceedings where the transaction was with a connected party (including directors, shadow directors, and associated persons and companies); and • six months for other parties. Court Involvement Most grounds for challenge require an office holder (or their assignee) to commence court proceedings. However, a floating charge entered into during the look-back period will be void automatically, save to the extent of any new money provided on or after the charge was granted. The court generally has wide discretion to make any order it thinks fit to restore the position to what it would have been but for the relevant antecedent transaction. Defences Defences include that: • the company was not insolvent at the relevant time (for a number of actions);
• extortionate credit transactions; • avoidance of floating charges;
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