An agreement with a company has gone into arrears. The vehicles may or may not have been sold. The company has placed itself into voluntary liquidation. Can the finance company take steps to protect itself if it suspects that there has been mismanagement or misappropriation of funds within the company? Yes. Where "prejudice" will be suffered by a creditor, the court can order a compulsory liquidation, where the activities of the company will be more vigorously examined than might otherwise be the case with a voluntary liquidation.
The High Court in England has made an interesting decision in the case of ED Games Limited. A director of that company procured that it did not pay VAT for a period prior to its liquidation and in that period, the net deficit on the company's balance sheet increased. The High Court has held that the director could be held personally liable for the increase in such net deficit.
The following is a broad overview of the duties and liabilities of directors when their company is in financial difficulties. It is a general guide only and there will be variations according to the specific laws in each jurisdiction.
In Bridge Trustees Limited v Noel Penny, Judge Purle QC, sitting as an additional Judge of the High Court, held that the Court could use its inherent jurisdiction to permit an independent trustee to distribute surplus in a scheme that was winding-up. Under the Pensions Act 1995, an independent trustee is appointed to exercise powers otherwise conferred on the employer where an insolvency practitioner begins to act in relation to a company.
The defendant was the sole director of a company which went into liquidation. Almost six years after his appointment as liquidator, the claimant commenced proceedings seeking an order pursuant to s 212 Insolvency Act 1986 that the defendant contribute to the company’s assets on the basis that he had acted in breach of duty of care and skill and in breach of fiduciary duty owed to the company, which had resulted in the company’s deficiencies.
With businesses focused on the impact of the novel coronavirus (COVID-19) pandemic on current and future liquidity, balance sheet and cash flow concerns, and an expected decline in the level and profitability of business activity in these difficult and uncertain times, in many cases attention has turned to the issue of the duties and responsibilities of directors to creditors when a corporation is financially troubled and is either approaching insolvency (the so-called “zone of insolvency”) or becomes insolvent.
Indenture trustees and agents participate in the administration of chapter 11 cases in a number of ways, including by protecting holders’ rights, ensuring compliance with the applicable indenture and other agreements, and fulfilling their duties and responsibilities under applicable law.
Avago Technologies Wireless (USA) Manufacturing Inc. acquired PLX Technologies, Inc. for $6.50 per share in cash. After the $300 million merger closed, certain former PLX stockholders sued for damages, alleging that the PLX directors had breached their fiduciary breaches, aided and abetted by both Potomac Capital Partners II, L.P. (a hedge fund that is an activist stockholder and had three designees on the PLX board) and the PLX board’s financial advisor (the “Banker”).
Fifth Circuit Rejects Breach of Fiduciary Duty and Fraudulent Transfer Claims
By Michael L. Cook*
“[T]he largely debt-financed purchase of a family-owned [business] was not a fraudulent [transfer] and did not amount to a violation of the fiduciary duty of the company’s directors,” held the U.S. Court of Appeals for the First Circuit on Dec. 4, 2017. In re Irving Tanning Co., 2017 W.L. 5988834, *1 (1st Cir. Dec. 4, 2017).