It's my understanding that, with English Limited Liability Companies,
the directors represent the shareholders' interests.

And that, in a company that is insolvent as regards Capital (ie
Negative Equity), the creditors' interests are paramount, and they
should be represented by the appointment of a registered Insolvency
Practitioner.

(The Company is the Claimant)

Is this correct or not? And can you support your opinion?

---

Request for Question Clarification by answerfinder-ga on 13 Jun 2003 08:56 PDT

Dear probonopublico-ga 

I need to check a few things.
First,
You need to know who directors of a company represent and their
responsibilites.
Is that correct?
Secondly,
Have the directors declared the company to be insolvent?
Is it a voluntary or compulsory liquidation?
Or, in your view are they insolvent and are not recognising their
obligations?
Thirdly,
You need to know that if a company is placed in liquidation what are
the priorities of the liquidator?
Is that correct?
Lastly,
I'm not sure what you mean by 'the company is claimant'. Is this a
creditor company? Could you explain further.

Sorry to be so precise, I just need to make sure I understand the
question. Then I shall try to answer it.
Many thanks
answerfinder-ga

---

Clarification of Question by probonopublico-ga on 14 Jun 2003 02:04 PDT

Hi, Answer Finder 

It's great having you on the case.

The company has been insolvent (as regards capital) since 1988 with
Negative Equity of £80,000. It has survived because its only
shareholder was also its principal creditor, being owed £190,000 or
so. Its only asset is a disputed trust that is in its books at
£110,000.

The shadow proprietor held his shares offshore in the names of
nominees and he used an alias in his capacity as creditor. His two
sons acted as directors and secretary.

This was OK while the shadow proprietor was alive but he died in
October 1995, leaving a validly executed will in which he named his
two sons (from two marriages) as executors. They were also
beneficiaries as to 25% with his widow getting 50%.

The elder son, who is ten years older than his half-brother, is a
crook and he has ripped off the estate to his own advantage.

He never 'gathered in' the estate and simply continued to act as
director.

His father had taken out £1,750,000 of Life Assurance on his own life
for the benefit of the company and, for a time, the elder executor
pursued the collection of these policies. In vain, because the
insurers refused to pay out because of various irregularities.

After kicking his half-brother off the Board, without due notice, the
crook is now pursuing his stepmother for the disputed trust. This was
set up when his father purchased the matrimonial home in his wife's
name, in 1981, and he apparently used some funds from the company for
this purpose. Hence, the trust was essentially a device to satisfy the
company's accountants. The contribution (40%) was therefore
capitalised in the company's accounts.

However, his wife had not received independent professional advice and
the trust had not been witnessed in a solicitor's office, so it may be
invalid having regard to the House of Lords ruling in Barclays Bank
plc v O'Brien and Another (1993). Moreover, she had never charged a
share of the expenses incurred for the upkeep of the property, as she
was entitled to do under the trust.

Consequently, the net effect as regards the estate is insignificant.

But, of course, the crook does not see it this way and, even though he
is funding the litigation, he claims to be acting 'out of duty' for
the benefit of some overseas shareholders who, recently, have
mysteriously appeared on the scene.

My understanding is that, with an insolvent company, the directors
should appoint a licensed Insolvency Practitioner who can look after
the interests of the creditors and this has not been done.

And I would now like to support my belief, if possible, with some
research ... hence my question.

Of course, the lady in question is taking high quality legal advice
anyway but I would like to amaze these lawyers with my encyclopaedic
knowledge gleaned through the services of your good self.

As a matter of interest, the judge has already ruled that there is an
almost cast-iron case for security against costs and there's a good
chance that the case will be struck off.

In addition, there's a second claim (that is to be heard with this)
where it can be demonstrated that the crook has been lying through his
back teeth, so things are looking good.

I am now looking forward to seeing what you can turn up.

Many thanks.

Bryan

Dear Bryan,
This is a sorry tale.

I have researched your question and if there is anything that is not
clear, or you want additional information, then do ask as this set of
circumstances is certainly not straight forward.

To place the company into liquidation either a creditor has to apply
to a court for a winding up order if they do not receive the payment
due to them. Or, if the directors know the company is insolvent, for
the directors to declare the company insolvent and to enter into
voluntary liquidation. I did not ask whether the company was still
trading. This may be quite important when it comes to wrongful
trading. Also, the position of the shareholder being the principal
creditor is unusual.


First let me deal with the directors responsibilities. (I quote from
one very useful site which summarises many other corroborating sites).

Directors have a number of duties under the Companies Act :
"Keeping proper books of accounts and preparing accounts for
presentation to the company's shareholders;
Filing accounts and returns annually with the Registrar of Companies;
Informing the Registrar of Companies of the appointment or retirement
of any director or the company secretary;
Informing the Registrar of Companies of any change in the situation of
the company's registered office;
Appointing auditors;
Calling and holding annual general meetings (at which annual accounts
are presented);
Making sure that the company acts strictly in accordance with the
powers and rules set out in its Memorandum and Articles of
Association."
Source
http://www.ukincorp.co.uk/?s=21

The directors owe a duty of care and a fiduciary duty. Their main
responsibility is the company itself, but it is also said they also
act as trustees to the shareholders.

"Fiduciary Duty - In the normal course of the governance of the
company's affairs, the fiduciary duties of the directors are owed to
the company alone. This means the company as a separate legal entity,
not the shareholders. Creation of a collateral duty to shareholders
will depend on the facts and circumstances of a particular case. The
directors should also remain impartial as between different groups of
shareholders in the same company. However, the directors cannot place
the interests of the group of which their company is a member above
those of the company itself."

"Duties Towards Creditors & Employees -While a company is solvent, its
directors do not owe strictly defined fiduciary duties to the
company's creditors, but are placed under a statutory obligation to
consider the interests of employees. The duty of directors to take
into account the interests of creditors is indirectly enforced through
the rules which call for the directors to maintain capital levels, and
which impose personal liability for fraudulent trading and wrongful
trading immediately before liquidation."
Source
http://www.ukincorp.co.uk/?s=21

Another view is:
"Common Law Duties, Fiduciary duty.
As a director you should act in good faith, act in the best interests
of the company, avoid conflict between personal and company interests.
Not make any personal gain from opportunities which arise by virtue of
your position.
The law recognises that your position as director is similar to that
of a trustee; ie the shareholders have ‘entrusted’ the company assets
to you and you must act in their best interests.
Skill and care
The courts have established that you must exercise due skill and care
when acting as a director. Although this is a subjective matter you
cannot accept appointment as a director and then do nothing.
Breach of duty
Failure to fulfil these duties can result in an action by the company
against you for damages. As many private companies are owned by their
directors such actions are rare in these circumstances."
Source
http://www.griffins.co.uk/business-advisor/directors-responsibilities.htm

The lawyers Kemp Little makes the following observation "Where a
company is in, or is heading towards, financial difficulties the
directors of the company, whether executive, non executive or shadow,
have some additional matters to think about. The directors of a
company that is, or is likely to become insolvent, must in discharging
their duties make the interests of creditors of prime importance."
http://www.comlegal.com/Short_Lines/Directors_Duties_1202.htm

The Institute of Directors also give the following advice in a
document on the Fiduciary responsibilities of directors:
"Take steps to minimise losses to creditors if the company is in
financial difficulties."
http://www.iod.com/intershoproot/eCS/Store/en/images/IOD_Images/pdf/St8direc.pdf


Insolvency
There are various definitions. This is from the Insolvency Service web
site.

"The most commonly used definition of insolvency is the inability of
an individual or company to pay debts when they become due."

Another description is along these lines:
Carrying on business as a company and incurring debts, when the
directors know or should know that there is no reasonable prospect
that the company would be able to repay. If the directors are
concerned they may be in this position then often a third party such
as an accountant or a lawyer is called in who review the books and
advise the directors to cease trading.


Liquidation. This can occur in two ways. Voluntary or compulsory
liquidation (winding up by the court).

First, voluntary. There are three types.

Company (CVA) voluntary arrangement 
Creditors’ voluntary liquidation 
Members’ voluntary liquidation 

These have various stages and requirements but they are displayed in a
useful guide at the Insolvency Service.
Guide for creditors in voluntary liquidations
http://www.insolvency.gov.uk/information/guidanceleaflets/creditors2001/gcrefs.htm#company


This is a general description of the starting of a voluntary
liquidation. It is a decision for the directors alone.
"The directors of an insolvent company elect to call an extraordinary
general meeting of the company. At this members (shareholders)
meeting, the directors will report that the company is insolvent,
there is no reasonable prospect of paying existing creditors, they
believe it would be wrong to take further credit and they advise the
members that the company should voluntarily enter liquidation.
At this meeting the members pass a resolution to cease trading
(normally) and to nominate a liquidator. This liquidator conducts a
relatively quick investigation into the statement of affairs of the
company and calls the creditors to a meeting. He /she must place an
advert in the London Gazette and in the local press calling this
meeting and write to the creditors inviting all known creditors to
submit a claim for their debts. The liquidator is then appointed by
the creditors at a creditors meeting (s98 Insolvency Act 1986). If
required the creditors can elect to form a creditor’s committee to
monitor the activities of the liquidator during the course of the
liquidation."

"The role of the liquidator is:
To convert the assets of the business into cash (hence liquidation)
To adjudicate the claims of the creditors
To investigate and report upon the conduct of the officers of the
company (directors and shadow directors)
To make payments (where dividends are available) to creditors in order
of priority"
Source
http://www.companyrescue.co.uk/company_rescue/options/creditors-voluntary-liquidation.html

The second type is compulsory liquidation (winding up by the court).

"Compulsory liquidation is the winding up of a company or a
partnership by a court order (a “winding up” order). A petition is
normally presented to the court by a creditor stating that he or she
is owed a sum of money by the company and that the company cannot
pay."

"The OR becomes liquidator but an IP will be appointed to take over
from the OR if the company has significant assets. The liquidator’s
role is to realise the company’s assets, pay all the fees and charges
arising from the liquidation, and pay the creditors as far as funds
allow in a strict order of priority ."
Source
http://www.insolvency.gov.uk/information/guidanceleaflets/creditors2001/gcabout1-3.htm#insol%20terms

A flow chart showing the winding up order procedure is at
http://www.insolvency.gov.uk/pdfs/gdprliq.pdf

The order priority can be viewed at,
Payments to creditors in compulsory liquidations
Source
http://www.insolvency.gov.uk/pdfs/gdpaycr.pdf

A FAQ sheet on directors and compulsory liquidation is at
http://www.insolvency.gov.uk/information/guidanceleaflets/directors/gdindex.htm

I hope that this has provided sufficient information to be an answer.
However, as I observed, this is certainly not a straight forward
matter. Do ask for clarification of any of this, or if you require
further research/explanation.

answerfinder-ga

Search strategy
Variations on directors, responsibilities, shareholders, insolvency,
liquidation, company law, UK
DTI, Insolvency Service, Companies House.

Perfect!

Many thanks. Exactly what I wanted.

Kindest regards

Bryan

Bryan,
Glad I could help and thank you for the tip.
answerfinder-ga