05 July 2024

Even a final judgment against the debtor company is not a guarantee for the recovery of the claim if the company goes bankrupt in the meantime. Fortunately, the creditor does not always have to consider it a lost cause, as the recovery can be pursued against the executives if they acted unlawfully during the insolvency.

1. When can underlying liability come into play?

Companies are independent legal entities, that are generally liable for their debts with their own assets, therefore, in general, its members and managers are not personally liable to pay the debts of the indebted company.

This means that the creditor must first try to collect the debt from the company, even if the chances are low, but there is a theoretical possibility of payment.

Management liability for the company's unpaid debts can only be established upon the dissolution of the debtor company. The procedures against the director(s) can be started if the debtor is under liquidation or forced strike-off procedure, since at the end of these procedures the company is dissolved without legal successor, without the creditors’ claims being satisfied. The procedure to hold the directors liable must be started before the closing of the liquidation.

2. The criteria for liability for wrongful trading

Liability of the liquidated debtor's managing directors may be determined if they failed to exercise their management functions in the interests of creditors in the three years prior to the opening of liquidation proceedings in the wake of any situation carrying potential danger of insolvency, in direct consequence of which the economic operator's assets have diminished, or providing full satisfaction for the creditors' claims may be frustrated for other reasons.

Typical cases where the management hides or disposes for no compensation or at undervalue the assets of the company or disproportionately favors one creditor at the expense of others.

Proving the above may be difficult for the creditors, who usually have limited insight into the debtor's internal processes. However, there are factors that may facilitate the enforcement of the claim:

- cooperation with the liquidator: although the liquidators are generally not interested in holding the directors liable for wrongful trading, they are required by law to investigate suspicious transactions and to make police report if they suspect criminal activity. The creditors can inspect the files of the liquidation and request copies.

- reverse burden of proof: if the director failed to publish the company's annual accounts or to comply with the obligation to hand over the company documents and assets to the liquidator, the burden of proof is reversed, which means that the managing director has to prove that he did not commit any violation against the creditors during the period of insolvency.

- “shadow directors”: it is important that the claim can also be pursued against persons who are not officially appointed as directors, but it can be proven that they had dominant influence over the operation of the debtor company.

3. Consequences of establishing the liability

If the court establishes the liability of a managing director, and the liquidation of the debtor company ends without the satisfaction of the creditor’s claim, the creditors who have registered their claims in the liquidation may claim the reimbursement of their outstanding claims from the director up to the amount for which the court determined the director’s liability.

4. Summary

In case the debtor company goes into liquidation and the creditor suspects that the executives unlawfully withdrew the assets instead of paying the creditors, it is possible to extend the debt recovery procedure to the executives. Although the procedure can be complex, in the case of a larger amount in question, it is recommended to consult with legal professional about the options.