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Insolvency Law: Once upon a time there was a company…

insolvency image

By Sukhbir Kaur, Underwriter

(Estimated reading time: 2 minutes 30 seconds)

It is no surprise that during the life of a company all appears to work well and in most cases without a glitch. However those assigned to investigating the affairs of a company or other businesses will tell you that most fraudulent activities remain undiscovered until ultimately the company or business closes its doors and ceases trading.

Sadly, liquidation is a time when insolvency practitioners will investigate why a company has failed. There are a variety of reasons why companies are investigated, with the most common reason being the interests of creditors and directories duties under the Insolvency Act 1986.

This article will explore the duties of a director and the types of fraud being committed.

What are a director’s duties?

The Companies Act 2006 sets out the 7 duties of a director

  • S171 – Duty to act within powers to Act within powers.
  • S172 – Duty to promote the success of the company
  • S173 – Duty to exercise independent judgment
  • S174 – Duty to exercise reasonable care, skill and diligence
  • S175 – Duty to avoid conflicts of interest
  • S176 – Duty not to accept benefits from third parties
  • S177 – Duty to declare interest in proposed transaction or arrangement

Common types of fraud

Director’s activities may go unnoticed for many years.  In most cases it’s only once a company enters into liquidation that the fraudulent activity shows its ugly head. Insolvency practitioners are seeing common trends when investigating company directors, such as hiding company assets, transactions at an undervalue, personal loans and continuing to trade knowing that orders cannot be completed. Misappropriation of company assets is another and takes place in various forms – falsifying invoices, falsifying expense claims, payroll fraud and company data theft.

Who can be liable?

Whilst the sections 171 to 177 (of the Companies Act 2006) are heavily associated with claims against directors, section 212 of the Insolvency Act 1986 is broadly drafted and renders it possible to bring action against someone who has “taken part in the promotion, formation or management of the company.”

Section 212 of the Insolvency Act 1986 also covers parties such as delinquent directors, liquidators someone who has taken part in company affairs who may be pursued. Making it harder for someone to say it “you can’t catch me, I was not a director.”

As times go on, the frauds committed will become increasingly sophisticated, making the work of insolvency practitioners more and more difficult.

Temple offers attractive premium rates for insolvency cases; these are provided on a bespoke basis.  We also offer delegated authority schemes to specialist insolvency practitioners to enable them to issue policies themselves. Temple also offers staged premiums, as we appreciate that investigations into the intricate affairs of a company may take time and that not every case is the same. And perhaps most importantly Temple offers fully deferred and contingent premiums that are only payable in the event of a successful outcome.

If you would like more information on ATE insurance and disbursement funding for insolvency litigation, or you have any other legal expenses insurance query, please email or call her on 01483 514809.

Sukhbir Kaur

Read articles by Sukhbir Kaur

Sukhbir Kaur

Sukhbir has an LLB honours degree in Law, she also completed the Legal Practice Course obtaining a Commendation.

She qualified as a Solicitor in 2020, she has worked in the personal injury sector for over a decade.

She joined the Commercial team at Temple Legal Protection as an Underwriter, in 2023.

Prior to joining Temple, Sukhbir worked in the Serious Injury team doing multi track work at a leading Law firm, dealing with injuries arising from road traffic accidents, accidents in the work place and public.

Her background has led her to have an interest in risk insurance.


Read articles by Sukhbir Kaur