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Good news for Unsecured Creditors: Directors' Duties

By Tony Johnson - 19 Dec 2019

A proposed new change to insolvency law is good news for unsecured creditors.  As the law currently stands, when a director is successfully sued for breaches of duties to the company, any recovery is an asset of the company.  This means that the money is subject to a secured creditor claim and quite possibly will not be available at all as a dividend to unsecured creditors.

The scenario above is especially galling if the director (or related entities) has a security interest over the assets of the property.  This often comes about when the director (who is also a shareholder) has introduced funds to the company, not by way of share capital or undistributed profits, but rather has lent money to the company under a security.

Unless the liquidator is able to set aside the security, when the director is successfully sued for breach of director's duties, any recovery is likely to then be paid back to the director (as a secured creditor).

The way around this problem has always been obvious. There are certain claims under the Companies Act that belong to the liquidator rather than the company.  For example, preferential payments which are recovered by a liquidator under section 292 of the Companies Act.  Those recoveries are for the benefit of unsecured creditors and not payable to secured creditors.  What is now being proposed is that directors' duties claims will fall into the same category.

The benefit of the change will be that the liquidator will be encouraged to take directors' duties claims, and that if there are proceeds, unsecured creditors will not stand behind secured creditors in receiving a share of the proceeds.

If you have an insolvency law issue, then Martelli McKegg's litigation team is available to discuss the matter with you.


Tony Johnson


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