Directors Accused Under Insolvency Act Lose Dismissal Attempt

Two former directors of a now-dissolved company lost an attempt at the dismissal of their case. The directors had sought for the cases against them to dismissed, on the grounds that a litigation funder should not benefit financially from the claim.  

Pinsent Masons explains that the court looked at the actual wording as well as the presumed intention of the agreement between the litigation funders who bought an interest in the recovery, and the liquidator who sold the rights. The court has affirmed that litigation funders who buy claims against directors or insolvent companies have the right to benefit financially.

This decision comes after an earlier one that the statutory rights of an action conferred to an officeholder—such as a liquidator—could not be assigned. This 2015 law was implemented at a time when directors of insolvent companies rarely saw cases taken to fruition because of the time and expense needed to do so. Litigation funding has changed that landscape significantly.

The directors in this action asserted that their case should be dismissed or stayed owing to the fact that the company is no longer in existence—saying if funds could not go back into the company and then to creditors, the claims should not move forward.

Courts were unimpressed, saying that the wording of the law in question negates the argument that the actions can be included. They also noted that the company does not have to be directly involved in order for money to move to creditors or those who bought a stake in the payout.

This was largely an expected decision by the High Court. But it’s one that is sure to please creditors and litigation funders alike. It’s also a wake-up call to unscrupulous directors, reminding them that a lack of company funds will not protect them from legal action.