A sting in the tail at the end of the recession

We all know how busy insolvency practitioners (IPs) were during the recession dealing with the huge rise in corporate and personal insolvencies. That is now feeding into a real spike in professional negligence claims. We briefly summarise some typical claims we are seeing and how best to handle them.

What types of claims are we seeing?

The majority of claims we see are brought by creditors, directors or shareholders of insolvent companies. In particular, they are criticising IPs over the sale of assets, the recovery of debts or even advice given before the company goes into administration. Typically, we are seeing claims arising out of:

• decisions by IPs to agree with debtors over the extent and timescales for repayment or to pursue claims against third party debtors;
• IPs liquidating companies too early and without fully investigating potential creditors and sales of assets at an undervalue; and 
• negligent business recovery advice.

Legal principles

Claimants are increasingly trying their luck but actually claimants face real hurdles in successfully pursuing claims against IPs and we can often see them off early. These are the key principles to keep in mind:

• Liquidators owe a duty of care to realise the company’s assets for the benefit of the creditors as a whole. There is no general duty to individual creditors absent a special relationship.
• Liquidators have wide-ranging powers to realise assets. The courts generally will only intervene where the liquidator has acted in bad faith or irrationally.
• Administrators similarly owe a duty to the company to which they are appointed. Again, in the absence of a special relationship, there is no duty of care to individual creditors, directors, shareholders or a new company which purchases the assets of the old one. 
• IPs have a duty to identify the relevant creditors. This includes those parties who have a contingent interest in existing litigation against the company, something not always openly apparent when performing basic due diligence. 
• IPs giving business recovery advice typically owe a duty of care to the company rather than to individual shareholders and directors. If their advice is negligent, it is the company (or its administrator) which should be pursuing the claim and it is typically the company which has suffered loss.

Practice points

Claims against insolvency practitioners can be expensive. Speculative claims by individual directors, shareholders or creditors need to be dealt with swiftly, before they gain momentum.

Key pointers:

• Think about whether the IP owes the claimant a duty of care. 
• Identify with the IP why he/she took the decision which is being criticised and explain why that decision was rational and made in good faith. 
• Focus on loss – it is often very difficult for claimants to recover consequential losses, let alone argue any gains would have been made by taking an alternative course of action.