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When proving a debt, and so claiming against a company or individual undergoing an insolvency event, a creditor must set off any ‘mutual debts or dealings’, taking into account monies owed by them to the company, as well as monies they are owed. Only the balance is provable in the Liquidation or Bankruptcy.
Note: the ‘mutual dealings’ must take place before the company commenced the insolvency event.
An example is: Company A is in Liquidation, legally owing Company B £10,000 (which Company B can ‘prove for’).
Company B owes Company A £3,000 for return of goods provided.
The £10,000 owed is ‘set off’ against the £3,000 return; Company B can only claim £7,000 (£10,000 – £3,000) in the Liquidation.
[See ‘Liquidation’ and ‘Bankruptcy’.]
A ‘shadow director’ is defined in section 251 Insolvency Act 1986 as a person whose instructions the board are accustomed to following. This includes disqualified directors (who may still hold sway at senior level and influence the decisions being made), major creditors (who can make decisions about the company’s future, withhold finance and even dictate policy), majority shareholders (who could terminate the office of directors by way of an ordinary resolution) and advisers and consultants.
This distinction is important, as sections of the Insolvency Act 1986 refer to ‘directors and shadow directors’. Section 214 is an example; it deals with wrongful trading, and a shadow director – as defined above – could be found liable to make an unlimited contribution towards an insolvent corporate estate where they were a person whose instructions were liable to be followed.
[See ‘Wrongful Trading’, ‘Insolvency Act’ and ‘Director’.]
