An insolvency administrator has sued a former director: why it pays not to wait

Written by attorney-at-law Tadas Ugintas.

A claim brought by an insolvency administrator against a director can have serious personal financial consequences. In such cases former directors are often asked to pay damages running to tens or hundreds of thousands of euros, together with procedural interest and legal costs.

Receiving a claim does not mean that the former director’s liability has been proved. But it is not a formality that can be answered with a few general explanations either.

Director liability cases combine questions of civil law, corporate governance, insolvency procedure and accounting. This article sets out the main risks, but it is not a guide to building an individual defence or drafting a procedural document.

The insolvency administrator usually holds most of the company’s documents: contracts, bank statements, accounting data, creditors’ claims and material from earlier court proceedings.

The former director often has only part of this information. Some documents may have been handed over to the administrator, others may have stayed with the company’s accountants or be held by other people.

So it is not enough to recall the general course of events. The administrator’s allegations must be compared with the documents, the timing of the challenged actions established, and an assessment made of what the director knew when taking each decision.

A further complication is that one claim may challenge actions of different kinds. Part of the claim may relate to starting insolvency proceedings too late, another part to the company’s payments, and the rest to failing to hand over assets or documents.

Each of these may be assessed differently in law.

The insolvency administrator may allege that the former director:

• did not start insolvency proceedings in time;
• paid selected creditors while the company was insolvent;
• entered into transactions that made no economic sense for the company;
• sold assets below market value;
• used the company’s funds for purposes unrelated to its business;
• did not keep or hand over the accounting records;
• did not hand over the company’s assets to the insolvency administrator;
• carried on trading and took on more liabilities when the company’s position was already critical.

These allegations may look similar, but their legal significance differs. It has to be established not only what happened, but which duty the director may have breached, when it arose and whether the company suffered the damage claimed by the administrator because of that breach.

The functions and powers of the insolvency administrator are governed by the Law on Insolvency of Legal Entities (in Lithuanian).

When serving the claim, the court sets a deadline for filing a defence. Under Article 142 of the Code of Civil Procedure this is usually no less than 14 and no more than 30 days.

In exceptional cases, taking into account the complexity of the case and a reasoned request, the court may extend the deadline to 60 days. But an extension is not automatic.

The current Code of Civil Procedure (in Lithuanian) is available in the Register of Legal Acts.

Within the time set by the court, it is not just a matter of writing a defence. The annexes to the claim must be reviewed, the legal basis of the claim assessed, the calculation of damage checked and the relevant evidence gathered.

If the claim is extensive, preparation can take time. Seeking help in the last days before the deadline can seriously limit the chances of assessing the case properly.

Failing to file a defence does not automatically mean the claim will be granted. But it may weaken the defendant’s procedural position and, where the conditions set by law are met, allow the court to give judgment in default.

Former directors often say that they acted in good faith, tried to keep the company going or did not know it was insolvent. These may be relevant, but simply stating them is usually not enough.

The court assesses specific actions and the situation at a specific time. It may therefore be important to establish:

• what the company’s financial position was;
• what information the director had;
• why a particular payment was made;
• what benefit the company received;
• what alternatives were considered;
• when the duty attributed to the director arose;
• how the administrator calculated the damage.

Careless explanations can also backfire. A defence filed with the court becomes part of the case file, so circumstances admitted in it can be hard to change or explain later.

A director takes decisions under economic uncertainty. Even a sound commercial decision may not produce the expected result. The mere fact that the company made losses or later went bankrupt does not in itself prove unlawful conduct by the director.

A director’s civil liability usually requires unlawful conduct, damage, a causal link and fault. But assessing these conditions is not simply a matter of copying out the provisions of the law.

The condition of the particular company, the timing of the decision, the information the director had and the economic sense of the director’s actions all have to be taken into account.

This is explained in more detail in the article Director liability when a Lithuanian company goes bankrupt.

Even if the conditions for liability were established, that does not mean that the full amount claimed by the administrator reflects the company’s actual loss. The amount may be made up of many payments, an increase in the company’s liabilities or a reduction in assets alleged by the administrator.

But the total of the payments does not necessarily equal the damage to the company. For example, if the company paid for services that were actually provided, the value it received must also be taken into account.

It is also important to check:

• whether the same payments are counted more than once;
• whether the damage is simply equated with all the company’s unpaid debts;
• whether the right period has been chosen for calculating the damage;
• whether each part of the amount is linked to a specific act of the director;
• whether the goods, services or other assets the company received have been taken into account.

This kind of assessment sometimes requires accounting or financial expertise as well as legal knowledge.

This is illustrated by a case we have described, in which an insolvency administrator’s claim of more than EUR 101,000 against a former director was dismissed (in Lithuanian).

Former directors often no longer have access to the company’s documents, email or accounting system. This is particularly so where several years have passed between leaving the post and the claim being brought.

Missing documents do not mean the administrator is right. But without evidence it can be hard to show why a particular decision was taken or what a payment was for.

In that situation it is important to establish which documents were handed over to the administrator, who kept the accounts, where correspondence was stored and what other evidence can confirm the relevant facts.

The former director’s own explanations may not be enough for the court.

If the company’s bankruptcy was declared intentional, or its transactions were already examined in earlier cases, the rulings in those proceedings must be studied.

Facts established in them may be relevant to a later claim for damages. But it is important to establish precisely what has already been decided, whose actions were examined and whether those facts relate to the claim now brought.

A finding of intentional bankruptcy does not in itself answer every question about a director’s civil liability. On the other hand, facts established in an earlier court ruling cannot simply be ignored.

To save costs, former directors sometimes try to prepare their defence using artificial intelligence.

Using AI is not prohibited as such. It can help outline a document or express ideas more clearly. But such a tool does not know all the facts of a particular case and cannot guarantee that the legal information it gives is correct.

AI sometimes cites legal provisions that do not exist or invents court rulings and case numbers. The text can look convincing even though its arguments have no legal basis.

Representatives of the Lithuanian court system (in Lithuanian) have also warned about AI “hallucinations” and the need to check the information it produces.

Confidential data is a further risk. A non-anonymised claim, contracts, bank statements or other case documents should not be uploaded to publicly available AI systems without assessing how the data will be processed.

A badly drafted procedural document may not only fail to help but also worsen the former director’s position. AI should therefore not replace an individual legal assessment of the case.

On receiving a large claim, there may be a temptation to propose a settlement as quickly as possible. But such a proposal should not be made without assessing whether the claim is well founded.

Before negotiating, it is important to understand:

• what evidence the administrator has;
• whether the damage has been calculated correctly;
• what the real risk of losing the case is;
• which claims the administrator would drop;
• whether the agreement would finally end the dispute.

A careless proposal may be seen as a sign of a weak negotiating position. On the other hand, well-prepared negotiations can in some cases help avoid long and costly litigation.

A director liability case requires more than drafting a procedural document. The whole basis of the administrator’s claim, the evidence and the possible procedural consequences must be assessed.

A lawyer experienced in insolvency and director liability cases can:

• identify the real legal basis of the claim;
• separate the administrator’s different claims;
• assess the significance of earlier court rulings;
• check the calculation of damage;
• identify what evidence is missing;
• prepare the procedural position;
• assess whether a settlement makes sense.

The earlier this assessment starts, the more time there is to gather documents and prepare a consistent defence.

Professional help is particularly important where a large amount is claimed, several different acts of the director are challenged, the company’s documents are missing or the bankruptcy has been declared intentional.

For representation in such cases, contact an insolvency lawyer acting for company directors and shareholders.

An insolvency administrator’s claim against a former director does not mean that the claim is well founded. But a proper response usually needs more than general explanations, a template found online or text generated by AI.

Each case depends on the specific payments, transactions, the company’s financial position, the information the director had and the evidence the administrator has submitted.

So the most important first decision is not to try to write a defence yourself as quickly as possible, but to have the claim and its annexes assessed in good time by a specialist in insolvency and director liability cases.

If you have received such a claim, the clock is already running. Contact attorney-at-law Tadas Ugintas and discuss your situation before the court’s deadline for filing a defence expires.

This information is general in nature and does not replace individual legal advice. Each director liability case must be assessed individually, on the basis of the particular claim, its annexes and the evidence in the case.