Contentious Insolvency: Key Claims, Risks and Strategic Decision-Making

When insolvency becomes contentious, disputes rarely arise in isolation.

Personal guarantees, director conduct, historic transactions and questions of control often sit on top of already-strained commercial relationships. For Insolvency Practitioners, the challenge is not simply identifying potential causes of action, but deciding which claims are worth pursuing, how they should be framed, and whether the likely recovery justifies the risk.

In this article, we will look at the most common forms of contentious insolvency litigation, the legal and evidential issues they raise and the strategic considerations that tend to determine outcomes.

Personal Guarantees in Insolvency

Personal guarantees are one of the most frequently encountered issues in insolvency-related disputes.

Common areas of contention include enforceability of guarantees signed under commercial pressure, defects in execution or authority, misrepresentation or non-disclosure at the point of signing, and variation of underlying lending arrangements without guarantor consent.

While many guarantees are technically valid, enforcement is often more nuanced than it first appears. The commercial leverage of a guarantee can differ significantly from its true litigation value, particularly where defences are fact-sensitive or documentary evidence is incomplete.

Early scrutiny of how the guarantee came into existence, and how it was subsequently relied upon, is often decisive.

Misfeasance and Breach of Duty Claims

Misfeasance claims sit at the core of contentious insolvency work.

Typical allegations include misuse or misapplication of company funds, preferential treatment of connected parties, failure to act in the interests of creditors, and excessive remuneration or improper dividends.

Although these claims are grounded in statutory and fiduciary duties, they often turn on credibility, contemporaneous records and the narrative of decision-making, rather than legal theory alone.

They can be resource-intensive and are frequently defended robustly. In practice, their value often lies as much in settlement leverage as in trial prospects.

Wrongful Trading and Trading While Insolvent

Wrongful trading and trading while insolvent are often used as shorthand for director misconduct, but they raise distinct legal questions.

Key issues typically include when directors knew, or ought to have known, that insolvency was unavoidable; whether reasonable steps were taken to minimise losses to creditors; the availability and scope of statutory defences; and causation and quantification of loss.

These claims are highly fact-specific and vulnerable to hindsight analysis. Courts focus on the commercial reality at the time, rather than judging decisions with the benefit of perfect information.

Unlawful Dividends and Transactions at an Undervalue

Claims involving unlawful dividends and transactions at an undervalue frequently overlap with allegations of breach of duty.

Issues commonly arise where dividends were declared based on inaccurate or overly optimistic management accounts, intra-group transactions lacked genuine consideration, historic transactions pre-dated insolvency by several years, and valuation evidence is contested.

While these claims can appear attractive on paper, they often raise complex accounting, valuation and limitation issues. The cost of pursuing them must be balanced against the realistic scope for recovery.

Shadow Directors and De Facto Control

Allegations of shadow or de facto directorship are increasingly common, particularly in SME and group insolvencies.

Indicators may include decision-making influence without formal appointment, instructions routinely followed by nominal directors, financial control exercised by lenders, investors or family members, and informal but consistent involvement in management decisions.

These claims are rarely straightforward. Establishing that influence crossed the legal threshold requires careful evidential analysis and a realistic appraisal of prospects.

Acting for Insolvency Practitioners and Directors

Contentious insolvency work is not confined to one side of the fence.

Alongside acting for Insolvency Practitioners in investigating and pursuing claims, we also regularly act for directors facing insolvency-related allegations, including misfeasance, wrongful trading, unlawful dividends and personal guarantee enforcement.

This dual perspective is valuable. Acting for directors provides insight into how claims are defended in practice, which allegations tend to gain traction and which do not, evidential weaknesses commonly exposed under pressure, and the commercial and personal drivers influencing settlement decisions.

For Insolvency Practitioners, this experience informs a more realistic assessment of risk, value and leverage when deciding whether and how to pursue contentious claims.

Strategic Considerations in Contentious Insolvency

Many insolvency disputes fail not because claims lack legal merit, but because risk, evidence and cost were not assessed early enough.

Common issues include optimistic valuations unsupported by evidence, under-estimating the burden of proof, disproportionate cost exposure relative to likely recovery, and claims pursued out of principle rather than strategy.

Effective contentious insolvency litigation requires early realism, clear objectives and disciplined decision-making.

Conclusion

Contentious insolvency disputes sit at the intersection of law, evidence, accounting and commercial judgment.

Whether acting for Insolvency Practitioners assessing potential recoveries, or for directors responding to allegations, the focus remains the same: identifying which claims genuinely matter, and which do not.

Handled properly, contentious insolvency litigation is not about volume – it is about precision, leverage and outcome.

Contact Us

If you’re facing a dispute and need a solicitor, email cclayton@longdens.co.uk or connect with Chris Clayton on LinkedIn and send him a direct message.

DISCLAIMER: The information provided on this blog is for general guidance only and does not constitute legal advice. If you require tailored legal advice, please contact us to discuss your specific circumstances.

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