Contentious insolvency is the litigation side of winding up an insolvent company: instead of a quiet sale of assets, the insolvency practitioner actively sues to recover property that left the business improperly and to hold directors personally liable for the losses creditors suffered. In England and Wales it runs on the Insolvency Act 1986, and it is where the real money often moves, both for creditors hoping to see a return and for directors facing claims against their own assets. Disqualification from running any company for up to fifteen years sits alongside the financial exposure.
What Makes an Insolvency Contentious
Most insolvencies are administrative. A company runs out of cash, a practitioner is appointed, what remains is sold, and creditors are paid in priority order. The process turns contentious when the numbers stop adding up.
Typical triggers are familiar once you know what to look for. Assets vanish in the months before the formal filing. Directors repay family loans while trade suppliers go unpaid. Tax returns and internal accounts tell different stories, hinting that revenue was diverted. A company shuts down abruptly while still holding valuable contracts or equipment, and nobody can explain where any of it went. Shareholder infighting adds fuel: when owners accuse each other of stripping value during the decline, the practitioner inherits those disputes on top of the creditors’ claims.
What the Practitioner Can Force You to Hand Over
Insolvency practitioners are not polite correspondents waiting for voluntary responses. The Act gives them compulsory powers that reach well beyond what an ordinary civil claimant could use.
The Duty to Cooperate
Section 235 of the Insolvency Act 1986 requires anyone who is or was an officer of the company, was involved in its formation, or was employed by it to cooperate with the practitioner on request. That covers handing over accounting records, internal communications, and bank statements for the relevant period. The duty reaches anyone the practitioner reasonably believes can help, not just directors. Refusing without a good excuse is a criminal offence punishable by imprisonment or a fine on conviction.1Legislation.gov.uk. Insolvency Act 1986 – Section 235
Court-Ordered Examinations
When cooperation falls short, Section 236 lets the practitioner apply for a court order summoning individuals for examination under oath.2Legislation.gov.uk. Insolvency Act 1986 – Section 236 This reaches third parties who never worked for the company: banks, auditors, former legal advisers suspected of holding documents or property. The court can also order delivery of books and records. Private examinations are often where practitioners work out how assets moved, who signed off, and whether the collapse was accelerated on purpose.
Claims to Claw Back Transferred Assets
Once the investigation points at suspicious transactions, the practitioner picks from several statutory claims. The timing of the transfer and the relationship between the parties decide which one fits and how hard it is to prove.
Transactions at an Undervalue
Section 238 targets assets given away or sold for far less than they were worth in the run-up to insolvency.3Legislation.gov.uk. Insolvency Act 1986 – Section 238 A director who transferred company property to a relative for a token payment while debts were mounting is squarely in range. The court can make whatever order it considers appropriate to put the company back where it would have been. The look-back window is two years before the onset of insolvency, and the company must have been unable to pay its debts at the time of the transfer or have become unable to pay as a result of it.
Preferences
Section 239 covers payments or other actions that put a particular creditor in a better position than they would have reached in a normal liquidation.4Legislation.gov.uk. Insolvency Act 1986 – Section 239 The classic case is a director repaying a personal loan from the company while suppliers go unpaid. The practitioner must show the company was influenced by a desire to improve the preferred creditor’s position. Connected persons face a serious disadvantage: when the recipient is connected to the company, that desire is presumed, and the recipient has to prove otherwise. The look-back is two years for connected persons and six months for everyone else.
Transactions Defrauding Creditors
Section 423 is the widest tool in the kit. It applies whenever someone transferred assets to put them beyond the reach of people who have or might have claims against them.5Legislation.gov.uk. Insolvency Act 1986 – Section 423 There is no fixed look-back period, and the company does not need to have been insolvent at the time. If a director moved a valuable property into a spouse’s name years before any trouble appeared, and the purpose was to shield it from creditors, the court can unwind the transfer. The price is that proving the intent is harder without the statutory presumptions that help under the other sections.
When Directors Pay Personally
Recovering diverted property is only half the story. Several provisions put a director’s own assets at risk, not just company property that landed in the wrong hands.
Wrongful Trading
Section 214 catches directors who kept trading after the point when they knew, or should have realised, that the company had no reasonable prospect of avoiding insolvent liquidation.6Legislation.gov.uk. Insolvency Act 1986 – Section 214 The test is partly objective: the court asks what a reasonably diligent person with that director’s responsibilities and qualifications would have known. A qualified accountant acting as finance director is held to a higher standard than a non-executive with no financial background. If the claim succeeds, the court orders a personal contribution to the company’s assets reflecting the extra losses creditors suffered because trading continued past the point of no return.
Fraudulent Trading
Section 213 goes further, targeting anyone knowingly involved in carrying on the business with intent to defraud creditors.7Legislation.gov.uk. Insolvency Act 1986 – Section 213 The civil liability is unlimited: the court can order whatever contribution it considers appropriate. The parallel criminal offence under the Companies Act 2006 carries a maximum sentence of ten years on conviction. Fraudulent trading is harder to prove than wrongful trading because it needs actual dishonest intent, not just negligent failure to act. Practitioners often plead both and let the court decide which threshold the evidence meets.
Misfeasance
Section 212 is the streamlined route for challenging directors who misused company money, kept property they had no right to, or otherwise breached their duties to the company.8Legislation.gov.uk. Insolvency Act 1986 – Section 212 Unlike wrongful and fraudulent trading, a misfeasance claim can be brought by the liquidator, the official receiver, individual creditors, or shareholders with the court’s permission. The court can order repayment of misapplied funds with interest or compensation for the loss caused by the breach. It is the workhorse of contentious insolvency because it covers a wide range of misconduct without needing proof of fraudulent intent.
Being Banned as a Director
Beyond money, directors of insolvent companies face disqualification. Under the Company Directors Disqualification Act 1986, the court must disqualify a director if it finds they were a director of a company that became insolvent and that their conduct makes them unfit to manage a company.9Legislation.gov.uk. Company Directors Disqualification Act 1986 Applications come from the Secretary of State or the official receiver. A disqualification order lasts between two and fifteen years and bars the person from serving as a director, acting as an insolvency practitioner, or being involved in company management. Breaching the order is a criminal offence in itself.
Who Actually Gets the Money Back
Everything recovered feeds the insolvency estate and gets paid out in strict statutory order. Where you sit in that order decides whether contentious proceedings are likely to help you at all.
- Fixed charge holders are paid first from the proceeds of the asset their loan was secured against, such as a mortgaged building.
- Insolvency costs come next: the practitioner’s fees, legal costs of the process, and wages or rent due during the insolvency.
- Preferential creditors follow, covering certain employee claims and, since December 2020, certain tax debts the company collected on HMRC’s behalf, such as VAT and PAYE.
- Floating charge holders are secured against a class of assets rather than specific items. A portion of what would otherwise go to them is carved out under the prescribed part rules for unsecured creditors.
- Unsecured creditors, including trade suppliers, customers owed refunds, and the company’s own tax liabilities, rarely recover in full.
- Shareholders are last and, in most insolvent liquidations, receive nothing.
Contentious recovery actions mainly benefit the unsecured creditors who would otherwise be left with pennies in the pound. Fixed charge holders usually recover from their security without needing litigation at all. The prescribed part redirects a slice of floating charge recoveries back to the unsecured pool.
How the Litigation Gets Paid For
An insolvent company has no money by definition, which raises an obvious question: how does it fund expensive proceedings? Third-party litigation funding has become standard in significant cases. A specialist funder covers the legal costs in exchange for a share of the recovery.
Since 2015, insolvency practitioners in England and Wales have had explicit statutory authority to sell officeholder claims outright, so a funder can simply buy the right to pursue transactions at undervalue, preference claims, and wrongful trading actions. Some funders prefer an upfront purchase; others take a cut of the proceeds. Portfolio arrangements let a single funder back multiple claims across different insolvencies, spreading risk so weaker individual cases can still move forward.
Courts police these deals to make sure the funder is not controlling the litigation or taking a disproportionate share relative to the creditors. An agreement giving the funder effective veto power over settlement is vulnerable to challenge. After-the-event insurance often sits alongside the funding, protecting against adverse costs if the claim fails. For creditors, the practical point is that an empty estate does not necessarily mean viable claims will go unpursued.
Timing That Can Sink a Claim
Avoidance claims under Sections 238 and 239 have to be brought within the look-back periods measured from the onset of insolvency, and those windows do not pause while the practitioner investigates. There are practical deadlines on top of the statutory ones. Delay drains the estate, lets respondents dissipate assets, and gives the court reason to question why the claim took so long to appear. Even a claim technically within time can lose credibility if the gap between appointment and filing is long and unexplained.
Most contentious insolvency claims settle before trial, often after mediation once both sides have seen the strength of the evidence. When settlement fails, the court delivers a judgment that the practitioner can enforce through freezing orders, charging orders over property, or seizure of assets. For a director on the receiving end, that enforcement toolkit is the reason to take the first letter from a practitioner seriously rather than wait for the pressure to build.