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Company Law > 10) Corporate Insolvency II > Flashcards

10) Corporate Insolvency II Flashcards

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1
Q

Liability of directors of an insolvent company

A

Directors can be personally liable if found guilty of:
* Misfeasance (s212 IA 1986)
* Fraudulent Trading (ss213/246ZA IA 1986)
* Wrongful trading (ss 214 / 246XB IA 1986)

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2
Q

Misfeasance Act

A

s 212 IA 1986

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3
Q

Fraudulent Trading

A

ss 213
ss 245ZA IA 1986

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4
Q

Wrongful trading

A

ss 214 / 246ZB IA 1986

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5
Q

Who can bring proceedings against directors personally

A

Liquidators and administrators

Liquidators can only do this for misfeasance

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6
Q

ss 171 - 178 CA 2006

A

Directors owe duties to the company.

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7
Q

Breach of ss 171 - 178 CA 2006

A

Actionable by the company.
Shareholders may bring a claim for unfair prejudice
= just and equitable winding up
= derivative claim

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8
Q

Typically on winding up

A
  • Liquidator who brings the actions against directors
  • Under s212 IA 1986
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9
Q

Section 212

A
  • Does not create any new liability or rights
  • Summary procedure to enable the company (acting via its liquidators) to pursue claims against directors who have breached duties.
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10
Q

If liability is established

A

Court may order that person compensate the company in respect of money or property misapplied.

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11
Q

What is misfeasance?

A

Misfeasance is the act of performing a legal action in an improper or illegal way?

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12
Q

Who may bring a claim?

A
  • Liquidator
  • Official receiver
  • Creditor or contributory
    s212(3) IA 1986
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13
Q

Mullarkey v Broad 2008

A

Burden of proof is on the claimants to establish misfeasance on the part of the director or defendant

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14
Q

Burden of proof

A
  • On the claimant to est misfeasance
  • Not up to director to justify their contact
    Mullarkey v Broad 2008
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15
Q

Who can a misfeasance claim be brought against?

A
  • Any person who has been an officer int he company
  • Any others who acted in promotion, formation or management of the company
  • A liquidator or administrative receiver.
    S212(1)
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16
Q

Re Centralcrest Engineering Co Ltd 2000

A
  • Inland Revenue brought proceedings against liquidator s212
  • Allowed trading for 27 months
  • £73,230 owed to IR
  • Court held 2 elements for misfeasance
  • Liquidator liable for £120,826
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17
Q

Two elements of misfeasance
Re Centralcrest Engineering Co Ltd 2000

A

1) Allowing the company to trade without sanction of the court or liquidation committee
2) Allowing the company to trade, when apparent assets should have been realised.

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18
Q

What amounts to misfeasance?

A
  • Misapplication of any money or assets of the company
  • Breach of statutory provisions
  • Undervalued or preferenced transactions
  • Brach of duty to exercise care, skill and diligence = negligence
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19
Q

s 174 CA 2006

A

Misfeasance:
Breach of duty to exercise reasonable care, skill and diligence
= s 174 CA 2006

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20
Q

s 238 CA 2006

A

Misfeasance:
Directors responsible for transactions at an undervalue

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21
Q

s 239 CA 2006

A

Misfeasance:
Directors responsible for transactions at an preference

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22
Q

Breach of statutory provision or duty = misfeasance

A
  • Unlawful loans (s197)
  • A director entering into a contract with own company and failing to notify the board (s177)
  • Failing to seek prior GM approval where a director entered a substantial property transaction (s190)
  • Director failing to act within their powers (s171)
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23
Q

s197 CA 2006

A

Misfeasance = breach of statutory duty

Unlawful loans to a director

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24
Q

s177 CA 2006

A

Misfeasance = breach of statutory duty

  • Director entering into a contract with his own company and failing to notify the board.
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25
Q

s190 CA 2006

A

Misfeasance = breach of statutory duty

  • Failing to seek prior GM approval where director has entered into a substantial property transaction.
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26
Q

s 171 CA 2006

A

Misfeasance = breach of statutory duty

A director failing to act within their powers

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27
Q

Remedies

A

Order for repayment, restoration, or contribution to the company’s assets as it thinks just

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28
Q

Directors relief

A

s 1157 - relief
Where court is satisfied that the director acted honestly and reasonably, having regard to all the circumstances of the case.

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29
Q

Finding misfeasance is a relevant factor when a court considers…..

A

A disqualification order for unfitness.

Company Directors’ Disqualification Act 1986

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30
Q

Ratification

A
  • Ratification by shareholders can usually absolve directors from personal liability for breach of duty.
    s 239 CA 2006
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31
Q

Ratification by the shareholders

A

Ratification when company is solvent precludes misfeasance proceedings.
s 239 CA 2006

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32
Q

When a company is facing insolvency, case law has established

A

Duties of directors shift toward the company’s creditors and away from the members as a whole.

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33
Q

It is not possible for shareholders to ratify directors’ breaches when….

A

The company’s fortunes have declines

No reasonable prospect of insolvent liquidation or administration.
s239(7) CA

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33
Q

s239(7) CA

A

Ratification procedure does not prejudice any rule of law which provides shareholder ratification is of no effect.

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34
Q

Provisions on fraudulent and wrongful trading in IA 1986

A

Aims to prevent directors incurring further debts when company is in financial difficulty with no reasonabl prospect fo turn around.

35
Q

Claim for fraudulent trading can be brought under….

A

ss213 / 246ZA IA 1986

36
Q

Claim for fraudulent trading can be brought against….

A
  • Any person knowingly carrying out business of the company
    s213(1) and s246ZA(1)
  • Intend to defraud creditors or for any fraudulent purpose s213(2) and s246ZA(2)
37
Q

Civil liability to contribute to …

s213 (when in liquidation)

s246Z (when in administration)

A

to general body of unsecured creditors who suffered loss caused by carrying out the company’s business with intent to defraud

38
Q

s993 CA 2006

A

Criminal claim for fraudulent trading

39
Q

What must be proved for a fraudulent claim to succeed

A

Actual dishonesty must be proven for fraudulent claim.

40
Q

How is dishonesty assessed…

A
  • Subjective not objective basis
  • Knowledge includes blind eye knowledge.
41
Q

Blind eye knowledge

A

Requires suspicion of relevant facts.
Deliberate decision to avoid confirming they did exist
Morris v State Bank of India 2005

42
Q

Morris v State Bank of India 2005

A

Blind eye knowledge
Requires suspicion of relevant facts.
Deliberate decision to avoid confirming they did exist

43
Q

Meaning of fraud
s213

A

“Real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame”
Re Patrick and Lyon Ltd 1933

44
Q

Re Patrick and Lyon Ltd 1933

A

Meaning of fraud:
“Real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame”

45
Q

It is not necessary for all creditors to have been defrauded

A

Re Gerald Cooper Chemicals Ltd 1978

…only one creditor is enough to establish

46
Q

Re Gerald Cooper Chemicals Ltd 1978

A

Advance payment for supply of foods from one creditor.
Directors knew that there was no prospect of of payment
= fraudulent trading

47
Q

Re Gerald Cooper Chemicals Ltd 1978

A

It is not necessary for all creditors to have been defrauded
… only one creditor is enough to establish

48
Q

Remedies for fraudulent trading

A
  • Court can order a contribution
  • Cannot include punitive element
  • Contribution must reflect loss of creditors
49
Q

Morphitis v Bernasconi 2003

A

Remedy contribution for fraudulent loss should reflect and compensate for the loss caused by creditors…. not punitive

50
Q

Re Esal (commodities) Ltd 1997

A

Any sums recovered are held in trust for the unsecured creditors generally and not for the defrauded credito.

51
Q

When a court makes an order against a director under ss213 / 246ZA

A

Then the court is also likely to make a disqualification order under
s 10 CDDA 1986

52
Q

s 993 CA 2006

A

Criminal sanctions can be imposed the court

Punish a person knowing party to fraud

Up to 10 years in prison or fines

53
Q

Criminal sanctions for knowingly fraudulent trading

A

s 993 CA 2006
* Up to 10 years in prison
* Fines

54
Q

Fraudulent vs wrongful trading

A
  • Usuually wrongful trading.
55
Q

Wrongful trading, difference to negligently

A

For negligently carrying out business… if not fraudulently

56
Q

Wrongful trading

A

s 214 or s246ZB IA 1986
* No criminal provisions for wrongful trading - but there is civil

57
Q

Duty of ss214 and s246ZB…

A

Directors under a duty to take every step possible to minimize the potential losses to the company’s creditors

58
Q

Under ss214 and s246ZB …

A

Courts can order directors to contribute to insolvent estate by why of compensation for losses by body of creditors.

59
Q

Wrongful trading liability

A

Imposes personal liability on directors.

= exception to the principle of limited liability.

60
Q

Proof of wrongful trading

A

No need to show intent or dishonesty

61
Q

Who can bring a claim for wrongful traiding

A
  • Liquidators s214(1)
  • Administrators 246ZB(1)
62
Q

SBEEA 2015

A

Wrongful trading claims can be assigned to a third party as a way of raising funds for insolvent estate. ]
Avoiding risk of litigation.

63
Q

Against whom may a claim for “wrongful trading” be brought?

A

Any person who was a director at the time

  • includes de facto, shadow and non-executive directors.
64
Q

Re Hydrodam (Corby) Ltd 1994

A

Shadow, de facto and non executive directors can be

65
Q

Requirements for liability

A

ss214(2) and 246ZB(2)

  • Before the insolvent liquidation
  • Director knew or ought to have concluded
  • No reasonable prospect that the company would avoid going into going into liquidation / administration
66
Q

A company goes into insolvent liquidation at a time when….

A

Assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up and adminstration.

ss214(6) and 246ZB(6)

67
Q

Insolvency for wrongful trading purposes is judged…

A

Judged solely on the
* Balance sheet test
* Not the cash flow test

68
Q

Continued trading

A
  • Must be proven that the director allowed company to trade
  • Knew or ought to have know there was no reasonable prospect to avoid liquidation /administration
  • Cont’d trading made position worse
    Re Continental Assurance Co of London plc 2001
69
Q

Re Continental Assurance Co of London plc 2001

A
  • Continued trading
  • Knew or ought to have known there was no reasonable prospect to avoid insolvency.
  • Cont’d trading worsened situation
70
Q

If the company has not reached a point of no return

A

Wrongful trading cannot arise.

No need to consider “every step” defence.

71
Q

Re Produce Marketing Consortium Ltd 1989

A
  • s 214 IA 1986
  • Two directors each liable for £75k
  • Directors ought to have realised, on the latest date the accounts ought to have been delivered.
  • Irrelevant they had not seen the accoutns.
72
Q

What defence can directors invoke to wrongful trading

A

The “every step” defence
ss214(3)
ss246ZB(3)

73
Q

The “every step” defence

A

After the “point of no return” the directors took every step with a view to minimising the potential loss to the company’s creditors

74
Q

Examples of the “every step” defence evidence

A
  • Voicing concerns at regular board meetings.
  • Independent and legal advice
  • Ensuring adequate, up-to-date financial advice
  • Suggesting reductions in overhead / liabilities
  • Not incurring further credit
  • Consulting a lawyer and/or insolvency practitioner for advice
75
Q

Brooks v Armstrong 2014

A
  • Burden of proof is on the directors to establish they took every step to minimise loss
  • Meaning of every step, depends on the facts
76
Q

Brooks v Armstrong 2015

Directors should keep an eye on the following factors

A

Accounting, budget and cash flow forecast, business review, future trading, creditors kept informed, agreements to deal with debt, monitor trading, financial position, business plan, minimising loss, professional advice,

77
Q

The reasonably diligent person test

A

ss214(4) and s246ZB(4)

  • Director ought to have concluded past “the point of no return”
  • Director then took every step to minimise the potential loss.
78
Q

ss214(2) and s246ZB(2)

A

Should a reasonable director ought to have concluded they were past “the point of no return”

79
Q

ss214(3) and s246ZB(3)

A

Director then took every step to minimise potential loss to creditors.

80
Q

Under reasonably diligent person test

A
  • General knowledge, skill and experience (Objective test)
  • Particular knowledge of a director (Subjective test)

Applies the higher of the two standards.

81
Q

Advice to director

A

Hold board meeting
Review financial position
Minutes

82
Q

Director cannot escape liability by resigning

A

Without previously taking every step with a view to minimise potential loss

Re Purpoint Ltd 1991

83
Q

Best course of action

A

For a company to seek professional advice as soon as possible

**Re Continental Assurance Co of London

84
Q
A

Company Law (11 decks)

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