10 Directors’ liabilities and voidable transactions Flashcards
The 2 formal insolvency procedures for insolvent individuals
- bankruptcy
- individual voluntary arrangement (IVA)
What is an Individual Voluntary Arrangement (IVA)?
an arrangement under which a debtor makes a proposal for a compromise of their liabilities with their creditors.
Advantages of Individual Voluntary Arrangement
- alternative to bankruptcy
- binds all unsecured creditors
- a moratorium is available if interim order is made
disadvantages of Individual Voluntary Arrangement
- may last longer than bankruptcy
- cannot bind secured or preferential creditor without creditor’s consent
- can be expensive and time-consuming
Bankruptcy order of priority
- secured creditors
- expenses of the bankruptcy
- preferential creditors
- unsecured creditors
- statutory interest
- debts of a spouse
- any surplus is payable to the bankrupt
Bankruptcy discharge
bankrupt is released from most of the bankruptcy debts and the personal restrictions eg acting as a director, obtaining credit
after max period of one year
What are voidable transactions?
transactions that take place in the lead-up to an insolvency process that may be set aside
meaning of ‘connected persons’ and ‘associates’
‘connected persons’ - directors, associates of directors and associates of the company
‘associates’ - spouses, business partners, employees, relatives including brother, sister, uncle, aunt, niece, nephew, etc.
The onset of insolvency - administration and liquidation
- Administration - date of filing of application (court procedure) or notice of intention to appoint or (if none) appointment (out-of-court procedure).
- Liquidation - date of commencement of winding up
Transaction at an undervalue (TUV)
Type of voidable transaction and can either be a
- gift
- a transaction for a consideration at value at which in money or money’s worth, is significantly less in value than the consideration provided by the company
Example of TUV
a company sells an asset worth £100k but only received £50k in payment
When can a TUV be avoided?
- if TUV took place within the relevant time (in the 2 years ending with the onset of insolvency)
- it is provided by the application that the co was insolvent at the time of the transaction or became as a result of it
Requirements to set aside a TUV by the court
- co entered into the transaction in good faith and for the purpose of carrying on its business
- transaction would benefit the co
Transactions defrauding creditors (TDC)
type of voidable transaction
to enable the setting aside of a TUV
Requirement for transactions defrauding creditors claim
- there has been a TUV
- the intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests.
Who may claim a transaction defrauding creditors
- liquidator or administrator
- supervisor of a voluntary arrangement
- victim of the transaction in question
Why is TDC better than TUV
TDC claims can be brought in respect of a transaction that took place at anytime whereas TUV only concerned transactions entered into within 2 years
Preferences by a company - purpose
- type of voidable transaction
to prevent a creditor obtaining an improper advantage over other creditors of a company at a time when the company is insolvent
Who can bring a preference claim?
- liquidator
- administrator
When would a co give a preference to a person?
1.if he is a creditor of the company
2. the co does anything which has the effect of putting that person in a better position in the event of insolvency
When is a preference voidable?
- it was given within the ‘relevant time’ - 6 months ending with the ‘onset of insolvency’ - can be extended to 2 years for connected persons or associates
- it is proved that the co was insolvent at the time of the transaction
Preferences: connected persons
- rebuttable presumption that co was influenced by the desire to prefer a creditor
- preferred person must prove that the co was not influenced by a desire to prefer them
Avoidance of certain floating charges
- to prevent a creditor obtaining a floating charge to secure an existing debt for no new consideration
- only applies on liquidation or administration
when can floating charges be avoided?
- floating charge must have been created within the ‘relevant time’ - 12 months
- must be proved that co was insolvent
When are new floating charges valid?
to the extent that ‘new money’ or other fresh consideration is provided to the company in return for the grant of the floating charger on or after its creation
When would the directors of a company be personally liable in terms of trading?
- fraudulent trading
- wrongful trading
Who can bring a fraudulent trading claim and how
liquidator or administrator
- making an application to court
Who is a fraudulent trading claim brought against?
- any person who is knowingly party to the carrying on of any business of the company
- any person with intent to defraud creditors to for any fraudulent purpose
What must be proven for a fraudulent trading claim to succeed
Actual dishonesty
Remedies for fraudulent trading claims
contribution to the company’s assets as the court thinks proper
Who can a wrongful trading claim be brought against? and by who
against a director by a liquidator or an administrator
Purpose of wrongful trading
to ensure that when directors become aware that an insolvent liquidation is inevitable, they are under a duty to take every step possible to minimise the potential losses to the company’s creditors
Meaning of wrongful trading
directors failing to make the right judgements about the company’s financial prospects and then failing to take steps to minimise losses to the creditors.
Requirements for liability for wrongful trading
- co has gone into insolvent liquidation or administration
- director knew or concluded that there was no reasonable prospect that the company would avoid g90ing into insolvent liquidation
Where would insolvency for wrongful trading be judged from
balance sheet test
NOT the cash flow test
the ‘every step defence’
that directors took every step with a view to minimising the potential loss to the company’s creditors
examples:
- voicing concerns at regular board meetings
- seeking independent financial and legal advice
‘reasonably diligent person test’
determines where liquidator or administrator has established that a director concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration
where directors then took every step to minimise the potential loss to the company’s creditors
Remedies for wrongful trading
- court can order director to make such contribution to the assets of the company as the court thinks fit
- disqualification order
Company D has a loan with ABC Bank which is secured by a fixed charge over certain assets of Company D. It also has a £20,000 overdraft with ABC Bank which is unsecured.
ABC Bank agrees to increase Company D’s overdraft facility from £20,000 to £30,000. This is on condition that Company D grants it a floating charge to secure the whole of the overdraft, to be taken over all assets not covered by the fixed charge. The floating charge is registered at Companies House. What advice would you give to ABC Bank about the validity of the floating charge if Company D goes into administration 3 months after the floating charge was created?
a) The floating charge was created within the relevant time. This means
the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £10,000 and not the full amount of £30,000.
b) The floating charge was created within the relevant time. This means
the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £20,000 and not the new increase to the overdraft of £10,000.
c) The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. However, the floating charge will be valid to secure £30,000 provided Company D has paid £20,000 or more into its account since the creation of the floating charge.
d) The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, and the overdraft will be unsecured.
e) The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, but the overdraft will be secured by the existing fixed charge that the bank has.
C
Give examples of potential warning signs which might prompt or should prompt a director to conclude that there is no reasonable prospect of the company avoiding insolvent liquidation.
- Continuance of losses
- Cash flow problems
- Increasing debt
- Evidence of increasing creditor pressure
