13 - BL - Corp insolve & Dir Flashcards
What are the implications for the directors if a company becomes insolvent?
They may be personally liable to compensate the company and its creditors if found guilty of:
- Fraudulent trading 👺
- Wrongful trading 😳
Who can bring a claim of Fraudulent trading?
A Liquidator or Administrator 💦
Who can a claim of Fraudulent trading be brought against?
- any person
- who is knowingly party to the carrying on of any business of the company
- with intent to defraud creditors or for any fraudulent purpose
Do all the creditors need to have been defrauded for a claim of Fraudulent trading be brought?
No
Is the dishonest criteria objective or subjective?
Subjective - what the particular person knew or believed. 🤔
Knowledge includes blind-eye knowledge - (suspicion of the relevant facts with a decision to avoid confirming that they did exist).
What are the remedies for Fraudulent Trading?
- A person can be ordered to make such contribution to the company’s assets as the court thinks proper. 💰
- Not punitive - contribution should only reflect the loss caused to the creditors.
- Any sums recovered are held on trust for the unsecured creditors generally and not for the defrauded creditor.
- Where the person is also a director, the court is likely also to make a disqualification order. ❌🎩
- Criminal sanctions can be imposed by the court. 👮
The penalties are
- imprisonment (of up to 10 years on indictment) and/or
- fines.
Who can bring a claim of Wrongful trading?
Liquidator or Administrator 💦
Are there criminal sanctions for wrongful trading?
No
What are the duties of directors in respect of wrongful trading?
- When directors become aware (or ought to become aware) that an insolvent liquidation/administration is inevitable,
- they are under a duty to minimise the potential losses to the company’s creditors.
What must be shown to demonstrate that the directors failed in their duty in respect of wrongful trading?
the director in question:
- allowed the company to continue to trade
- during the period in which they knew or ought to have known that
- there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration, and
- that the continued trading made the company’s position worse.
What is the defence against wrongful trading?
the director took every step with a view to minimising the potential loss to the company’s creditors.
What standard is applied when considering the ‘ought to have known’ element
reasonably diligent person, with the higher of:
- general knowledge of a director, or
- actual knowledge of the director
What if the directors fail in their duty in respect of wrongful trading?
The court can order the directors to contribute (as the court see proper) to the insolvent estate.
- Not punitive - contribution should only reflect the loss caused to the creditors.
Is intent or dishonesty required to prove wrongful trading?
No
Against whom can a claim for wrongful trading be brought?
Directors and shadow directors
Is wrongful trading based on the P&L or the balance sheet?
Balance sheet - its about assets and debts not cashflow
What are the questions that must be asked when considering voidable transactions?
- Did the transaction involve a ‘connected person’ or ‘associate’?
- Did the transaction take place within the ‘relevant time’?
- Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
- Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?
Transactions at Undervalue for companies:
When must a TUV have occurred?
Within the 2 years preceding the onset of insolvency (regardless of whether connected)
Transactions at Undervalue
Who has to prove that the company was insolvent at the time of the TUV?
the applicant, unless:
where a transaction is entered into with a connected party, insolvency is presumed unless the connected person can prove otherwise.
Transactions at Undervalue
What are the defences against transactions at under value?
the company entered into the transaction in
- good faith and
- business purpose and
- benefit of the company.
Transactions at Undervalue
What happens to the purchaser in a transactions at under value?
🎁
Court has discretion to make such order as it thinks fit to restore the position as if the company had not entered into the transaction.
Any order:
- should not be prejudiced provided they were acting in good faith AND for value
- there is a rebuttable presumption that the acquisition was not in good faith where the subsequent purchaser either:
- had notice of the relevant surrounding circumstances; or
- was connected
Transaction Defrauding Creditors
What are the requirements of a Transaction Defrauding Creditors claim for companies?
- transaction as undervalue 🎁
- the intention or purpose of the transaction was to put assets beyond the reach of creditors of the comapny or otherwise prejudice their interests (includes future creditors who were not know at the time)
⚙️👻👺
Transaction Defrauding Creditors
Who can bring TDC:
- Liquidator or administrator
- supervisor CVA
- a victim of the transaction in question
Transaction Defrauding Creditors
What is the time limit for a TDC?
There is no limit
Transaction Defrauding Creditors
What are the remedies of a TDC?
The court may make such orders as it sees fit to restore the position to what it would have been but for the transaction
Transaction Defrauding Creditors
What is the disadvantage of using Transactions at Undervalue rather than Transactions to defraud creditors?
TUV has a time limit TDC does not
Transaction Defrauding Creditors
What is the disadvantage of using Transactions to defraud creditors rather than Transactions at Undervalue?
TDC requires intent, TUV does not
Preference
Who can claim preference?
😚
- a liquidator, or administrator 💦
Preference
What is required for preference?
😚
- a person is a creditor of the company
- the company puts the creditor in a better position than they otherwise would have been
- proved the company was insolvent at the time of the transaction or became so as a result of it, and
- proved the company was influenced by a desire to prefer the creditor (subjective test)
Preference
What is the relevant time for preference?
- 6 months preceding the onset of insolvency
- 2 years if connected person or associate (includes settling a debt that is guaranteed by a director)
Preference
Is there a presumption in Preference that the creditor was preferred?
😚
No - unless connected in which case there is a rebuttable presumption that the creditor was preferred.
👯
Preference
What are the sanctions for preference?
😚
The court has discretion to make an order to restore the position as if the comapny had not given preference.
Avoidance of certain floating charges
What is Avoidance of certain floating charges?
Prevent an unsecured creditor obtaining a floating charge to secure an existing loan for no new consideration, at the expense of other unsecured creditors.
Avoidance of certain floating charges
When must the floating change have been created?
- Unconnected: 1 year
- Connected: 2 years
Of onset of insolvency
Avoidance of certain floating charges
What must be proved to avoid a floating charge for an unconnected person?
- company was insolvent
- on either a cash-flow or balance sheet basis
- at the time of the floating charge’s creation or
- became insolvent in consequence of the transaction under which the charge was created.
Avoidance of certain floating charges
When may a floating change be invalid for an connected person?
- The floating charge must have been created within 2 years preceding the onset of insolvency.
- there no insolvency requirement.
Avoidance of certain floating charges
When are new floating charges valid?
To the extent that ‘new money’ or other fresh consideration is provided to the company (even if this didn’t come from the lender) 🎁
Avoidance of certain floating charges
What happens if a floating charge is found to be void?
Only the security is void and not the debt itself
