6.1): Claw-back of Assets for Creditors Flashcards
What is a preference according to s 239 of the Insolvency Act 1986?
a company prefers a person if:
the person is a creditor/surety/guarantor of any of the company’s debts/liabilities; and
if it does anything to put that person in a better position during insolvent liquidation than they would have been; and
preference was given during 6 months (2 years for connected person) before insolvency; and
company was unable to pay its debts as a result
what may an administrator or liquidator do in relation to a preference?
apply to court to set aside preference or make appropriate order
What is a connected person to the company?
director/ shadow director
close relative or business associate of director/ shadow director/ associate of the company
What is a transaction at an undervalue according to s 238 of the Insolvency Act 1986?
a company enters into a transaction at an undervalue at the relevant time where it:
makes a gift; or
enters into a transaction for consideration is significantly less than what the company provided
relevant time: 2 years ending with onset of insolvency
company must have been solvent at the time or become insolvent as a result of the transaction
What is fraudulent trading according to s 213 of the Insolvency Act 1986?
where liquidator/administrator finds that business of the company has been carried on with the intent to defraud the company’s/some other person’s creditors
What action can a liquidator/administrator take in a finding of fraudulent trading?
seek court declaration that anyone knowingly party to the fraudulent business must make a contribution to the company’s assets
court can make a disqualification order against a person if they are found liable for fraudulent trading
What is wrongful trading as per s. 214 of the Insolvency Act 1986?
imposes personal liability where:
company goes into insolvent liquidation; and
director knew/ought to have known that there was no reasonable prospect that the company would avoid insolvent liquidation; and
that person was a director at the time
Is there a defence to a finding of wrongful trading?
yes.
if a director took every step with a view to minimising the potential loss to the creditors as he ought to have taken
Objective test: what would a reasonable director have known in the circumstances?
subjective: what did this particular director know?
What action can be taken against a director found liable for wrongful trading?
they may have to contribute personally to the company’s assets
court can make a disqualification order against a person found liable or wrongful
What is setting aside a floating charge according to s 245 of the Insolvency Act 1986?
floating charge is invalid if at the relevant time, when charge was created:
the company got nothing in return, whether in new money, the provision of goods/services or extinguishing of existing debts.
relevant time:
charge was created in favour of a person connected to the company in the two years before insolvency
OR
if the charge was created in favour of any other person in 12 months before insolvency
What is a person connected with the company for the purpose of setting aside a floating charge?
director, shadow director,
OR
close relative or business associate of either a director /shadow director/ associate of the company
What is the order of priority for distribution to creditors?
Not available to creditors and repossessed by true owners:
assets loaned/leased to the company, assets held on trust for 3rd parties and assets held on retention of title clauses.
Order of priority between creditors:
- fixed charge holders (surplus becomes company property and available to creditors generally)
- general costs of liquidation/administration
- preferential creditors
- floating charge holders
- ordinary unsecured creditors
What is ring fencing?
insolvency practitioner must figure out how much is left over to pay floating charge holders
IA states they must carve out a sum and set it aside for unsecured creditors
this balance is paid to floating charge holders.
