BLP - Week 9 Voidable transactions and Directors Flashcards
What are directors personally liable for in an insolvent company?
Directors may be personally liable for:
* Fraudulent trading
* Wrongful trading
What is fraudulent trading under IA 1986?
Fraudulent trading occurs when:
* A person knowingly carries on the business
* With intent to defraud creditors or for any fraudulent purpose (s 213 / 246ZA IA 1986)
Who can be liable for fraudulent trading?
Any person (not just directors) who knowingly participates in fraudulent activities, including banks and third parties.
What must be proven for fraudulent trading?
Actual dishonesty, assessed through:
* The director’s subjective knowledge
* Whether their conduct was dishonest by objective standards
What are the consequences of fraudulent trading?
Consequences include:
* Court can order a contribution to company assets
* Civil liability for unsecured creditors
* Possible criminal sanctions (up to 10 years in prison + fines)
* Director disqualification likely
What is wrongful trading?
When directors allow a company to continue trading past the ‘point of no return’, making the company’s financial situation worse.
Who can bring a wrongful trading claim?
Liquidators and administrators.
Who can be liable for wrongful trading?
Any director (including de facto and shadow directors) at the relevant time.
What is the key difference between wrongful and fraudulent trading?
Wrongful trading does not require proof of dishonesty.
What is the ‘every step’ defence for wrongful trading?
Directors must prove they took every reasonable step to minimize losses, such as:
* Holding regular board meetings
* Seeking financial/legal advice
* Reducing overhead costs
What are the consequences of wrongful trading?
Consequences include:
* Directors may be ordered to compensate creditors
* Joint and several liability among directors
* Disqualification from acting as a director
What are voidable transactions?
Certain transactions made before insolvency that can be ‘clawed back’ by administrators or liquidators to protect creditors.
What key questions must be asked about a voidable transaction?
Key questions include:
* Was it with a connected person?
* Did it occur within the relevant time?
* Was the company insolvent at the time or because of it?
* Does a presumption shift the burden of proof?
Who is considered a ‘connected person’ in a voidable transaction?
Connected persons include:
* Directors and shadow directors
* Relatives (siblings, parents, spouses, etc.)
* Companies controlled by directors
* Business partners and employees
What is a TUV?
A transaction where the company receives little/no value in return, including gifts, selling assets below market value, or paying excessive dividends.
When can a TUV be set aside?
If it:
* Took place within two years before insolvency
* Was made while insolvent or made the company insolvent
Who has the burden of proof for TUV claims?
If the transaction was with a connected person, the connected person must prove solvency at the time.
What is the defence for TUV claims?
The company acted in good faith and reasonably believed the transaction would benefit the business.
What are the consequences of a successful TUV claim?
The court may:
* Reverse the transaction
* Order repayment of undervalued amounts
What is a TDC?
A transaction made with intent to put assets beyond creditors’ reach.
Who can bring a TDC claim?
Liquidators/administrators, voluntary arrangement supervisors, victims of the transaction.
How does a TDC differ from a TUV?
A TDC does not require insolvency and focuses on intent to defraud creditors.
What remedies are available for a TDC?
The court can reverse the transaction or order compensation.
What is a preference?
A company gives a preference when it:
* Pays off one creditor over others
* Transfers assets to secure an existing debt
When can a preference be avoided?
If:
* Made within six months before insolvency (or two years for connected persons)
* The company was insolvent or became insolvent due to it
* There was a desire to prefer the creditor
What is the defence to a preference claim?
No desire to prefer the creditor.
What are the consequences of a successful preference claim?
The court may reverse the transaction to restore fairness.
What is the purpose of voiding floating charges?
Preventing a creditor from securing an existing debt without giving new consideration.
When is a floating charge void?
If:
* Created within 12 months before insolvency (or 2 years for connected persons)
* No new consideration was provided
What is the exception to voiding a floating charge?
It is valid if fresh consideration (new money) was provided when the charge was granted.
