Business Law and Practice - Insolvency

Question 1

Clawback of Assets

Answer 1

Allow administrator, liquidator or trustee in bankruptcy to challenge transactions made before bankrupty

Question 2

Preferences

Answer 2

Paying certain creditor ahead of others so they get more of debt owed to them than they would in formal insolvency proceedings - putting them in a better position than they would have been on insolvency

Granting security for a previous unsecured debt - moves them up the statutory order

Liquidator can get these transactions set aside if it took place in the last 6 months

• If recipient is a person connected to bankrupt or company the period extends to 2 years - did transaction take place in the 2 years prior to insolvency, at a time the company became insolvent or became insolvent as a result of the transaction?
• A connected person is a close relative or partner of an individual and for a company this is a director, shadow director, close relative or partner of a director or person in control of the directors
• Must show there was a desire to prefer - desire to prefer is presumed with a connected person

Question 3

Transactions at an Undervalue

Answer 3

Gift of an asset or sale of an asset at significantly less of a consideration than it is worth

By a company: voidable by liquidator or administrator if it took place in the 2 years prior to insolvency, at a time the company became insolvent or became insolvent as a result of the transaction - presumed if transaction is with a connected person.

• Defence: if transaction was entered into in good faith for purpose of carrying on its business and reasonable grounds for believing transaction would benefit the company

Bankrupt: time period extends to 5 years if bankrupt insolvent or became insolvent as a result of the transaction. If within 2 years it is not necessary to show insolvency when gift made. Insolvence presumed if transaction made in favour of a close relative or business associate

Question 4

Defruading creditors

Answer 4

Individual: transaction entered into at an undervalue for the purpose of putting assets beyond the reach of a creditor

Company: liquidator or adminstrator can bring action against directors or anyone else who has been a party to the carying on of a business in an attempt to defraud creditors

Defence: if director genuinely believed things would get better even if this was unrealistic (dishonesty is required to make out fraud)

Question 5

Wrongful trading

Answer 5

Claim which can be brought by liquidator or creditor in a compulsory or creditors’ voluntary liquidation

Charge that director knew or ought to have known that company would become insolvent and failed to minimise effect on creditors

• Duty shifts from doing what is best for the company to what is best for the creditors
• If director fails to meet this duty it constitutes wrongful trading and can be held personally liable to make such contribution to company’s assets as court thinks proper
• Courts use the resonably diligent person test

Directors cannot avoid liability by resigning

Question 6

Floating charges

Answer 6

If created within 12 months of insolvency for no fresh consideration and it is proved that company insolvent at time given or became insolvent as a result the floating charge is automatically void

If given to a connected person the time period is extended to 2 years and no requirement to show insolvency at time of charge

May also be voidable as a preference

Question 7

When will company be deemed unable to pay its debts?

Answer 7

If it is proved:

• Creditor owed more than £750 served a statutory demand not paid within 21 days
• Creditor has obtained a judgment and attempted to execute it but the debt is not fully satisfied
• Company is unable to pay debts as they fall due (cash flow test)
• Value of assets are less than liabilities (balance sheet test)

Balance sheet test and cash flow test harder for creditor to prove as they do not have up to date financial records

Question 8

Ring fencing

Answer 8

Liquidators required to set aside (ring fence) part of the assets subject to a floating lien for the benefit of unsecured creditors

50% of first £10,000 in the value of the property subject to floating charges and 20% of amounts above up to a maximum fund of £800,000