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Company Law > Corporate Insolvency - Voidable Transactions > Flashcards

Corporate Insolvency - Voidable Transactions Flashcards

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1
Q

Which four transactions may potentially be avoided by liquidators/administartors?

A
  • Transactions at an undervalue
  • Transactions defrauding creditors
  • Preferences
  • Avoidance of Floating Charges.
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2
Q

How are these type of transactions known?

A

Voidable OR antecedent

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3
Q

What is the aim of challenging these transactions?

A

To restore the company to the same position it would have been in had the transaction not taken place and so increase the funds available in the insolvent estate for the benefit of creditors

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4
Q

How are these provisions often described?

A

Clawback provisions

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5
Q

What is a clawback provision?

A

Provisions which can result in an order reversing transactions or more usually, providing for financial restitution to be paid, to increase the assets of the insolvent company for the benefit of creditors

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6
Q

What questions does an A/L need to ask?

A

1) Did the transaction involve a ‘connected person’ or ‘associate’?
2) Did the transaction take place within the ‘relevant time’?
3) Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
4) Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

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7
Q

What is meant my TUV?

A

Transactions by a company under value?

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8
Q

Which section deals with TUVs?

A

s238 IA 1986

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9
Q

Which section defines insolvency?

A

s123 IA 1986

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10
Q

What is the definition of insolvency under s 123 IA 1986?

A

Inability to pay it’s debts

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11
Q

Who can bring a TUV transaction under s238(1) IA 1986?

A
  • A liquidator

- An administrator

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12
Q

Which older case said granting of a security cannot be a TUV?

A

Re MC Bacon Ltd [1990]

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13
Q

Re MC Bacon Ltd [1990]

A

Granting of security by a company cannot amount to a TUV on the basis that the security does not itself deplete the assets of the company or diminish their value

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14
Q

Which case gives a different view on granting securities being a TUV compared to Re MC Bacon Ltd [1990]?

A

Hill v Spread Trustee Company Limited [2006]

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15
Q

Hill v Spread Trustee Company Limited [2006]

A

Granting of security for no consideration (or for consideration significantly less than the value of the charge) can be challenged as a TUV. In Hill, the main purpose for the granting of security was to put assets beyond the reach of HMRC.

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16
Q

How does the law stand currently on granting securities as TUVs?

A

The law is somewhat uncertain on this point because of the difference in view between the MC Bacon and Hill cases.

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17
Q

BTI 2014 LLC v Sequana SA & others [2019]

A

A dividend, lawfully paid can amount to a TUV

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18
Q

What is a TUV?

A
  • A gift; or
  • A transaction for a consideration the value of which, in money or money’s worth, is significantly less in value than the consideration provided by the company
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19
Q

When can the court set aside a TUV?

A
  1. The company made a gift or otherwise entered into a transaction for a consideration, the value of which in money or money’s worth is significantly less in value than the consideration provided by the company.
  2. It took place within the ‘relevant time’ (s 238(2))
  3. It is proved by the applicant that the company was insolvent at the time of the transaction or became so as a result of it (s 240(2))
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20
Q

What is the relevant time for a TUV?

A
  • In the two years preceding the onset of insolvency (s 240(1)(a)), which is the commencement of the relevant insolvency procedure (administration or liquidation) (s 240(3)).
  • Note that the relevant time is two years regardless of whether the transaction took place with a connected person or not.
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21
Q

What is the defence for a TUV?

A

1) The company entered into the transaction in good faith and for the purpose of carrying on its business; and
2) At the time there were reasonable grounds for believing that the transaction would benefit the company.

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22
Q

Sanctions for a TUV?

A

The court has a discretion to make such order as it thinks fit to restore the position as if the company had not entered into the transaction (s 238(3)).

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23
Q

s238(3) IA 1989?

A

The court has a discretion to make such order as it thinks fit to restore the position as if the company had not entered into the transaction

24
Q

Section 241(1) IA 1986?

A

Section 241(1) provides a non-exhaustive list of the types of restoration order that the court might make under s 238

25
Q

Which section provides a non-exhaustive list of sanctions the court may apply under s238?

A

s241(1)

26
Q

Under s 241(2A) there is a rebuttable presumption that an acquisition by a subsequent purchaser was not in good faith where the subsequent purchaser either:

A

1) Had notice of the relevant surrounding circumstances and of the relevant proceedings; or
2) Was connected with or was an associate of either the company or the party which transacted at an undervalue with the company.

In such circumstances the burden of proof shifts to the subsequent purchaser to show good faith.

27
Q

What is a TDC?

A

Transaction defrauding creditors

28
Q

Which section relates to TDCs?

A

s423 IA 1986

29
Q

s423 IA 1986?

A

Concerns TDCs

30
Q

Must a company be insolvent for a claim of TDC?

A

No

31
Q

What are the requirements for a claim of TDC?

A

1) There has been a transaction at an undervalue and
2) The intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests, this transaction may be avoided under s 423(3).

This even includes future creditors who were unknown at the time of the transaction.

32
Q

Why might insolvency practitioners prefer to bring a claim under s238 (TUVs) thank s423?

A

Under s 238, it need not be proved that the purpose of the transaction was to put the assets beyond the reach of creditors or otherwise prejudice them = easier

33
Q

Who may apply for a TDC claim? s424

A

1) A liquidator or an administrator;
2) A supervisor of a voluntary arrangement; or
3) A victim of the transaction in question.

34
Q

What are the sanctions for a TDC?

A

The court may make such order as it thinks fit to restore the position to what it would have been but for the transaction in question (s 423(2)).
A non-exhaustive list of orders is set out in s 425(1).

35
Q

What is the main advantage of a claim under s423 compared to s238?

A

No risk of becoming time barred in the same way

36
Q

What is the purpose of s239 IA 1986?

A

The purpose of s 239 is to prevent a creditor obtaining an improper advantage over other creditors of a company at a time when that company is insolvent

37
Q

Who can bring a claim under s2391(1)?

A
  • A liquidator,

* An administrator.

38
Q

When is a company considered to have given a preference?

A

1) That person is a creditor of the company (or a surety or guarantor of any of the company’s debts or liabilities); and
2) The company does anything or allows anything to be done which has the effect of putting that person in a BETTER position in the event of the company going into insolvent liquidation than he/she would otherwise have been in.

39
Q

Example of a company granting a preference?

A

Paying an unsecured creditor first

40
Q

When can a preference be avoided?

A

1) It was given within the ‘relevant time’ (s 239(2))
2) It is proved that the company was insolvent (on either a cash flow or balance sheet basis) at the time of the transaction or became so as a result of it (s 240(2)).
3) It is proved that the company was ‘influenced … by a desire’ to prefer the creditor (s 239(5)).

41
Q

What is the relevant time for avoiding preferences?

A

6 months preceding the ‘onset of insolvency’ (s 240(1)(b)), being the commencement of the relevant insolvency procedure (s 240(3)).
- Extended to 2 years for preferences to connected persons and associates (s 240(1)(a)).

42
Q

Case showing that s239(5) ‘influenced..by a desire’ to prefer a creditor is a subjective test?

A

The company must have positively wished to put the party in a better position (see Re MC Bacon Ltd)

43
Q

Where are ‘connected persons’ defined in the IA 1986

A

s249

44
Q

Where are associates defined?

A

s435 IA 1986

45
Q

What is the defence to a preference?

A

Absence of the desire to prefer required by s 239(5).

46
Q

Why was there no preference in Re MC Bacon Ltd [1990}

A

The court said it is not necessary to prove an intention to prefer (objective), but a desire to prefer (subjective).
Could not be challenged as a preference because the directors had not been influenced by a desire to prefer the bank, but only by the desire to continue trading and to avoid the calling in of the company’s overdraft

47
Q

Under s 239(3) what sanctions does the court make?

A

The court has a discretion to make an order to restore the position as if the company had not given the preference (s 239(3)).

48
Q

What is the purpose of s245 IA 1986?

A

s 245 is to prevent an unsecured creditor obtaining a floating charge to secure an existing loan for no new consideration, at the expense of other unsecured creditors

49
Q

When is a floating charge voidable?

A

1) Created within the ‘relevant time’. The relevant time is 12 months preceding the onset of insolvency - s254(3)
2) It must be proved that the company was insolvent (on either a cash-flow or balance sheet basis) at the time - s254(4)

50
Q

When will a floating charge be valid?

A

Floating charge will be valid to the extent that ‘new money’ or other fresh consideration (which can include goods or services) is provided to the company (or existing debts of the company are extinguished) in return for the grant of the floating charge on or after its creation (s 245(2)).

51
Q

What is the purpose s254(2) FCs?

A

The effect of s 245(2) is that if a floating charge is granted to secure the repayment of a new loan made on or after the creation of the charge, then it will be valid.

52
Q

Sections for TUVs?

A

s238

53
Q

Section for avoidance of floating charges?

A

s245?

54
Q

Section for TDCs?

A

s423

55
Q

Section for preferences?

A

s239

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