Corporate Insolvency - voidable transactions and directors Flashcards
Fraudulent trading?
Liability for fraudulent trading
- Enacted to prevent the abuse of limited liability
- Concern is that directors may contribute to trade and incur further debts when company is in financial difficulty – but claims are repair because of the needed intention to defraud creditors
Fraudulent trading
Under s213 IA 1986 an be brought against
- Any person (definition includes, directors, banks
- Who is knowingly party to carrying on of any business of the company
- With intent to defraud creditors or for any fraudulent purpose
S213 imposes a civil liability to contribute to funds available to general body of unsecured creditors if liable. – ALSO corresponding criminal claim for fraudulent trading to succeed.
To prove fraudulent trading what do you need?
Actual dishonesty
- Must be proven for a claim to succeed.
- On a subjective basis
- Meaning of fraud for purposes of s213 requires ‘real dishonesty involving, according to current notions of fair trading among commercial men’
- Two stage test liquidator needs to demonstrate DIRECTORS subjective state of knowledge AND SECOND show directors conduct was dishonest, applying the objective standards of decent people.
Remedies
- A person liable – can be ordered to make such contribution to assets as court thinks proper.
- Court does not have power to include a punitive element – only reflects the loss incurred to creditors. They’re held on trust for unsecured creditors GENERALLY not for the defrauded creditor.
- When found liable also likely for court to issue a disqualification order and criminal sanctions
High standard of proof needed for fraudulent trading. More likely for wrongful trading claims to be brought.
Wrongful trading?
Claim
- Following ineffectiveness of fraudulent trading wrongful trading was brought in.
- A civil claim – can be brought against a director by a LIQUIDATOR under s214 or an administrator under s246ZB IA. No criminal provisions.
Purpose of wrongful trading
- When directors become aware that an insolvent liquidation is reasonably inevitable, they are UNDER A DUTY OF CARE to take steps to minimise potential loses to company’s creditors.
- If they fail, court can order directors to contribute insolvent estate by way of compensation for losses that the general body of creditors have suffered.
- No requirement to show dishonesty or intent, so easier to prove.
Who can bring a claim
- Liquidators
- Administrators
- Both can also assign to a third party as a way of raising funds.
Against whom?
- Any person who was at the relevant time a director
What is needed for a wrongful trading claim?
Requirements for liability
- 2 limbs
- Limb 1
- 1) Court must be satisfied that the company has gone into insolvent liquidation or administration AND
o 2) At some time before the commencement of the winding up or insolvent administration and
o The director knew or ought to have concluded that
o There was no reasonable prospect the company would avoid going into it.
Insolvent liquidation is when – its assets are insufficient for the payment of its debts. – judges solely on balance sheet test.
- Must be proven that the director allows the company to continue to trade during that period AND that the continued trading made the company’s position worse.
- If limb 1 is met then go to limb 2
- Limb 2
o Every step defences
o WILL NOT HAVE LIABILITY IF They took every step with a view to minimising the potential loss to company’s creditors.
o Examples include:
o Voicing concerns at board meetings
o Seeking independent financial and legal advice
o Ensuring adequate financial info is available
o Suggesting reductions in costs
o Not incurring credit
- The reasonably diligent person test is applied by court to see whether it has been established that not every reasonable step was taken.
- The general knowledge and skill expected of a person and the actual knowledge of that particular director. Court applies the higher of the two standards.
Remedies
- Court can order that director to make such contributions to the assets of the company as the court thinks fit. Court had wide discretion, ordinarily based on depletion of company assets caused by the continued trading.
No relief from liability under s1157 CA
Voidable transactions?
Voidable transactions
- The IA 1986 gives both a liquidator and administrator the ability to challenge certain transactions that have taken place within statutory periods prior to the insolvency of a company.
- Aim is to restore company to place it would have been but for transaction and increase funds available in insolvent estate for creditors.
Called claw back provisions
Questions to ask
- A liquidator or an administrator seeking to challenge a transaction will need to ask
- Did the transaction involve a connected person or associate
o Connected person – are directors and associates of directors
o Associates – include spouses, business partners, employee, relatives of the director or companies owned by the director
- Did the transaction take place within relevant time
o Onset of insolvency is in ss240(3)
o Administration – date of filing of application or notice of intent or appointment
o Liquidations – date of commencement of winding up
- Was the company ‘insolvent; at the time of transaction or become so as a result
- Is there a presumption available which shifts the burden of proof from liquidator to the other party?
- The fact there is a connected person shifts burden of proof from administrator to other party for the insolvency requirement – now there is a presumption of insolvency. Other party in TUV will be the buyer.
Transactions at an undervalue?
- Concern loss of value from a company
- Whether there is significant inequality in value of consideration it received to value of asset it gave away at the time when it is insolvent
- Insolvency HAS A WIDER MEANING THAN FOR WRONGFUL TRADING
TUV - A gift
- Significant less in value than consideration received.
- Granting of security to payment of dividend
o In Hill v Spread Trustee – found that granting security for no consideration or for significantly less can be challenged as transaction at an undervalue.
o The case of Sequana established that a dividend can amount to a transaction at an undervalue
TUV – when and how can it be avoided - Court may set aside a transaction as one at an undervalue if:
- It was a TUV
- Made in the relevant time – within two years ending with the onset of insolvency
- It is provided by applicant that company was insolvent to become insolvent as a result of it
TUV – Defence - Even if all the above is satisfied court may still not set aside it if they’re satisfied that
- The company entered into the transaction in good faith and for purposes of carrying out its business.
- Reasonable grounds at the time for believing that the transaction would benefit the company
TUV – Sanctions - Restoration Order - Court has discretion to make such an order that will restore the company into pre-transaction position.
Transactions at an undervalue defrauding creditors?
- These can also be brought by a victim of a transaction when the company is solvent
- NO TIME LIMIT
- NO REQUIREMENT OF INSOLVENECY
- Requirements are:
- There has been a transaction at an undervalue
- The intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or prejudice their interests, even future creditors.
o It is balance of probabilities – but court is going to want to be REALLY satisfied that there is fraud.
Usually preferred to bring claims under TUV rather than this.
TDC – Who can claim and sanctions
- A liquidator or administrator
- A supervisor of a voluntary arrangement
- A victim of the transaction in question
- Court can make whatever order to put back into pre-transaction position.
Preferences by a company?
Doesn’t have to be a creditor
- Purpose of s239 is to prevent a creditor obtaining an improper advantage over other creditors at time company is insolvent
- May be brought by a liquidator or administrator
- A company gives preference to a person if
o That person is a creditor
o The company does anything which puts that person in a better position in the event of the company going into insolvent liquidation.
When can a preference be avoided
- If given in relevant time – in 6 months ending with onset of insolvency
- Relevant time is extended to 2 years for preferences to connected persons and associates. (if given – THERE IS A REBUTTABLE PRESUMPTION THAT THE COMPANY WAS INFLUENCED BY A DESIRE TO PREFER THE CREDITOR)
- It is proved that the company was insolvent at time of transaction or became so because of it
- It is proved that the company was influenced by a desire to prefer the creditor. THIS IS A SUBJECTIVE TEST.
- When the preference is to a connected person THERE IS A PRESUMPTION THAT THEY WERE INFLUENCED BY A DESIRE TO PREFER YOU.
Preference defence
- If shown that it wasn’t out of desire to prefer creditor
Preference sanctions
- Put company back in position as if the preference had not been given
- From the person who had the preference.
Avoidance of certain floating charges?
- To prevent a creditor obtaining a floating charge to secure an existing debt for no new consideration.
- It automatically applies in liquidation or administration. But if there is a dispute proceeding may be needed.
When is a floating charge avoided - For a floating charge to be invalid:
- Must be created within relevant time – 12 months ending with the onset of insolvency – 2 years for connected person
- Unless granted to a connected person or an associate – the company was insolvent at time of creation or become insolvent in consequence of transaction under which the charge was created.
When are new floating charges valid
- Will be valid to the extent that new money or other fresh consideration is given
Overdrafts?
Overdrafts
- In Re Yeovil Glove Co. Ltd [1965] CH 148, the company granted a floating charge to its bank to secure an existing unsecured overdraft, as a condition of the bank not calling in the overdraft, at a time when it was insolvent. The company owed £67,000 under the overdraft at the time the floating charge was created. The company went into liquidation a few months later. The liquidator argued the floating charge was invalid as it secured debt incurred by the company before the date the floating charge was created. The court held that the floating charge was valid because (1) each time the company used its overdraft facility after the creation of the floating charge, this was deemed to be ‘new money’ advanced by the bank (2) The rule in Devaynes v Noble [1816] 1 Mer. 572 provides that payments into an overdrawn bank account by the company is first applied in discharging the oldest advances made by the bank. As the company had paid more than £67,000 into its bank account since the grant of the floating charge, it could be said that the precharge debt of £67,000 had been paid off and that the existing overdraft balance at the time of appointment of the liquidator was ‘new’ debt.
- Pay off old debt first
