Insolvency

Question 1

What is the role of the liquidator?

Answer 1

Collect the company’s assets, pay off debts, and distribute remaining assets in the correct order (s143 Insolvency Act 1986)

Question 2

What are the 2 ways of maximising the assets of the company, for the benefits of the creditors?

Answer 2

To challenge prior transactions: that were at an undervalue AND voidable preferences

Question 3

What other ways are there to maximise assets of the company?

Answer 3

The other way to hold directors personally accountable for their dealings: 3) fraudulent and 4) wrongful trading

Question 4

What section of IA can you find “transactions at an undervalue”?

Answer 4

S238 - the liquidator can apply to the court for an order that the company at the relevant time entered into a transaction at an undervalue

Question 5

What is the relevant time for transaction at an under value?

Answer 5

The relevant time is 2 years, ending with the commencement of the winding up - s240(3)

Question 6

What is a transaction?

Answer 6

Transaction defined in 238(4):
A) the company makes a gift or otherwise enters into a transaction for no consideration connected to the company
B) the company enters into a transaction with a person for consideration which is significantly less than the monetary value of the consideration provided by the company

Question 7

Who must enter the transaction?

Answer 7

It is crucial that the company itself enters into the challenged transaction (Hunt (Liquidator of Ovenden Colbert Printers) v Hosking)

Question 8

What is important about the meaning of consideration?

Answer 8

Phillips v Brewin Dolphin Bell Lawrie - When evaluating consideration, speculative values are not being taken into account

Question 9

What happened in Re MC Bacon?

Answer 9

• Company ran into financial difficulties and provided a debenture over its assets to its bank for an overdraft facility. The liquidator challenged the debenture as transaction at an undervalue.
• However, held that there was no transaction at undervalue because granting debenture did not deplete its assets or diminish value. By charging its assets via security, only appropriates them to meet liabilities due to the secured creditor and adversely affects rights of other creditors in the event of insolvency. Company had partied with nothing of value.
• All company loses is the ability to apply he proceeds otherwise than in satisfaction of he secured debt. This is not something capable of valuation in monetary terms, so did not come within s238(4)(b)

Question 10

What did the judges say in Re Bacon about meaning of section 238(4)(b)?

Answer 10

• It requires a comparison to be made between the value obtained by the company for the value of the consideration provided by he company.
• Both must values must be measurable in money or money’s worth and both must be considered from the company’s point of view
• Grant of security cannot constitute a transaction at an undervalue.

Question 11

Conversely, there will be a transaction at an undervalue if:

Answer 11

1) the company gives away assets prior to insolvency for free (Re Barton Manufacturing Co Ltd)
2) the company sells assets prior to insolvency for less than their true worth (Phillips v Brewin Dolphin Bell Lawrie)

Question 12

What must be a consequence of the transaction?

Answer 12

The company must have gone into insolvency as a consequence of that transaction - I.e. Unable to pay its debts (s123)

Question 13

What is the definition of inability to pay its debts?

Answer 13

S123: a company is unable to pay its debts if
1
(a) a creditor is owed more than £750 and the company has failed to pay it after 3 weeks after notice of debt
(e) proved to the court that company is unable to pay its debts as they fall

(2) proved to the court that the value of the company’s assets is less than amount of its liabilities - taking into account prospective and contingent liabilities

Question 14

What are voidable preferences?

Answer 14

S239 - liquidator can apply to the court for an order restoring the situation that would exist had the company not given a preference towards a group of creditors over other creditors

Question 15

What is one situation where a voidable preference is given?

Answer 15

239(4) The company gives a preference to a person if

(1) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities AND
(2) the company does anything or suffers anything which has the effect of putting that person into a position, which in the event of going into insolvent liquidation, will be better than the position he would have been if that thing had not been done

Question 16

What must the company been influenced by?

Answer 16

S239(5) stipulates that the company must have been influenced by the desire to place that person in a better position.

This is a subject test. In MC Bacon, held that the company must have positively wished that the relevant creditor be placed in a better position

Question 17

What is the difference between intention and desire?

Answer 17

In Re MC Bacon, it is no longer sufficient to establish an intention to prefer (objective), but there must be a positive desire improve position of creditor (subjective)

Question 18

Was there a voidable preference in Re MC Bacon?

Answer 18

No - granting the debenture, the company was influenced by the desire to continue trading and not by the desire to prefer the bank as a creditor

Question 19

When must the preference have been given?

Answer 19

Relevant time - period of 2 years ending with onset of insolvency IF preference is given to a person connected with the company OR 6 months if preference given to any other person

Question 20

What is fraudulent trading?

Answer 20

S213

1) if in the course of winding up the company, it appears that any business of the company has been carried on with the intent to defraud creditors or any other person, or for any fraudulent purpose, the following has effect
2) the court may declare any persons who were knowingly parties to the carrying on of the business in that manner liable to make any contributions to the company’s assets the court seems proper

Question 21

What counts as fraudulent trading?

Answer 21

Requires real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame (Re Patrick and Lyon) = High threshold

Question 22

What is blind eye knowledge?

Answer 22

If someone suspects something goes wrong, but deliberately avoids to seek confirmation - Morris v State Bank of India

Question 23

When can it be properly inferred the company is carrying on business with the intent to defraud?

Answer 23

If a company continues to carry on business and to incur debts when there is knowledge to the directors no reasonable prospect of the creditors ever receiving payment, it can be inferred that the company is carrying on business with the intent to defraud (Re William C Leitch Brothers)

Question 24

What must the intention be?

Answer 24

The intention must be to defraud or mislead the creditors - plans to protect directors by avoiding Phoenix rule under s216 not enough

Question 25

What is the section 216?

Answer 25

Section 216 prevents a director of a company that has gone insolvent (including anyone who has been a director during 12 moth period ending before company went into liquidation) to get involved for five years in the management of a company with either same or similar name, that suggests and association with that company. Breach results in criminal liability. AKA Phoenix syndrome

Question 26

What is wrongful trading?

Answer 26

S214 - If a director continued to trade at a time when they knew or ought to have know that there was no reasonable prospect of avoiding insolvent liquidation, they may be required to make such contribution to the company's assets as the court sees fit