Insolvency II MCQs Flashcards
A private limited company is in insolvent administration. 3 days before the administrator was appointed, one of the company’s directors transferred a delivery van from the company to themselves for no consideration. The administrator has applied to court for an order that the director pay the company for the van.
Which of the following statements best explains whether or not the administrator is likely to obtain the remedy sought?
The administrator is likely to obtain the remedy sought, provided that it can prove that the company was insolvent at the time or became so as a result. The company has entered into a transaction at an undervalue at a relevant time.
The administrator is likely to obtain the remedy sought if it can be shown that the transaction was carried out with an intent to defraud creditors.
The administrator is unlikely to obtain the remedy sought. Although the company has entered into a transaction at an undervalue at a relevant time with a person connected to the company, the most likely remedy that the court will order will be an order for disqualification of the director.
The administrator is likely to obtain the remedy sought. The transaction is a voidable preference with a person connected to the company. There will be a presumption that the company was insolvent at the time or became so as a result.
The administrator is likely to obtain the remedy sought. The company has entered into a transaction at an undervalue at a relevant time with a person connected to the company. There will be a presumption that the company was insolvent at the time or became so as a result.
The administrator is likely to obtain the remedy sought. The company has entered into a transaction at an undervalue at a relevant time with a person connected to the company. There will be a presumption that the company was insolvent at the time or became so as a result.
Correct. The administrator is likely to obtain the remedy sought under s 241(1)(d) Insolvency Act 1986 because the company entered into a transaction at an undervalue and the material facts should be easy for the administrator to prove. The director gave no consideration for the van (s 238(4)(a)); the transaction took place at a relevant time (s. 220(1)(a)); and the director is a person connected to the company (s 249(a), giving rise to a presumption of insolvency under s. 240(2). We cannot tell on the facts whether or not there is any chance of the director proving the defence under s 238(5).
A private limited company has gone into liquidation. Upon reviewing the company’s accounts, the liquidator has discovered that the company had been trading at a time when the directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation. The continued trading caused substantial further loss to the company.
What is the most likely action that the liquidator may take against the directors?
The liquidator may bring a claim against the directors for breach of directors’ duties.
The liquidator may bring a claim against the directors for fraudulent trading.
The liquidator may bring a claim against the directors for wrongful trading.
The liquidator may bring a claim against the directors for negligence.
The liquidator may bring proceedings for disqualification of the directors.
The liquidator may bring a claim against the directors for wrongful trading.
Correct. The directors will be liable for wrongful trading unless they can show that they took every step to minimise loss to creditors (s 214(3)). This does not look to be the case on the facts of this scenario.
A private limited company went into insolvent administration last month, following the presentation of a creditor’s petition. Twelve months ago, the company had repaid a sum of money loaned from one of its directors. Under the terms of the loan agreement, the loan was not due to be repaid until three months later. The company was insolvent on the cash flow test at the time of this transaction.
Will the administrator be able to challenge the payment made by the company to its director?
The administrator may challenge the transaction as a voidable preference since it took place within the relevant time and a desire to prefer will be presumed due to the director being connected to the company.
The administrator may challenge the transaction as a voidable transaction at an undervalue since it took place within the relevant time and there will be a presumption of insolvency due to the director being connected to the company.
The administrator will not be able to challenge the transaction as a voidable preference unless it can be shown that in making the repayment, the company had a desire to prefer the director.
The administrator will not be able to challenge the transaction as a voidable preference since it took place over six months ago.
The administrator will not be able to challenge the transaction as a voidable preference unless it can be shown that the company was insolvent on the balance sheet test at the time of the transaction or became so as a result of the transaction.
The administrator may challenge the transaction as a voidable preference since it took place within the relevant time and a desire to prefer will be presumed due to the director being connected to the company.
Twelve months ago, a company sold some equipment to one of its directors for £125,000. At the time of the sale, the equipment had a market value of £200,000. Two months ago, the company went into insolvent liquidation.
What is the most likely claim that the liquidator would bring against the director who received the equipment?
A claim to set aside the transaction as a preference.
A claim to set aside the transaction as a transaction at an undervalue.
A claim to set aside the transaction as a transaction defrauding creditors.
A claim for wrongful trading.
A claim for fraudulent trading.
A claim to set aside the transaction as a transaction at an undervalue.
Correct. The fact pattern points to a transaction at undervalue. Preferences involve putting a creditor in a better position eg by paying-off the creditor ahead of other creditors in the run up to an insolvency. A liquidator would prefer to rely on s 239 IA 1986 transactions at undervalue as opposed to s 423 IA 1986 because there is no requirement to prove that there was intention to put assets beyond the reach of creditors.
A private limited company had an overdraft with a bank which as at three months ago stood fully drawn at £500,000. The company became unable to meet its debts as they fell due and therefore requested that the bank extend the overdraft to £750,000. The bank agreed to do this on the basis that the company granted a floating charge over all of the assets of the company to secure the whole overdraft amount of £750,000. The additional £250,00 was advanced and the floating charge granted at the same time two months ago. The floating charge was duly registered at Companies House. One month ago, the company was put into liquidation.
Will the floating charge be effective security for the overdraft?
The floating charge will be invalid against the liquidator in respect of the full £750,000 until the overdraft is repaid and redrawn at which point it will be valid security for the monies redrawn.
The floating charge will be invalid against the liquidator in respect of the full £750,000 at the point at which it is granted.
The floating charge will be valid security for the existing £500,000 at the point at which it is granted and will be invalid against the liquidator in respect of the additional £250,000.
The floating charge will be valid security for the full £750,000 since it has been properly registered.
The floating charge will be valid security for the additional £250,000 at the point at which it is granted and will be invalid against the liquidator in respect of the £500,000 already drawn.
The floating charge will be valid security for the additional £250,000 at the point at which it is granted and will be invalid against the liquidator in respect of the £500,000 already drawn.
Correct. Floating charges granted at a time when the company is insolvent are void against a liquidator except to the extent that they secure money granted at the same time or after the floating charge is granted. The existing £500,000 overdraft will therefore not be secured by the floating charge but the £250,000 advanced at the same time that the floating charge was granted will be secured by the floating charge.
Question 1
It is early 2023. The client had a flourishing business until December 2022. In December
2022, the client’s managing director forgot to renew the fire insurance policy for the client’s
warehouse. Shortly afterwards the warehouse burned down, destroying nearly all of the
client’s stock. From then on, the managing director took every step she should have done
with a view to minimising the potential loss to the client’s creditors if it went into insolvent
liquidation. However, the client has just gone into insolvent liquidation as a result of the fire.
In December 2022 the managing director was working both as managing director and
buildings manager.
Assuming that the court accepts the facts stated above, which of the following best
describes whether the managing director will be liable for wrongful trading?
A No, she will not be liable for wrongful trading because she made an innocent mistake.
B No, she will not be liable for wrongful trading because she has a defence.
C Yes, she will be liable for wrongful trading because she was negligent and this resulted
in the client going into liquidation.
D Yes, she will be liable for wrongful trading because she should not have been carrying
out two jobs at once.
E Yes, she will be liable for wrongful trading but the client will incur liability instead as
her employer.
Answer
Option B is correct. Liability for wrongful trading is personal to the director, and the
employer is not vicariously liable. It may be that the managing director’s mistake will result
in liability being established for wrongful trading under s 214 IA 1986, but in any event
the managing director will be able to use the defence under s 214(3). This is that she took
every step she should have done with a view to minimising the potential loss to the client’s
creditors if it went into insolvent liquidation – and we are told in the question that she
did do this.
Four chartered surveyors set up together in business as a Limited Liability Partnership (‘the LLP’). Two of them are designated members and two are ordinary members of the LLP and all work full time. The members all meet formally once a month to discuss profit and loss, cash flow and financial forecasts. This financial information has indicated for the past 12 months that the LLP is unable to pay its debts. The LLP has continued in business, and the members have discussed ways of limiting costs. As a result they have made considerable reductions in office expenditure. At one meeting (‘the Meeting’) a few months ago, one of the ordinary members (‘the Ordinary Member’) suggested that they should obtain financial and/or legal advice on their position. This suggestion was rejected on the basis that it would be too expensive.
A liquidator is appointed on the insolvent winding up of the LLP. The liquidator considers it clear that at the date of the Meeting there was no reasonable prospect that the LLP would avoid insolvent liquidation and is considering whether to bring a claim for wrongful trading against all the members.
Which of the following must the Ordinary Member show to establish a defence against a claim by the liquidator?
A. That he took all reasonable measures to reduce expenditure incurred by the LLP.
B. That as he is not a designated member he benefits from limited liability and cannot be required to contribute to the assets of the LLP.
C. That he took every step to minimise the potential loss to the LLP’s creditors.
D. That it was reasonable for the LLP to continue trading in the expectation that the LLP’s business would recover.
E. That as he is not a designated member he did not have access to all information necessary to decide whether the business was insolvent.
C - That he took every step to minimise the potential loss to the LLP’s creditors.
83
A private limited company went into insolvent liquidation last week. The liquidator is examining the accounts of the company and has discovered that three weeks ago the company had paid one of its suppliers in advance of the due date of the invoice for raw materials used in the business. Further enquiries have revealed that one of the directors of the supplier in question is the husband of one of the company’s directors.
Will the liquidator be able to challenge the payment made by the company to the supplier?
Select one alternative:
The liquidator will not be able to challenge the transaction unless they can prove that in making the payment, the company had an intention to defraud creditors.
The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was influenced by a desire to prefer the creditor.
The liquidator will be able to challenge the transaction as a voidable preference since it took place within the relevant time. It will be presumed that the company was influenced by a desire to prefer the creditor and that the company was insolvent at the time of the transaction or became so as a result of it.
The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was insolvent at the time of the transaction or became so as a result of it. A desire to prefer will be presumed on the facts.
The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was influenced by a desire to prefer the creditor and that the company was insolvent at the time of the transaction or became so as a result of it.
The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was insolvent at the time of the transaction or became so as a result of it. A desire to prefer will be presumed on the facts.
This is a BLP question. This question concerns voidable transactions. The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was insolvent at the time of the transaction or became so as a result of it. A desire to prefer will be presumed on the facts.
One of the directors of a private limited company which is in financial difficulties seeks your advice as to their position. The company has several trade debts which are outstanding, which it cannot pay due to cashflow issues. One of the unpaid suppliers has been putting pressure on the company to pay and has threatened to take further steps if the outstanding invoice is not settled.
The director is very concerned about the company’s finances and has discussed their concerns with the board, suggesting that the company needs to ensure that it does not incur any further indebtedness, that cost cutting measures should be explored and that a full auditor’s report should be urgently requested. The director tells you that the other board members do not share their concerns and seem to believe that the financial problems are merely temporary and that the company will be able to trade out of them. The company is currently continuing to trade and is currently negotiating a high value order with one of its regular customers.
The director wants your advice as to what they should do to protect themselves from any personal liability should the company go into insolvent liquidation. What advice would you give the director?
Select one alternative:
The director should resign from the board immediately to ensure that they minimise their personal liability.
The director need not be concerned about any personal liability. The company is a separate legal person from its members and directors, and the doctrine of limited liability will protect the director from any personal liability.
The director should ensure that they take every step to minimise losses to creditors. This means that the company should immediately cease trading and financial and legal advice should be sought.
The director should ensure that they take every step to minimise losses to creditors. This would include raising concerns at board meetings, putting in place cost cutting measures, ensuring adequate up to date financial information is available and seeking financial and legal advice.
Provided that the director is not knowingly party to the carrying on of the business of the company with intent to defraud creditors, they need not be concerned about any personal liability.
The director should ensure that they take every step to minimise losses to creditors. This would include raising concerns at board meetings, putting in place cost cutting measures, ensuring adequate up to date financial information is available and seeking financial and legal advice.
This is a BLP question. This question concerns the liability of directors of an insolvent company. The major risk here would be liability for wrongful trading. In order to ensure that the director does not incur liability for wrongful trading, they should ensure that they take every step to minimise losses to creditors. This would include raising concerns at board meetings, putting in place cost cutting measures, ensuring adequate up to date financial information is available and seeking financial and legal advice.
Company D has a loan with ABC Bank which is secured by a fixed charge over certain assets of Company D. It also has a £20,000 overdraft with ABC Bank which is unsecured.
ABC Bank agrees to increase Company D’s overdraft facility from £20,000 to £30,000. This is on condition that Company D grants it a floating charge to secure the whole of the overdraft, to be taken over all assets not covered by the fixed charge. The floating charge is registered at Companies House. What advice would you give to ABC Bank about the validity of the floating charge if Company D goes into administration 3 months after the floating charge was created?
A. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £10,000 and not the full amount of £30,000.
B. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £20,000 and not the new increase to the overdraft of £10,000.
C. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. However, the floating charge will be valid to secure £30,000 provided Company D has paid £20,000 or more into its account since the creation of the floating charge.
D. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, and the overdraft will be unsecured.
E. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, but the overdraft will be secured by the existing fixed charge that the bank has.
C
A correct but not the best answer
A floating charge was granted to a bank four months prior to the onset of insolvency to secure a company’s existing overdraft of £10,000. At the same time the bank increased the overdraft facility to a maximum of £25,000, which the company drew on fully. Which one of the following correctly describes the validity of the floating charge?
* The floating charge is invalid for the existing overdraft of £10,000 but valid in respect of the additional £15,000 of ‘new money’.
* The floating charge is valid for the entire £25,000 since new consideration was granted.
* The floating charge is valid only for the existing overdraft of £10,000.
* The floating charge is invalid entirely.
1 week prior to going into insolvent administration
- The floating charge is invalid for the existing overdraft of £10,000 but valid in respect of the additional £15,000 of ‘new money’.
1 week prior to going into insolvent administration, Company A paid off in full one of its unsecured creditors, a company controlled by Company A’s Chief Executive Officer, whilst debts to other creditors remained unpaid.
Which one of the following claims is the administrator most likely to bring to recover the money paid from the recipient?
* Preference
* Transaction at an undervalue.
* Wrongful trading
* Transaction defrauding creditors
- Preference
Company A sold a van at half-price to a company controlled by a close friend of its managing director, six months before Company A’s winding up petition. Company A is now in liquidation. Which one of the following claims might the liquidator seek to bring to recover the money paid?
* Transaction at an undervalue
* Transaction defrauding creditors
* Preference
* Avoidance of floating charge
- Transaction at an undervalue
