SGS 25 (Insolvency Transactions)

Question 1

Give an example of a situation in which a floating charge would be void?

Answer 1

An existing unsecured creditor is granted a floating charge by an insolvent company within the relevant time whereby the charge purports to secure the repayment of EXISTING monies owed to that creditor.

Question 2

What is the meaning of insolvent liquidation / administration in wrongful trading?

Answer 2

= time when assets are insufficient for payment of debts and other liabilities and expenses of winding up / administration

ss.214(6) / 246ZB(6).

Both = balance sheet test (s.123(3)).

Question 3

What must a liquidator or administrator prove under a wrongful trading claim?

Answer 3

Some time before commencement of winding up

director knew or ought to have concluded

that there was no real prospect the company would avoid going into insolvent liquidation / administration.

Question 4

What does the reasonably diligent person test apply to?

Answer 4

‘Director knew or ought to have concluded’ s.214(2)(b)

Every step defence (s.214(3)).

Question 5

What is the reasonably diligent test?

Answer 5

s.214(4)
Objective
Subjective
apply higher of two standards (e.g. if a finance director better able to understand financial position and direction of company and recognise point when insolvent liq / admin is unavoidable.)

Question 6

What does ‘every’ step mean?

Examples?

Answer 6

every reasonable step.

Call BMs and voice concerns
Suggest savings
Request steps to avoid incurring further debt
Suggest advice of IP, lawyer, independent financial adviser.

Question 7

What does s.1157 NOT apply to?

Answer 7

Wrongful trading.

Question 8

Resignation in the context of wrongful trading?

Answer 8

Does not help a director escape liability - may be appropriate if other directors persistently ignore concerned director’s concerns.

Question 9

Basis of sanction for wrongful trading?

Answer 9

additional depletion of assets caused by director’s conduct from point of no return until date company went into liquidation.

Question 10

Preference?

Answer 10

If company went into liquidation or administration, the L or A’or could apply to the court for an order to set aside payment as a preference.

Question 11

Relevant time?

Answer 11

calculated backwards from onset of insolvency = commencement of administration or liquidation procedure (s.240(3)).

Question 12

Insolvency for voidable transactions?

Answer 12

cash flow or balance sheet basis.

Question 13

Third limb of requirement for preference?

Answer 13

Company influenced by a ‘desire to prefer’ = Re MC Bacon = desire rather than intention. Subjective test.
Response to genuine commercial pressure will not suffice.

Question 14

Burden of proof shift for preference?

Undervalue?

Answer 14

Desire presumed where preference given to connected person (s.239(6)).

Insolvency presumed where person is connected (s.240(2)).

Question 15

Grounds for avoidance of floating charge?

Answer 15

created within relevant time

company insolvent (if granted to a person that is not connected nor an associate).

Given to secure past indebtedness.

Question 16

Two ways an overdraft facility secured on a floating charge can avoid being invalidated?

Answer 16

Yeovil Glove Co

Each time company draws, bank deemed to have advanced ‘new money’.

Re Clayton’s case - payments into overdraft pay the earliest indebtedness first.

Question 17

What is a distinction between preference and undervalue vs floating charge avoidance?

Answer 17

Former require application of liquidator or administrator, latter is automatic.

Question 18

At the end of a s.239 / 238 question what should you also consider?

Answer 18

Potential liability of directors for misfeasance, s.212 and risk of disqualification under CDDA for responsibility for the company entering into a voidable transaction,

Question 19

CDDA?

Answer 19

s. 10 - disqualification order of up to 15 years (fraudulent and wrongful trading)
s. 6 = disqualification if directors conduct found to have made them unfit to be concerned in the management of the company. (unfit conduct of directors of insolvent companies)

Question 20

Genuine commercial pressure?

Answer 20

Check terms of loan agreement

Is there an event of default clause entitling the bank to immediate repayment in the event of insolvency?

Was the debt repaid before its due date?