Voidable Transactions Flashcards
Define fraudulent trading in the context of insolvency.
Fraudulent trading refers to the act of carrying on business with the intent to defraud creditors, as outlined in sections 213 and 246ZA of the Insolvency Act 1986.
Define wrongful trading in the context of insolvency.
Wrongful trading occurs when directors continue to trade when they knew or ought to have known that the company was insolvent, as specified in sections 214 and 246ZB of the Insolvency Act 1986.
How can liquidators and administrators hold directors accountable during insolvency?
Liquidators and administrators can initiate proceedings for compensation against directors personally for engaging in fraudulent or wrongful trading.
Describe the purpose of provisions on fraudulent trading.
The provisions on fraudulent trading were enacted to prevent the abuse of limited liability by those running companies, particularly to stop directors from incurring further debts when a company is in financial difficulty.
How does the IA86 empower the court regarding fraudulent trading?
The IA86 gives the court the power to impose both criminal and civil sanctions on directors and other persons found guilty of fraudulent trading.
Define fraudulent trading in the context of company law.
Fraudulent trading refers to the act of continuing to trade and incur debts when a company is in financial difficulty, potentially increasing losses to creditors.
What is the role of a liquidator in fraudulent trading claims?
A liquidator can make a claim for fraudulent trading by applying to the court under section 213 of the IA86.
Explain the evidential requirements for proving fraudulent trading.
Claims for fraudulent trading are rare due to the evidential requirements needed to prove an intent to defraud creditors.
What section of the IA86 allows administrators to claim for fraudulent trading?
Section 246ZA of the IA86 allows administrators to make a claim for fraudulent trading.
Describe the parties that can be held liable for fraudulent trading under sections 213 and 246ZA of the IA 1986.
Any person who is knowingly party to the carrying on of any business of the company with intent to defraud creditors or for any fraudulent purpose can be held liable.
How does the definition of ‘any person’ in the context of fraudulent trading extend beyond directors?
The definition is broad and includes banks and other entities that may be liable due to their employees’ knowledge.
What is the civil liability imposed by sections 213 and 246ZA of the IA 1986?
The civil liability requires contributing to the funds available to the general body of unsecured creditors suffering loss caused by fraudulent trading.
Explain the relationship between fraudulent trading and criminal claims under the CA 2006.
There is a corresponding criminal claim for fraudulent trading under section 993 of the CA 2006.
What is the significance of the case Morris v State Bank of India in the context of fraudulent trading?
The case illustrates that banks can be held liable for fraudulent trading due to the knowledge of their employees.
Identify the sections of the IA 1986 that deal with fraudulent trading in different contexts.
Sections 213 deals with fraudulent trading in liquidation, while section 246ZA deals with it in administration.
Describe how dishonesty is assessed in fraudulent trading cases.
Dishonesty is assessed on a subjective basis, meaning it is based on what the particular person knew or believed.
Is it necessary to show that all creditors have been defrauded to bring a claim for fraudulent trading?
No, it is not necessary to show that all of the company’s creditors have been defrauded; provided at least one creditor has been defrauded, this is sufficient to bring a claim.
Describe the contribution a person found liable under s 213 / 246ZA can be ordered to make.
A person found liable can be ordered to make a contribution to the company’s assets as deemed proper by the court, reflecting and compensating for the loss caused to the creditors.
How will sums recovered be held.
Any sums recovered are held on trust for unsecured creditors generally and not for the defrauded creditor.
What criminal sanctions can be imposed under s 993 CA 2006?
Criminal sanctions can include imprisonment for up to 10 years on indictment and/or fines for a person knowingly party to fraudulent trading.
Explain the relationship between s 213 / 246ZA and the protection of creditors.
The contributions ordered under s 213 / 246ZA are intended to reflect and compensate for the loss caused to the creditors, ensuring their protection.
What are the potential penalties for fraudulent trading under s 993 CA 2006?
The potential penalties include imprisonment for up to 10 years and/or fines.
What is the purpose of a disqualification order under s 10 CDDA 1986?
The purpose of a disqualification order is to prevent a person found liable from acting as a director in the future.
How can a director demonstrate they took every step to minimize creditor loss after the point of no return?
A director can demonstrate this by providing evidence such as voicing concerns at board meetings, seeking independent financial and legal advice, ensuring access to up-to-date financial information, suggesting reductions in overheads, avoiding further credit, and consulting with legal or insolvency professionals.