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.
Describe the concern directors have regarding wrongful trading during difficult economic times.
Directors may be worried about the risk of personal liability for wrongful trading, especially in challenging economic climates.
What factors does the court consider when deciding to relieve a director from liability under section 1157 CA 2006?
The court considers whether the director acted honestly and reasonably, and all circumstances of the case to determine if the director ought fairly to be excused.
How does section 1157 CA 2006 impact directors facing negligence claims?
Section 1157 CA 2006 allows courts to relieve directors from liability in negligence claims if they acted honestly and reasonably.
Define the term ‘wrongful trading’ in the context of section 1157 CA 2006.
Wrongful trading refers to a situation where a director continues to trade when they know, or ought to know, that the company is unable to pay its debts.
Explain the relationship between a contribution order and a disqualification order for directors.
When the court makes a contribution order under s 214 / 246ZB, it also has the discretion to issue a disqualification order against the director under s 10 CDDA 1986.
Describe the consequences for a director found liable for wrongful trading.
The court can order the director to contribute to the company’s assets, which increases the assets available for distribution to unsecured creditors.
How does case law affect directors’ responsibilities regarding financial reviews?
Case law indicates that directors are still responsible for critically reviewing the company’s position, even if they do not receive warnings from advisers.
Define wrongful trading in the context of company directors.
Wrongful trading refers to a situation where directors continue to trade while knowing the company is unable to pay its debts, potentially leading to liability for the company’s creditors.
What does s 214(4) / 246ZB(4) pertain to in the context of the ‘reasonably diligent person’ test?
s 214(4) / 246ZB(4) pertains to the application of the ‘reasonably diligent person’ test, outlining the criteria for determining whether a director has acted with the necessary diligence in their role.
Explain the significance of applying the higher standard in the ‘reasonably diligent person’ test.
The significance of applying the higher standard in the ‘reasonably diligent person’ test is that it ensures accountability by requiring directors to meet the expectations of both general and specific knowledge, skill, and experience, thereby promoting responsible decision-making in the interest of creditors.
What are the two components of the ‘reasonably diligent person’ test?
The two components of the ‘reasonably diligent person’ test are: 1) the general knowledge, skill, and experience expected of a person in the same role (objective test), and 2) the actual knowledge, skill, and experience of the specific director (subjective test).
Define the liability under s 214(2) / 246ZB(2).
The liability under s 214(2) / 246ZB(2) refers to the obligation of a liquidator or administrator to establish that a director ought to have concluded there was no reasonable prospect of avoiding an insolvent liquidation or administration.
Describe the ‘reasonably diligent person’ test as applied by the court.
The ‘reasonably diligent person’ test is used by the court to determine if a director should have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration, and whether the director took steps to minimize potential loss to creditors. It considers both the general knowledge, skill, and experience expected of someone in the same role (objective test) and the actual knowledge, skill, and experience of the specific director (subjective test), applying the higher of the two standards.
How does ensuring adequate financial information contribute to a director’s defense in insolvency cases?
Ensuring adequate financial information contributes to a director’s defense by showing that they are informed about the company’s financial status and are making decisions based on accurate data, which is crucial for minimizing creditor losses.
Define the point of no return in the context of company insolvency.
The point of no return refers to the moment when a director first knows or should have concluded that there is no reasonable prospect of the company avoiding insolvent administration or liquidation.
Describe the difference between fraudulent trading and wrongful trading.
Fraudulent trading requires proof of dishonest intent and is both a civil and criminal wrong, while wrongful trading involves negligence without the need for dishonest intent and is only a civil claim.
Describe the ‘every step’ defense in the context of company insolvency.
The ‘every step’ defense allows a director to escape liability if they can prove to the court that after realizing there was no reasonable prospect of avoiding insolvency, they took all possible actions to minimize losses to the company’s creditors.
Explain the significance of continued trading in the context of wrongful trading liability.
Continued trading is significant because it must be shown that this action made the company’s financial position worse for a director to be held liable for wrongful trading.
How does the concept of ‘point of no return’ relate to wrongful trading liability?
If a company has not reached the point of no return, wrongful trading liability cannot arise, meaning that directors cannot be held liable for allowing the company to continue trading.
Describe the conditions under which a director may be held liable for wrongful trading.
A director may be held liable for wrongful trading if it is proven that they allowed the company to continue trading while knowing or should have known that there was no reasonable prospect of avoiding insolvent liquidation or administration, and that this continued trading worsened the company’s position.
What must a director conclude to avoid liability for wrongful trading?
To avoid liability for wrongful trading, a director must conclude that there is a reasonable prospect of the company avoiding insolvent liquidation.
How is insolvency determined for wrongful trading purposes?
Insolvency for wrongful trading purposes is determined solely by the ‘balance sheet test’, which assesses whether the company’s assets are insufficient to cover its debts and liabilities.
Describe the conditions under which a director can be held liable for wrongful trading.
A director can be held liable for wrongful trading if the company has gone into insolvent liquidation and at some point before the winding up, the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.
Identify the key difference in the scope of liability between directors and those involved in fraudulent trading.
The key difference is that claims against directors are limited to those who were directors at the relevant time, while fraudulent trading claims can involve any person intending to commit fraud.
How does liability differ between claims against directors and fraudulent trading?
In claims against directors, liability is specific to those who were directors at the relevant time, while in fraudulent trading, any person with the intention to commit fraud can be held liable, not just directors.
Who can bring a wrongful trading claim?
The SBEEA 2015 allows administrators and liquidators to assign wrongful trading claims to third parties.
Define wrongful trading liability.
Wrongful trading liability imposes personal liability on directors for failing to act in the best interests of creditors when a company is nearing insolvency, marking an exception to the principle of limited liability.
How can directors be held accountable under sections 214 and 246ZB?
Directors can be held accountable under sections 214 and 246ZB if they fail to minimize losses to creditors, as the court can order them to contribute to the insolvent estate as compensation for the losses suffered by creditors.
Describe the purpose of sections 214 and 246ZB.
The purpose of sections 214 and 246ZB is to ensure that when directors become aware that an insolvent liquidation or administration is inevitable, they have a duty to take steps to minimize potential losses to the company’s creditors.
Define wrongful trading in the context of company law.
Wrongful trading refers to the liability of directors who continue to trade when they know or ought to know that the company is insolvent, without the requirement of proving dishonest intent.
Describe the purpose of challenging voidable transactions under the IA 1986.
The purpose is to restore the company to the same position it would have been in had the transaction not taken place, thereby increasing the funds available in the insolvent estate for the benefit of creditors.
Define the defence mentioned in s238(5) regarding company transactions.
The defence in s238(5) allows a company to avoid having a transaction set aside if it can demonstrate that the transaction was made in good faith and with reasonable belief that it would benefit the company.
Explain the role of a liquidator and an administrator regarding voidable transactions.
Both a liquidator and an administrator have the ability to challenge voidable transactions to restore the company’s position and benefit creditors.
List the four key questions a liquidator or administrator must consider when challenging a voidable transaction.
- Did the transaction involve a ‘connected person’ or ‘associate’? 2. Did the transaction take place within the ‘relevant time’? 3. Was the company insolvent at the time of the transaction or did it become insolvent as a result? 4. Is there a presumption available which shifts the burden of proof?
Define ‘connected persons’ as per Section 249.
‘Connected persons’ with the company include directors (including shadow directors), associates of directors, and associates of the company.
Describe the term ‘associates’ according to Section 435.
‘Associates’ of a director or company include spouses, business partners, employees, relatives (such as brother, sister, uncle, aunt, niece, nephew), certain trustees, and companies controlled by the director or associated with the company.
Describe the onset of insolvency in the context of administration.
The onset of insolvency in administration is determined by the date of filing of the application (court procedure), the notice of intention to appoint, or if none, the date of appointment (out-of-court procedure).
Explain the difference between voluntary and compulsory winding up in terms of onset of insolvency.
Voluntary winding up begins with a resolution by members or creditors, while compulsory winding up starts with the presentation of a petition to the court.
What are transactions by a company at an undervalue as per section 238 IA 1986?
Transactions by a company at an undervalue refer to situations where a company gives away assets or makes gifts that are significantly less in value than what it receives in return.
What situations may lead to a transaction being classified as at an undervalue?
Situations such as the granting of security or the payment of a dividend may be classified as transactions at an undervalue.
How did the case of Hill v Spread Trustee Company Limited challenge previous thoughts on granting security?
In Hill v Spread Trustee Company Limited, it was found that granting security for no consideration or for consideration significantly less than the value of the charge can be challenged as a transaction at an undervalue.
How does the relevant time frame affect transactions at an undervalue?
The relevant time frame is two years ending with the onset of insolvency, meaning any transaction within this period can be scrutinized for being at an undervalue.
Explain the presumption of insolvency when a transaction at an undervalue involves a connected person.
In transactions involving a connected person, insolvency is presumed unless the connected person can prove that the company was solvent at the relevant time.
Describe the conditions under which a court will not set aside a transaction despite all requirements being satisfied.
A court will not set aside a transaction if it is satisfied that the company entered into the transaction in good faith for the purpose of carrying on its business and that there were reasonable grounds for believing the transaction would benefit the company.
Describe the court’s discretion under section 238 regarding transactions at an undervalue.
The court has the discretion to make orders it deems fit to restore the position as if the company had not entered into the transaction.
Under what conditions does section 241(2A) create a presumption against good faith for subsequent purchasers?
There is a rebuttable presumption against good faith if the subsequent purchaser had notice of the relevant circumstances or was connected to the company or the party that transacted at an undervalue.
What is the burden of proof for a subsequent purchaser under section 241(2A)?
The burden of proof shifts to the subsequent purchaser to demonstrate good faith if they had notice of the relevant circumstances or were connected to the company.
Describe the nature of claims under section 423.
Claims under section 423 do not necessarily relate to insolvency and can be brought by a victim of the transaction even if the company is solvent.
What are the two main requirements for a transaction defrauding creditors claim?
- There has been a transaction at an undervalue; 2. The intention or purpose of the transaction was to put assets beyond the reach of creditors or otherwise prejudice their interests.
How does section 423 address the interests of future creditors?
The reference to creditors in section 423 includes future creditors who were unknown at the time of the transaction.
Explain why liquidators and administrators may prefer transaction at an undervalue over transaction defrauding creditors
Liquidators and administrators often prefer to bring TUV claims because it does not require proving that the purpose of the transaction was to put assets beyond the reach of creditors or otherwise prejudice them.
How does section 238 differ from section 423 in terms of proving intent?
Section 238 does not require proof of the intent to put assets beyond the reach of creditors, unlike section 423, which requires demonstrating that intent.
Who can make an application to the court to set aside a transaction?
Any of the following: a liquidator or an administrator, a supervisor of a voluntary arrangement, or a victim of the transaction in question.
What is a key difference between TDC claims and TUV claims?
TDC claims can be brought for transactions that took place at any time in the past, while TUV claims only concern transactions entered into within two years of the onset of insolvency.
Define what it means for a company to give a preference to a person.
A company gives a preference to a person if that person is a creditor (or a surety or guarantor) and the company does something that puts that person in a better position in the event of the company going into insolvent liquidation.
How can a company give a preference to a creditor?
A company can give a preference by paying an unsecured creditor in priority to other creditors or granting security to an unsecured creditor.
Describe the conditions under which a preference is considered voidable.
A preference is voidable if it was given within the relevant time (6 months before the onset of insolvency for general creditors, 2 years for connected persons), the company was insolvent at the time of the transaction or became so as a result of it, and it is proved that the company was influenced by a desire to prefer the creditor.
How is insolvency determined in relation to voidable preferences?
Insolvency is determined on either a cash flow or balance sheet basis at the time of the transaction or as a result of it.
Explain the subjective test related to preferences.
The subjective test requires proving that the company had a desire to prefer the creditor, meaning the company must have positively wished to put the creditor in a better position.
When can a preference be avoided?
A preference can be avoided if it meets the criteria of being given within the relevant time, the company being insolvent, and the company being influenced by a desire to prefer the creditor.
What is the difference between preferences and transactions at an undervalue regarding insolvency presumption?
Unlike transactions at an undervalue, there is no statutory presumption of insolvency when a preference is given to a person connected with the company.
Describe the rebuttable presumption related to preferences given to connected persons or associates.
If a preference is given to a connected person or associate, there is a rebuttable presumption that the company was influenced by the desire to prefer the creditor, shifting the burden of proof to the preferred person to show that they were not influenced.
What is the significance of section 239(6) in relation to creditor preferences?
Section 239(6) establishes a rebuttable presumption that a company was influenced by a desire to prefer a creditor when a preference is given to a connected person or associate.
Describe the court’s discretion regarding restoration orders under section 239(3).
The court has the discretion to make an order to restore the position as if the company had not given the preference.
Describe the purpose of section 245 in relation to floating charges.
Section 245 aims to prevent a creditor from obtaining a floating charge to secure an existing debt without new consideration, specifically during liquidation or administration.
How does section 245 impact creditors seeking to secure existing debts?
Section 245 restricts creditors from securing existing debts with floating charges unless new consideration is provided, thereby protecting the interests of the company in liquidation or administration.
Describe the relevant time period for a floating charge to be considered invalid.
The relevant time period is 12 months ending with the onset of insolvency, which is the commencement of administration or liquidation. This period is extended to 2 years if the floating charge is granted to a connected person.
How does the insolvency status of a company affect the validity of a floating charge?
Unless the floating charge was granted to a connected person, it must be proved that the company was insolvent at the time of the floating charge’s creation or became insolvent as a result of the transaction under which the charge was created.
What must be demonstrated for a floating charge to be avoided if it was not granted to a connected person?
It must be demonstrated that the company was insolvent at the time of the floating charge’s creation or that it became insolvent as a consequence of the transaction that created the charge.
How does the creation of a floating charge relate to the company’s financial status?
The creation of a floating charge must be assessed against the company’s financial status, specifically whether it was insolvent at the time of creation or became insolvent due to the charge.
Describe the conditions under which a floating charge is considered valid.
A floating charge is valid if ‘new money’ or fresh consideration is provided to the company in return for the grant of the floating charge on or after its creation.
How did the court rule in the case of Re Yeovil Glove Co. Ltd regarding the floating charge and the existing overdraft?
The court ruled that the floating charge was valid because the use of the overdraft facility after the charge was deemed as ‘new money’ advanced by the bank.
Explain the argument made by the liquidator regarding the floating charge in Re Yeovil Glove Co. Ltd.
The liquidator argued that the floating charge was invalid as it secured debt incurred before the charge was created.
How did the payments made by the company after the floating charge affect the existing overdraft?
The company paid more than £67,000 into the account after the floating charge, which allowed the court to consider the pre-charge debt as paid off, classifying the remaining overdraft as ‘new’ debt.
Describe the implications of a floating charge being void under section 245.
If a floating charge is void under section 245, only the security and its advantage to a floating charge creditor in the order of priority are void, but the underlying debt remains valid.
Define the circumstances under which a floating charge may be considered voidable.
A floating charge may be considered voidable as a transaction at an undervalue or a preference under sections 238 and 239 of the Companies Act.
Explain the relationship between floating charges and Companies House registration.
The registration of floating charges with Companies House is crucial for their validity; failure to register can render the charge void against certain creditors.
