Voidable Transactions Flashcards
What can directors be personally liable for during insolvency?
Can be held to be personally liable to compensate the company and its creditors if found guilty of one of the following:
- fraudulent trading
- wrongful trading
Liquidators and administrators have power to bring proceedings.
Who can bring a claim for fraudulent trading?
Can be made by a liquidator or an administrator by making an application to court.
What kind of offence is fraudulent trading?
Court has the power under IA 1986 to impose both criminal and civil sanctions on directors if they are found guilty of fraudulent trading.
Elements of fraudulent trading?
Can be brought against:
- any person (includes banks)
- who is knowingly party to the carrying on of any business of the company
- with intent to defraud creditors or for any fraudulent purpose
Fraudulent trading: actual dishonest
Must prove actual dishonesty
Ivey:
(1) What was the director’s actual state of knowledge
(2) Was the director’s conduct dishonest applying the objective standards of ordinary decent people
Remedies for fraudulent trading
- Ordered to make such contribution to the company’s assets as the court thinks proper
- court can also make a disqualification order (as director)
- May also impose criminal sanctions - up to 10 years indictment and/or fines
Fraudulent vs wrongful trading
- Very high standard of proof for fraudulent trading which makes it difficult to establish
- rare in practice
- wrongful claims are much more common
Purpose of Wrongful Trading
Under a duty to take every step possible to minimise the potential losses to the company’s creditors
Wrongful trading is about directors failing to make the right judgments about the company’s financial prospects and then failing to take steps to minimise losses to the creditors
If they fail to do this they court can order the directors to contribute to the insolvent estate by way of compensation for the losses that the general body of creditors have suffered as a result of the director’s conduct - therefore wrongful trading imposes a personal liability on directors and marks very important exception to the principle of limited liability under which those who run a company cannot be liable for its unpaid debts
Who can bring a wrongful claim
May be brought by:
- liquidators
- administrators
Can also assign wrongful trading claims to a third party as a way of raising funds for the insolvent estate and thereby avoid the risk of litigation.
Against whom may a claim be brought?
A claim may be brought against any person who was at the relevant time a director.
Includes shadow directors, de factor and non-executive directors.
But not more than this (contrast to fraudulent trading which has a wider scope.
Wrongful trading
Limb 1:
Court must be satisfied that at some time before the commencement of the winding up or insolvent administration, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
Limb 2:
Director may be able to escape liability if they can satisfy the court that after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation they took “every step with a view to minimising the potential loss to the company’s creditors.
Applies diligent person test to what the director ought to have known.
Insolvent liquidation for wrongful trading
Insolvency for wrongful trading is judged solely on the balance sheet test not the cashflow test.
Limb 1
Therefore it must be proven that the director allowed the company to continue to trade during the period in which they knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent administration. and
the continued trading made the company’s position worse.
Every step defence
Defence to wrongful trading is that the director took every step with a view to minimising the potential loss to the company’s creditors:
Evidence that may support this:
- voicing concerns at regular board meetings
- seeking independent financial and legal advice
- ensuring adequate, up-to-date financial information is available
- suggesting reductions in overheads and costs
- not incurring further credit
- taking advice on initiating appropriate insolvency procedures or negotiating with creditors to restructure liabilities.
Reasonably diligent person test
- General knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as carried out by director;
- actual knowledge, skill and experience of that particular director
The court applies the higher of the two.
The court applies the ‘reasonably diligent person’ test in order to determine whether a director ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration and whether the director then took every step to minimise the potential loss to the company’s creditors.
Advice to directors
Should;
- hold frequent board meetings to review financial position of the company and write up the minutes of each so there is a written record on which the directors can later rely to justify the decisions that they took
- take professional advice as soon as possible
- make sure they have up to date financial information about the state of the company’s finances and this information is considered at the board meetings and acted upon
Remedies for wrongful trading
- court can order that the director makes such contribution to assets of the company as the court thinks fit.
- can also make a disqualification order against the director
Note: relief normally available to directors if acted honestly and reasonably i snot available for wrongful trading
What are voidable transactions?
Gives both a liquidator and administrator the ability to challenge certain transactions which have taken place within specified statutory periods prior to the insolvency of a company.
Aim of challenge is to restore the company to the same position it would have been in had the transaction not taken place and thereby increase the funds available in the insolvent estate for the benefit of the creditors.
Effect: clawback provisions - court can reverse transactions or order financial restitution to be paid which has the effect of a clawing back assets.
Questions to ask in relation to voidable transactions
- Did the transaction involve a ‘connected person’ or associate
- Did the transaction take place within the relevant time
- Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
- Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?
Connected persons and associates
Connected persons with company - directors, associates of directors and associates of the company
Associates - spouses, business partners, employees, relatives including brother, sister, uncle, aunt, niece, nephew etc, certain trustees, a company which is controlled by the director and a company which is itself associated with the company in question where both are mutually controlled by some other company or person
Onset of insolvency
Administration:
date of filing of application to court or notice of intention to appoint or appointment
Liquidation:
Date of commencement of winding up (resolution or petition)
Insolvency means inability to pay debts - cashflow or balance sheet (wider than wrongful trading)
Transactions at an undervalue
- Transaction for an undervalue within 2 years prior to the onset of insolvency
- Company insolvent at time or as a result (presumed with connected persons)
Brought by administrator or liquidator
- granting of security for no consideration can be TUV
- dividend can be TUV
DEFENCE:
- company entered into transaction in good faith and for the purpose of carrying on its business
- at the time there were reasonable grounds for believing that the transaction would benefit the company
e.g. granting new security for no new consideration where an unsecured bank threatens winding up procedures where directors consider on reasonable grounds they can turn around its financial difficulties and thereby avoid entering into an insolvency procedure
Court can make whatever order it sees fit to restore position as if transaction had not been entered
Transactions defrauding creditors
- Transaction for an undervalue
- Intention to defraud creditors
- No need for company to be insolvent
- No time limit before insolvency to consider
Can be made by:
- liquidator or administrator
- supervisor of a voluntary arrangement
- victim of the transaction in question
Preferences
- Company puts creditor in better position and influenced by desire to prefer
- Within 6 months prior to onset of insolvency/2 years if connected person and presumption of preference
- Company insolvent at the time/as a result
DEFENCE:
absence of a desire to prefer e.g. influenced by a desire to continue trading and avoid insolvency
Sanction:
Court has discretion to make an order to restore the position as if the company had not given the preference
Avoidance of floating charges
- Floating charge created for no new consideration
- within 12 months prior to onset of insolvency/within 2 years if connected person
- Company insolvent at time/as a result (presumed with connected person)
