Voidable transactions and directors Flashcards
Why should directors be careful in their actions when a company faces the prospect of insolvency?
Can be personally liable if guilty of fraudulent/wrongful trading
Who can bring a claim for fraudulent trading?
Administrators or liquidators
What can the court impose if someone is found guilty of fraudulent trading?
Criminal and civil sanctions
What is the test for fraudulent trading?
- Any person
- Who is knowingly party to the carrying on of any business of the company
- With intent to defraud creditors or any fraudulent purpose
What must be proven for a fraudulent claim to be successful?
Actual dishonesty
How is actual dishonesty assessed?
Subjective
Includes suspicion + deliberate decision to avoid confirming they exist
What is the two stage test for fraudulent trading?
- Liquidator demonstrates director’s subjective knowledge
- Shows director’s conduct was dishonest applying objective standard of ordinary decent people
What are the remedies for fraudulent trading?
- contribution to company’s assets
- disqualification order
- criminal sanctions
Who can bring a claim for wrongful trading?
Liquidators and administrators
Can assign claim to a third party
Who can an action for wrongful trading be brought against?
Any person who was at the relevant time a director
Includes de jure, de facto and shadow directors and non-executive directors
What is the first limb of the wrongful trading requirements?
Company has gone into liquidation/administration and
- At some time before commencement
- The director knew or ought to have concluded that
- There was no reasonable prospect would avoid going into insolvent liquidation/administration
What must also be proven in the first limb of wrongful trading?
o Director allowed company to continue trading during this and
o Continued trading made company’s position worse
What is the second limb of the wrongful trading requirements?
- Every step Defence - They took every step with a view to minimising potential loss to the creditors
When does the court apply the reasonably diligent person test?
court applies to determine whether
* Liquidator/administrator has established that director ought to have concluded no reasonable prospect and
* Whether director took every step to minimise potential loss
What is the reasonably diligent person test based on?
General knowledge, skill and experience of a person carrying out the same functions
Actual knowledge, skill and experience
Court applies higher of two
What are the remedies for wrongful trading?
- contribution to company’s assets
- disqualification order
Will there be relief available for wrongful trading?
No
What are the voidable transactions
Transactions at an undervalue
Transactions at an undervalue defrauding creditors.
Preferences
Avoidance of floating charges
What is the aim of a voidable transaction challenge?
restore company to position as if transaction had not taken place
What questions will a liquidator/administrator ask when challenging a transaction?
- Did transaction involve a connected person/associate?
- Did transaction take place within the relevant time?
- Was the company insolvent at the time or become insolvent as a result?
- Is there a presumption which shifts the burden of proof from liquidator/administrator to the other party?
Who are connected persons with the company?
directors, associates of directors and associates of the company
Who are associates
spouses, business partners, employees, relatives, trustees, controlled company
When is the onsent of insolvency?
Administration: date of filing of application or notice of intention to appoint or appointment
Liquidation: date of commencement of winding up
What is the test for insolvency for voidable transactions?
Cash flow or balance sheet test
What transactions are at an undervalue
gift or transaction for consideration significantly less than consideration provided
When may granting a security be a TUV?
For no consideration or significantly less
When will the court set aside a TUV?
- Did within relevant time – 2 years ending with onset of insolvency
- Proved that the company was insolvent at the time or became insolvent as a result
What is the effect of a TUV with a connected person?
insolvency is presumed unless connected person presumes company was solvent
What are the defences to a TUV?
- Company entered transaction in good faith for purpose of carrying on business
- At the time there were reasonable grounds for believing transaction would benefit the company
What sanction is imposed for a TUV?
Court discretion to make any order to restore the position as if the company had not entered
What is the special rule for sanctions imposed for a TUV?
Shouldn’t prejudice a subsequent purchaser provided they acted in good faith and for value
When is there a rebutabble presumption that a subsequent purchaser involved in a TUV has not acted in good faith?
o Had notice of relevant surrounding circumstances and proceedings
o Connected with or associate of company
What are the requirements for a claim of TDC?
- Transaction at an undervalue and
- Intention or purpose to put assets beyond the reach of creditors or prejudice their interests
Who may make a TDC claim?
- Liquidator/administrator
- Supervisor of voluntary arrangement or
- Victim of transaction
Is there a relevant time for TDC?
No
Is insolvency required for TDC?
No
When will a company have given a preference?
- Person is a creditor and
- Company puts that person in a better position in the event of insolvent liquidation than they would otherwise have been
When can a preference be made void?
- Given within relevant time – 6 months ending with onset of insolvency
- Proved that company was insolvent at time or became as a result
- Proved that company was influenced by a desire to prefer the creditor (subjective)
What are the rules on preferences where they are made to a connected person?
- 2 years relevant time
- rebuttable presumption that company was influenced, shifing burden to connected person
What is the defence for preferences?
absence of desire to prefer
What is the sanction for preferences?
order to restore position as if company had not given preference
Who can bring a claim for avoiding a floating charge?
None - automatic
When will a floating charge be invalid?
- Within relevant time – 12 months ending with onset of insolvency
o 2 years where granted to connected person - Unless granted to connected person, company was insolvent at the time or became insolvent as a result
What is the effect of a floating charge being voidable?
Only the security is void – not the debt itself
