Voidable Transactions and Directors' Liability Flashcards
What is fraudulent trading and who can bring proceedings?
Where a director or any other person is knowingly party to the carrying on of business in a way with intent to defraud some / all creditors will be personally liable in civil and criminal law. A liquidator or administrator can bring proceedings for compensation against the director / person.
What must the liquidator / administrator show to prove fraudulent trading?
Intent to defraud some creditors for any fraudulent purpsoe.
Ivey v Genting Casinos =
* Subjective: director / person must have knowingly carried on business with intent to defraud or has suspicion of the relevant facts + makes a deliberate decision to avoid confirming them.
* Objective: actions would be considered dishonest by the standards of ordinary, decent people.
What are the remedies for fraudulent trading?
- Personally liable and can be ordered to make a contribution to the company’s assets as the court thinks proper;
- No punitive element, only compensation of loss to creditors
- Sums recovered held on trust for unsecured creditors generally (not specifically victim creditors)
- Disqualification order
- 10 years imprisonment or fines.
What is wrongful trading and who can bring proceedings?
A claim by a liquidator or administrator against a director for carrying out business negligently (i.e directors become aware or ought to become aware that insolvency of company is reasonably inevitable and fail to take steps to minimise the losses to creditors).
What must a liquidator / administrator prove to show wrongful trading?
- D knew or ought to have concluded that there was no reasonable prospect that the co would avoid liquidation / administration BEFORE commencement of wining up / administration (balance sheet test) => applying reasonably diligent person test + despite this, allowed company to continue trading, causing company’s position to be worse.
Reasonably diligent person = D deemed to have knowledge of reasonably diligent person having the general knowledge, skill & experience of a director (objective) and the actual knowledge, skill and experience of that specific director (subjective).
“Allows co to continue trading = resigning will not avoid liability unless kept trying to raise it with other directors who outvoted them.
What are the defences to wrongful trading?
The director took all reasonable steps with a view to minimising the potential loss to the company’s directors, e.g:
* voicing concerns at GMs
* Seeking independent legal / financial advice
* ensuring up to date info available
* suggesting reduction in cost
* avoiding incurring more credit and debt
“Reasonable steps” - determined with reference to reasonably diligent person.
What are the remedies for wrongful trading?
- Contribution to assets of co
- Discretion to make disqualification order
- Wide discretion to determine liability and apportion based on culpability
- No relief under s.1157 CA
Who is a “connected person” in the context of voidable transactions?
Directors, associates of directors and associates of the company.
Associates =
* spouses
* relatives (brother, sister, uncle, aunt, neice, nephew, lineal ancestor, half-blood or stepchild or adopted child or illegitimate child)
* relatives of spouse / civil partner
* business partner
* relatives of business partner
* employees/employer
* trustees of trust where director / associated person is a beneficiary
* company controlled by the director (accustomed to act at his direction or 33.33% of voting rights)
* company controlled by the same parent co / person.
What is “onset of insolvency” in the context of voidable transactions?
- Administration (in court): date application filed
- Administration (out of court): date notice of intention to appoint or date of appointment
- Voluntary liquidation: date of members resolution
- Compulsory liquidation: date petition presented.
What is a transaction at an undervalue?
A claim by the liquidator or administrator against the recipient of the undervalued thing (even if recipient did not know).
Requirements:
1. Gift or other transaction (incl. grant of security or dividend) where consideration is significantly less than value;
2. Made in the 2 years before onset of insolvency (cash flow / balance sheet);
3. Company was insolvent at time transaction made or became insolvent as a result (presumed where made to connected person / associate).
What is the effect of a T.U.V?
- Company may set aside the transaction
- Court has discretion to make order to restore the position before company entered transaction, e.g pay amount of undervalue, vest property in co.
BUT court must not make order which would prejudice good faith purchaser for value from the recipient. Presumed not equity’s darling where connected person or associate of company / recipient.
What is the recipient’s defence to a T.U.V?
Co entered the transaction in good faith + for purpose of carrying on business + at the time there were reasonable grounds for believing the transaction would benefit the company.
What is a transaction at an undervalue defrauding creditors?
Claim by a liquidator / administrator / supervisor of a CVA / victim creditor (future or current) against the recipient.
- No requirement for company to be insolvent, simply a remedy for victims of fraud.
- Gift / TUV where intention or purpose of it was to put assets beyond the reach of creditors
- No time limit
- Court can make application as it sees fit to restore the position.
What is a preference?
Where the co does anything or allows anything which has the effect of putting a creditor / surety / guarantor of the co in a better position in the event of the co going into liquidation.
Claim by a liquidator or administrator against the guarantor, creditor or surety provider.
What must the liquidator / administrator show to prove a preference?
- Preference in 2 years before onset of insovlency (connected and associated persons) or 6 months before (others)
- Company was insolvent (balance sheet / cash flow) or became insolvent as a result
- Company influenced by desire to prefer the creditor
