Voidable transactions and directors' liability in insolvency

Question 1

what are the 4 types of voidable transactions?

Answer 1

1. transactions at undervalue.
2. transactions defrauding creditors.
3. preferences.
4. avoidance of floating charges.

Question 2

who has the burden of proof?

Answer 2

usually an administrator.
but if there is a connected person or associate, the burden of proof is reversed to the connected person and insolvency is PRESUMED/

Question 3

what is the relevant time for a transaction at undervalue and what must be proved?

Answer 3

2 years ending with the onset of insolvency and proved the company was insolvent at the time of the transaction or became so as a result of it (presumed if there is a connected person).

Question 4

what is the relevant period for transactions defrauding creditors and what must be proved?

Answer 4

no time limit.

1. transaction at undervalue.
2. intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests.

Question 5

what is the relevant time for a preference and what must be proved?

Answer 5

6 months ending in the onset of insolvency for unconnected persons.
2 years for connected persons.

1. person is a creditor of the company.
2. company does anything or allows anything to be done which has the effect of putting that person in a better position in the event of the company going into insolvent liquidation that they would otherwise have been in.

Proved company was insolvent (on either a cash flow or balance sheet basis) at the time of the transaction or become so as a result of it. (no statutory presumption of insolvency if connected here).

Must prove they were influenced by a desire to prefer the creditor (If the 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).

Question 6

what is the relevant time for certain floating charges and what must be proved?

Answer 6

Created 12 months preceding the onset of insolvency. Extended to 2 years in the case of a connected person.

Proved the company was insolvent at the time of the floating charge’s creation or became insolvent in consequence of the transaction under which the charge was created (unless there is a connected person then no insolvency requirement)

Question 7

what are the 4 questions to ask for voidable transactions?

Answer 7

1. 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 of the transaction?
4. Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

Question 8

what is wrongful trading?

Answer 8

1. Company is in insolvent administration or liquidation.
2. Some time before, the company knew or ought to have known it was going to go into administration OR liquidation (judged solely on balance sheet test_
3. Did not take every step to minimise the loss to the creditors.

Question 9

what is fraudulent trading?

Answer 9

1. Any person (s 213(2) and s 246ZA(2))
2. who is knowingly party to the carrying on of any business of the company
3. with intent to defraud creditors or for any fraudulent purpose** (s 213(1) and s 246ZA(1)).

Question 10

what are the defences for a transaction at undervalue?

Answer 10

1. company entered into the transaction in good faith and for the purpose of carrying on its business and
2. at the time there was reasonable grounds for believing the transaction would benefit the company.