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Business Litigation > Voidable Transactions in Insolvency A&Q > Flashcards

Voidable Transactions in Insolvency A&Q Flashcards

1
Q

Who can bring claims for fraudulent trading against the directors personally?

A

Claims for fraudulent trading may be brought by

1) A liquidator

or

2) An administrator

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2
Q

When a company faces the prospect of entering into an insolvency procedure, why do directors need to be careful in how they act?

A

Since they may be held to be personally liable to compensate the company and its creditors if found guilty of one of the following:

1) Fraudulent trading

or

2) Wrongful trading

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3
Q

Why were the provision on fraudulent trading enacted?

A

To prevent the abuse of limited liability by those running companies.

The concern is that directors may continue to trade and incur further debts at a time when the company is in financial difficulty, with the result that losses to creditors are increased.

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4
Q

How is a claim for fraudulent trading made by a liquidator or an administrator ?

A

by making an application to the court

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5
Q

What is the courts power, if a director is found guilty of fraudulent trading?

A

IA 1986 gives the court power to impose both criminal and civil sanctions on directions (and other persons).

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6
Q

What is the provision for fraudulent trading for an application made by an administrator?

A

s. 246ZA IA 1986

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7
Q

What is the provision for fraudulent trading for an application made by a liquidator?

A

s.213 IA 1986

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8
Q

Who can a claim for fraudulent trading under s.213 / 246ZA IA 1986 be brough against?

A

1) Any person

2) who is knowingly party to the carrying on of any business of the company

3) with the intent to defraud creditors or for any fraudulent purpose.

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9
Q

Can a claim for fraudulent trading be brought against a bank?

A

Yes

Any person is a wide definition and includes banks, who may be liable for fraudulent trading by virtue of their employees’ knowledge

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10
Q

What are civil sanctions that a court can impose for fraudulent trading?

A

They can impose a civil liability to contribute to the funds available to the general body of unsecured creditors if directors are found liable for fraudulent trading.

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11
Q

What is the element that needs to be proven to show intent to fraudulent trading?

A

Actual dishonesty must be proven for a claim for fraudulent trading to succeed

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12
Q

How is dishonesty assessed in fraudulent trading?

A

Dishonesty is assessed on a subject not objective basis (what the particular person knew or believed). Knowledge includes blind-eye knowledge, which requires a suspicion of the relevant facts together with a deliberate decision to avoid confirming that they did exist.

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13
Q

What is the meaning of fraud?

A

As requiring ‘real dishonesty involving according to current notions of fair trading among commercial men at the present day, real moral blame’

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14
Q

What is the test for actual dishonesty ?

A

Ivey v Genting Casino

1) the liquidator needs to demonstrate the director’s subjective state of knowledge

and

2) show that the director’s conduct was dishonest applying the objective standard of ordinary decent people

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15
Q

Is it necessary to show that all of the company’s creditors have been defrauded, to bring a fraudulent trading claim?

A

No

Provided at least one creditor has been defrauded, this will be enough to bring a claim

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16
Q

What are the remedies under fraudulent trading?

A

A person held liable can be ordered to make:

1) such contribution to the company’s assets as the court thinks proper. (should only reflect and compensate for the loss caused to the creditors)

2) disqualification order under s.10 CDDA

3) Criminal claim for fraudulent trading under s 993 CA 2006 = 10 years imprisonment and/or fines

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17
Q

Does the court have the power to include a punitive element in the amount of any contribution made, in regards to fraudulent trading?

A

No

The contribution should only reflect and compensate for the loss caused to the creditors.

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18
Q

How are the sums recovered in fraudulent trading distributed?

A

Any sums recovered are held on trust for the unsecured creditors generally and not for the defrauded creditors

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19
Q

When is a disqualification order likely to be made, in regards to fraudulent trading ?

A

when that person is a director

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20
Q

What is the criminal sanctions imposed in regards to fraudulent trading?

A

the penalties are imprisonment (of up to 10 years on indictment) and/or fines

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21
Q

Does the company need to be would up for criminal sanctions to be imposed for fraudulent trading?

A

No

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22
Q

Who can bring a civil claim for wrongful trading can be brought against a director?

A

1) A liquidator

or

2) Administrator

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23
Q

Is there a criminal provision for wrongful trading?

A

No

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24
Q

Is there a criminal provision for fraudulent trading?

A

Yes

25
Q

What’s the purpose of wrongful trading?

A

1) To ensure that when directors become aware (or ought to become aware) that

2) insolvent liquidation (or insolvent admiration, as the case may be) is reasonably inevitable,

3) = they are under a duty to take every step possible to minimise the potential losses to the company’s creditors.

26
Q

Can administrator and liquidators assign wrongful trading claims to third party?

A

Yes, as a way of raising funds for the insolvent estate and thereby, avoid the risk of litigation.

27
Q

Who can a claim be brought against for wrongful trading?

A

A claim may be brought against any person who was at the relevant time a director

+

Administrator and liquidators can also assign wrongful trading claims to third party

28
Q

Can a claim be brought against a de facto director for wrongful trading?

A

Yes

29
Q

Can a claim be brought against shadow director for wrongful trading?

A

Yes

30
Q

Can a claim be brought against non-executive director for wrongful trading?

A

Yes

31
Q

Can a claim be brought against executive director for wrongful trading?

A

Yes

32
Q

What are the requirements for the first limb for liability in wrongful trading?

A

Limb one:

The court must be satisfied that the company has gone into insolvent liquidation or administration and:

1) at some time before the commencement of winding up or insolvent administration (for convenience, that time is referred as the ‘point of no return)

2) the director knew or ought to have concluded that

3) there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration)

33
Q

When does a company goes into insolvent liquidation (or insolvent administration) for wrongful trading?

A

A company goes into insolvent liquidation (or insolvent administration) at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up or administration.

*Balance sheet test

34
Q

what is the insolvency test for wrongful trading?

A

Balance sheet test

35
Q

When does the second limb for liability for wrongful trading should be considered?

A

If the directors know or ought reasonably to know that they cannot avoid a liquidation or administration of their company do they need to consider limb 2.

36
Q

If a directors assess on reasonable grounds that at a particular moment in time they consider the company has reasonable prospect of avoiding insolvency, do they satisfy limb one for liability for wrongful trading? if so, what is the next step?

A

They do not satisfy limb one and there are no further steps they need to take from a wrongful trading point of view.

37
Q

If a director have concluded or ought reasonably to have concluded that there is no reasonable prospect of avoiding insolvency, do they satisfy limb one for wrongful trading? If so, what is the next step?

A

Yes,

they must go on to consider limb 2.

38
Q

If a company has not reached the point of no return, can wrongful trading liability arise?

A

No

39
Q

What are the requirements for the second limb for liability in wrongful trading?

A

‘Every step Defence’:

They took every step with a view to minimising the potential loss to the company’s creditors.

40
Q

If a company has reached the point of no return. However, after the directors 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 creditor.

Would the directors be liable for wrongful trading?

A

No

41
Q

What is the every step defence?

A

It is the second limb to establish liability for wrongful trading.

Which states:

Directors took every step with a view to minimising the potential loss to the company’s creditors.

42
Q

What is examples of evidence that may be supportive of establishing the every step defence?

A

1) Voicing concerns at regular board meetings

2) seeking independent financial advice

3) Ensuring adequate, up to date financial information is available

4) suggesting reductions in overheads and costs

5) Not incurring further credit with someone who is not an existing creditor or increasing credit owed to an existing creditor

and

6) Taking advice on steps such as initiating appropriate insolvency procedures or negotiating with creditor to restructure liabilities.

43
Q

What test is applied in order to determine whether the limbs for liability for wrongful trading is satisfied?

A

A reasonably diligent person test

44
Q

What is a reasonably diligent person test for wrongful trading?

A

For both limbs, the directors which he has (or ought to) taken, are those which would have been known or ascertained, or reached, or taken by a reasonably diligent person having both:

1) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the directors in question

and

2) The actual knowledge, skill and experience of that particular director.

*The court then applies the HIGHER of the 2 strands

45
Q

What is the objective test for reasonable diligent person test for wrongful trading?

A

The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the directors in question

46
Q

What is the subjective test for reasonable diligent person test for wrongful trading?

A

The actual knowledge, skill and experience of that particular director

47
Q

What are the requirements for the limb for liability in wrongful trading?

A

Limb one:

The court must be satisfied that the company has gone into insolvent liquidation or administration and:

1) at some time before the commencement of winding up or insolvent administration (for convenience, that time is referred as the ‘point of no return)

2) the director knew or ought to have concluded that

3) there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration)

Limb two:

‘Every step Defence’:

They took every step with a view to minimising the potential loss to the company’s creditors.

48
Q

Can director escape liability for wrongful trading by resigning?

A

No

It might be an act of wrongful trading to resign.

A directors should only consider resigning if they are constantly out voted by the other directors and therefore unable to persuade them to change their course.

49
Q

To minimise the risk of a wrongful trading, what should directors do?

A

1) Hold frequent board meetings to review the company’s financial position and write up minutes of each meeting so there is a written record on which the directors can later rely to justify the decisions that they took. It is common for lawyers advising a company in financial difficulties to take an active role in helping directors to prepare minutes and to ensure that board meetings consider all the relevant issues e.g. whether the directors consider on reasonable grounds that the company can avoid an insolvency in which case the minutes should set out the evidence for that view. If limb two is engaged, the board minutes should set out the steps the directors propose to take to minimise loss to creditors.

2) Take professional advice (e.g., from lawyers, insolvency practitioners and/or accountants) as soon as possible.

3) Make sure they have up to date financial information about the state of the company’s finances and that this information is considered at the board meetings and acted upon.

50
Q

If a director is found to be liable for wrongful trading, what remedies can the court order?

A

1) The court can order that director to make such contribution to the assets of the company as the court thinks fit. The contribution will increase the assets of the company available for distribution to the general body of unsecured creditors.

2) Court also has a direction to make a disqualification order

51
Q

How will the contribution be assessed, if a director is found to be liable for wrongful trading?

A

The contribution will ordinarily be based on the additional depletion of company’s assets caused by the directors conduct from the date that the directors ought to have concluded that the company could not have insolvent administration or liquidation (From point of no return)

52
Q

What is the point of no return, for wrongful trading?

A

Directors conduct from the date that the directors ought to have concluded that the company could not have insolvent administration or liquidation

53
Q

Is an order by the court for a director to contribute to the company’s asset penal in nature? If not, what is nature of the order?

A

No,

it is compensatory in nature

54
Q

Is an order by the court for a director to contribute to the company’s asset compensatory in nature? If not, what is nature of the order?

A

Yes

55
Q

Can an order to contribute be made against a director on joint basis?

A

Yes

56
Q

Can an order to contribute be made against a director on several basis?

A

Yes

57
Q

If two directors are liable for wrongful trading, but one of the director is less culpable than the other. Can the court apportion liability between directors based on their culpability on the contribution to the assets?

A

Yes,

The court has a discretion to apportion liability between directors based on their culpability by ordering the more culpable director to pay more than the less culpable one.

58
Q

Who determines the extent of the directors liability for wrongful trading?

A

The Court

The court has a wide discretion to determine the extent of the director’s liability.

59
Q

Is relief available for directors liable for wrongful trading?

A

No

The relief is not available in wrongful trading proceedings.

Business Litigation (6 decks)

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