W10

Question 1

Under what circumstances may a company grant new security to stave off a genuine threat made by an unsecured bank?

Answer 1

A company may grant new security to prevent termination of facilities and winding up proceedings threatened by an unsecured bank if the directors have reasonable grounds to believe that the company can turn around its financial difficulties and avoid insolvency.

Question 2

Who can bring a claim for fraudulent trading and how is it initiated?

Answer 2

A claim for fraudulent trading can be brought by a liquidator or an administrator by making an application to court.

Question 3

Requirements for fraudulent trading?

Answer 3

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

Question 4

What is the significance of a floating charge being deemed ‘new money’ advanced by the bank?

Answer 4

Considering each use of the overdraft facility as ‘new money’ ensures that the floating charge remains valid and secures the debt incurred after its creation.

Question 5

Under what circumstances can a floating charge be void against a liquidator, administrator, or other creditors?

Answer 5

A floating charge can be void against a liquidator, administrator, or other creditors if it is not duly registered with Companies House. It may also be voidable as a transaction at an undervalue or a preference.

Question 6

What is the purpose of a restoration order in relation to transactions at an undervalue?

Answer 6

A restoration order aims to restore the position as if the company had not entered into the transaction. It may involve ordering the counterparty to pay the amount of the undervalue sustained by the company under the transaction.

Question 7

In the context of insolvency, what claim might a liquidator seek to bring when a company pays off one unsecured creditor while leaving other debts unpaid?

Answer 7

The liquidator is most likely to bring a claim for preference to recover the money paid to the close friend-controlled company.

Question 8

What needs to be proven for a claim of fraudulent trading to succeed?

Answer 8

To succeed in a claim for fraudulent trading, actual dishonesty must be proven on a subjective basis. The liquidator needs to demonstrate the director’s subjective state of knowledge and show that the director’s conduct was dishonest applying the objective standards of ordinary decent people.

Question 9

Who may claim and what sanctions are associated with preferences by a company?

Answer 9

Claims to set aside preferences can be made by a liquidator, an administrator, or a victim of the transaction. The court has the discretion to make orders to restore the position to what it would have been without the preference.

Question 10

When can a floating charge be avoided and what are the requirements for a valid floating charge?

Answer 10

A floating charge can be avoided if it was created within the relevant time, the company was insolvent at the time of creation or became insolvent as a result, and no new money or fresh consideration was provided in return for the charge. A valid floating charge requires the provision of new money or other fresh consideration to the company.

Question 11

What remedies are available for a person found liable for fraudulent trading?

Answer 11

A person found liable for fraudulent trading can be ordered to make a contribution to the company’s assets as the court deems proper. However, there is no punitive element to the remedy, and the contribution should only reflect and compensate for the loss caused to the creditors.

Question 12

What is the difference between wrongful trading and fraudulent trading in terms of liability and sanctions?

Answer 12

Wrongful trading focuses on insolvency and can lead to disqualification and personal contribution orders. Fraudulent trading involves dishonesty and carries criminal sanctions such as imprisonment and fines.

Question 13

What are the potential consequences for directors who engage in wrongful trading?

Answer 13

Directors found liable for wrongful trading may be ordered by the court to contribute to the assets of the company, increasing the funds available for distribution to creditors. The court also has the discretion to make a disqualification order against them.

Question 14

What is wrongful trading and who can bring a claim for it?

Answer 14

• The claim can be brought against any person who was at the relevant time a director.
• The 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 (or insolvent administration)
• The court applies the reasonably diligent person test under s 214(4) / 246ZB(4) to what the director ought to have known.

Question 15

What is the effect of s 245(2) in relation to the validity of a floating charge?

Answer 15

Section 245(2) states that if a floating charge is granted to secure the repayment of a new loan made on or after the creation of the charge, then it will be considered valid.

Question 16

Under what circumstances can a director be relieved from liability in proceedings for negligence, breach of duty, or breach of trust?

Answer 16

A director may be relieved from liability if the court is satisfied that they acted honestly and reasonably and that, considering all the circumstances, it would be fair to excuse them from liability. However, relief is not available in wrongful trading proceedings.

Question 17

Who can be held personally liable for wrongful trading?

Answer 17

Any person who was at the relevant time a director of the company can be held liable for wrongful trading, including shadow directors, de facto and non-executive directors.

Question 18

What is the purpose of s 239 IA 1986 and who may bring a claim under this section?

Answer 18

Section 239 aims to prevent a creditor from obtaining an improper advantage over other creditors by giving a preference. Claims under this section can be brought by a liquidator or an administrator.

Question 19

How does the court determine whether a director has taken every step to minimize loss to creditors in wrongful trading cases?

Answer 19

The court applies an objective test based on the general knowledge, skill, and experience expected of a person carrying out the same functions as the director. It also considers the actual knowledge, skill, and experience of the particular director.

Question 20

What are some potential warning signs that may prompt a director to conclude that there is no reasonable prospect of avoiding insolvent liquidation?

Answer 20

Struggling to meet deadlines for debts, insufficient assets, high liabilities and overheads, and increased creditor pressure are all potential warning signs.

Question 21

What evidence can demonstrate that a director took every step to minimize loss to creditors in wrongful trading cases?

Answer 21

Raising concerns in meetings, seeking independent financial and legal advice, ensuring up-to-date financial information is available, and implementing cost-cutting measures are examples of evidence that a director acted diligently.

Question 22

What is the ‘every step’ defense in wrongful trading?

Answer 22

The ‘every step’ defense allows a director 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 avoiding an insolvent administration or liquidation, they took every step with a view to minimizing potential losses to the company’s creditors.

Question 23

What is the difference between claims under s 238 and s 423 IA 1986?

Answer 23

Claims under s 238 relate to transactions at an undervalue in insolvency situations, while claims under s 423 can be brought by a victim of the transaction even when the company is solvent

Question 24

Who can bring a claim to set aside a transaction at an undervalue?

Answer 24

A liquidator or administrator can bring a claim to set aside a transaction at an undervalue.

Question 25

What is the advantage of bringing TDC claims under s 238 compared to s 423 IA 1986?

Answer 25

Liquidators and administrators often prefer to bring TDC claims under s 238 because there is no requirement to prove that the purpose of the transaction was to put assets beyond the reach of creditors or otherwise prejudice them.

Question 26

What are the potential consequences if a director is liable for wrongful trading?

Answer 26

The potential consequences of liability for wrongful trading include disqualification and personal contribution orders, where directors may be required to pay what they personally contributed to the company.

Question 27

How does wrongful trading differ from fraudulent trading in terms of liability and balance sheet test?

Answer 27

Wrongful trading focuses on the balance sheet test and can lead to disqualification and personal contribution orders. Fraudulent trading involves dishonesty and carries criminal sanctions, regardless of the company’s winding-up status.

Question 28

Under what circumstances does the burden of proof shift to the subsequent purchaser in relation to TUV claims?

Answer 28

The burden of proof shifts to the subsequent purchaser to show good faith if they had notice of the relevant surrounding circumstances or were connected with the company or the party involved in the undervalue transaction.

Question 29

Transactions at an undervalue s 238?

Answer 29

o Within 2 years prior to onset of insolvency
o Company insolvent at time / as a result (this is presumed with connected persons)

Question 30

Avoidance of floating charges s 245?

Answer 30

o Floating charge created for no new consideration
o within 12 months prior to onset of insolvency
o Within 2 years if connected person
o Company insolvent at time / as a result

Question 31

Transactions defrauding creditors s 423?

Answer 31

o Transaction for an undervalue
o Intention to defraud creditors
 Makes it hard to prove this transaction
o No need for company to be insolvent
o No time limit before insolvency to consider

Question 32

Preferences?

Answer 32

o Company puts creditor in better position and influenced by desire to prefer
o Within 2 years prior to onset of insolvency
o 6 months if connected person and presumption of preference
o Company insolvent at time / as a result

Question 33

What is the effect of a court order to set aside a transaction at an undervalue?

Answer 33

A court order to set aside a transaction at an undervalue can result in financial restitution being paid to the insolvent estate, increasing the assets available for distribution to creditors. The counterparty to the transaction is the target of the clawback provisions, not the directors responsible for causing the company to enter into the transaction.

Question 34

What is the defence available in relation to preferences by a company?

Answer 34

The absence of the desire to prefer required by s 239(5) is a defence against claims of preferences. The court held in Re MC Bacon Ltd that it is not necessary to prove an intention to prefer, but rather a desire to prefer.

Question 35

Under what circumstances can a floating charge be avoided automatically?

Answer 35

A floating charge can be avoided automatically under s 245 IA 1986 if it was created within the relevant time and no new money or fresh consideration was provided in return for the charge.

Question 36

Who are considered connected persons and associates in the context of voidable transactions?

Answer 36

Connected persons include directors (including shadow directors), associates of directors, and associates of the company. Associates can include spouses, business partners, employees, relatives, trustees, and companies controlled by the director or associated with the company.

Question 37

Who may claim and what sanctions are associated with avoidance of certain floating charges?

Answer 37

Claims to avoid certain floating charges can be made by a liquidator, an administrator, or a supervisor of a voluntary arrangement. The court has the discretion to make orders to restore the position as if the company had not given the charge.

Question 38

What is the purpose of s 214 and 246ZB in relation to wrongful trading?

Answer 38

Sections 214 and 246ZB aim to ensure that directors fulfill their duty to minimize potential losses to the company’s creditors when an insolvent liquidation or administration becomes inevitable.

Question 39

Can granting security or payment of a dividend be considered a transaction at an undervalue?

Answer 39

The granting of security for no consideration or significantly less than the value of the charge can be challenged as a transaction at an undervalue. Similarly, the payment of a dividend can also be attacked as a transaction at an undervalue.

Question 40

Company D has a loan with ABC Bank which is secured by a fixed charge over certain assets of Company D. It also has a £20,000 overdraft with ABC Bank which is unsecured.
ABC Bank agrees to increase Company D’s overdraft facility from £20,000 to £30,000. This is on condition that Company D grants it a floating charge to secure the whole of the overdraft, to be taken over all assets not covered by the fixed charge. The floating charge is registered at Companies House. What advice would you give to ABC Bank about the validity of the floating charge if Company D goes into administration 3 months after the floating charge was created?

A. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £10,000 and not the full amount of £30,000.

B. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £20,000 and not the new increase to the overdraft of £10,000.

C. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. However, the floating charge will be valid to secure £30,000 provided Company D has paid £20,000 or more into its account since the creation of the floating charge.

D. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, and the overdraft will be unsecured.

E. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, but the overdraft will be secured by the existing fixed charge that the bank has.

Answer 40

A. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £10,000 and not the full amount of £30,000.
a. Correct but not the best answer – could pay the whole £30,000 if 2£20,000 was paid in because it would pay off the old debt allowing the company to use the whole of the overdraft again and everything then becomes new

B. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will only be valid to secure £20,000 and not the new increase to the overdraft of £10,000.

a. Wrong got it the wrong way round

C. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. However, the floating charge will be valid to secure £30,000 provided Company D has paid £20,000 or more into its account since the creation of the floating charge.
a. Correct and the better answer

D. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, and the overdraft will be unsecured.

a. Not right – the floating charge is valid because of new consideration

E. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. If the administrator is successful, the floating charge will not be valid, but the overdraft will be secured by the existing fixed charge that the bank has.
a. Red herring

Question 41

4 tests for insolvency

Answer 41

· is unable to pay its debts as they fall due (s 123(1)(e)) known as the cash flow test;
· has liabilities that are greater than its assets (s 123(2)) known as the balance sheet test;
· does not comply with a statutory demand for a debt of over £750 (s 123(1)(a)), this provides evidence that the company is cash flow insolvent; or
· has failed to pay a creditor to satisfy enforcement of a judgment debt (s 123(1)(b))