13 - BL - Corp insolve & Dir

Question 1

What are the implications for the directors if a company becomes insolvent?

Answer 1

They may be personally liable to compensate the company and its creditors if found guilty of:

• Fraudulent trading 👺
• Wrongful trading 😳

Question 2

Who can bring a claim of Fraudulent trading?

Answer 2

A Liquidator or Administrator 💦

Question 3

Who can a claim of Fraudulent trading be brought against?

Answer 3

• any person
• who is knowingly party to the carrying on of any business of the company
• with intent to defraud creditors or for any fraudulent purpose

Question 4

Do all the creditors need to have been defrauded for a claim of Fraudulent trading be brought?

Answer 4

No

Question 5

Is the dishonest criteria objective or subjective?

Answer 5

Subjective - what the particular person knew or believed. 🤔

Knowledge includes blind-eye knowledge - (suspicion of the relevant facts with a decision to avoid confirming that they did exist).

Question 6

What are the remedies for Fraudulent Trading?

Answer 6

• A person can be ordered to make such contribution to the company’s assets as the court thinks proper. 💰
  
  • Not punitive - contribution should only reflect the loss caused to the creditors.
  • Any sums recovered are held on trust for the unsecured creditors generally and not for the defrauded creditor.
• Where the person is also a director, the court is likely also to make a disqualification order. ❌🎩
• Criminal sanctions can be imposed by the court. 👮

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

Question 7

Who can bring a claim of Wrongful trading?

Answer 7

Liquidator or Administrator 💦

Question 8

Are there criminal sanctions for wrongful trading?

Answer 8

No

Question 9

What are the duties of directors in respect of wrongful trading?

Answer 9

• When directors become aware (or ought to become aware) that an insolvent liquidation/administration is inevitable,
• they are under a duty to minimise the potential losses to the company’s creditors.

Question 10

What must be shown to demonstrate that the directors failed in their duty in respect of wrongful trading?

Answer 10

the director in question:
- allowed the company to continue to trade
- during the period in which they knew or ought to have known that
- there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration, and
- that the continued trading made the company’s position worse.

Question 11

What is the defence against wrongful trading?

Answer 11

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

Question 12

What standard is applied when considering the ‘ought to have known’ element

Answer 12

reasonably diligent person, with the higher of:
- general knowledge of a director, or
- actual knowledge of the director

Question 13

What if the directors fail in their duty in respect of wrongful trading?

Answer 13

The court can order the directors to contribute (as the court see proper) to the insolvent estate.
- Not punitive - contribution should only reflect the loss caused to the creditors.

Question 14

Is intent or dishonesty required to prove wrongful trading?

Answer 14

No

Question 15

Against whom can a claim for wrongful trading be brought?

Answer 15

Directors and shadow directors

Question 16

Is wrongful trading based on the P&L or the balance sheet?

Answer 16

Balance sheet - its about assets and debts not cashflow

Question 17

What are the questions that must be asked when considering voidable transactions?

Answer 17

• Did the transaction involve a ‘connected person’ or ‘associate’?
• Did the transaction take place within the ‘relevant time’?
• Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
• Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

Question 18

Transactions at Undervalue for companies:

When must a TUV have occurred?

Answer 18

Within the 2 years preceding the onset of insolvency (regardless of whether connected)

Question 19

Transactions at Undervalue
Who has to prove that the company was insolvent at the time of the TUV?

Answer 19

the applicant, unless:

where a transaction is entered into with a connected party, insolvency is presumed unless the connected person can prove otherwise.

Question 20

Transactions at Undervalue
What are the defences against transactions at under value?

Answer 20

the company entered into the transaction in
- good faith and
- business purpose and
- benefit of the company.

Question 21

Transactions at Undervalue
What happens to the purchaser in a transactions at under value?

🎁

Answer 21

Court has discretion to make such order as it thinks fit to restore the position as if the company had not entered into the transaction.

Any order:

• should not be prejudiced provided they were acting in good faith AND for value
• there is a rebuttable presumption that the acquisition was not in good faith where the subsequent purchaser either:
  • had notice of the relevant surrounding circumstances; or
  • was connected

Question 22

Transaction Defrauding Creditors
What are the requirements of a Transaction Defrauding Creditors claim for companies?

Answer 22

• transaction as undervalue 🎁
• the intention or purpose of the transaction was to put assets beyond the reach of creditors of the comapny or otherwise prejudice their interests (includes future creditors who were not know at the time)

⚙️👻👺

Question 23

Transaction Defrauding Creditors
Who can bring TDC:

Answer 23

• Liquidator or administrator
• supervisor CVA
• a victim of the transaction in question

Question 24

Transaction Defrauding Creditors
What is the time limit for a TDC?

Answer 24

There is no limit

Question 25

Transaction Defrauding Creditors
What are the remedies of a TDC?

Answer 25

The court may make such orders as it sees fit to restore the position to what it would have been but for the transaction

Question 26

Transaction Defrauding Creditors
What is the disadvantage of using Transactions at Undervalue rather than Transactions to defraud creditors?

Answer 26

TUV has a time limit TDC does not

Question 27

Transaction Defrauding Creditors
What is the disadvantage of using Transactions to defraud creditors rather than Transactions at Undervalue?

Answer 27

TDC requires intent, TUV does not

Question 28

Preference
Who can claim preference?

😚

Answer 28

• a liquidator, or administrator 💦

Question 29

Preference
What is required for preference?

😚

Answer 29

• a person is a creditor of the company
• the company puts the creditor in a better position than they otherwise would have been
• proved the company was insolvent at the time of the transaction or became so as a result of it, and
• proved the company was influenced by a desire to prefer the creditor (subjective test)

Question 30

Preference
What is the relevant time for preference?

Answer 30

• 6 months preceding the onset of insolvency
• 2 years if connected person or associate (includes settling a debt that is guaranteed by a director)

Question 31

Preference
Is there a presumption in Preference that the creditor was preferred?

😚

Answer 31

No - unless connected in which case there is a rebuttable presumption that the creditor was preferred.

👯

Question 32

Preference
What are the sanctions for preference?

😚

Answer 32

The court has discretion to make an order to restore the position as if the comapny had not given preference.

Question 33

Avoidance of certain floating charges
What is Avoidance of certain floating charges?

Answer 33

Prevent an unsecured creditor obtaining a floating charge to secure an existing loan for no new consideration, at the expense of other unsecured creditors.

Question 34

Avoidance of certain floating charges
When must the floating change have been created?

Answer 34

• Unconnected: 1 year
• Connected: 2 years

Of onset of insolvency

Question 35

Avoidance of certain floating charges
What must be proved to avoid a floating charge for an unconnected person?

Answer 35

• company was insolvent
• on either a cash-flow or balance sheet basis
• at the time of the floating charge’s creation or
• became insolvent in consequence of the transaction under which the charge was created.

Question 36

Avoidance of certain floating charges
When may a floating change be invalid for an connected person?

Answer 36

• The floating charge must have been created within 2 years preceding the onset of insolvency.
• there no insolvency requirement.

Question 37

Avoidance of certain floating charges
When are new floating charges valid?

Answer 37

To the extent that ‘new money’ or other fresh consideration is provided to the company (even if this didn’t come from the lender) 🎁

Question 38

Avoidance of certain floating charges
What happens if a floating charge is found to be void?

Answer 38

Only the security is void and not the debt itself