BLP: Insolvency - Voidable Transactions and Directors Duties

Question 1

What statute creates civil liability for fraudulent trading?

Answer 1

Section 213 IA 1986 (liquidation) and Section 246ZA IA 1986 (administration)

Question 2

Who can be sued for fraudulent trading?

Answer 2

Any person knowingly party to the carrying on of the company’s business with intent to defraud creditors (s 213(2) IA 1986)

Question 3

What mental state must be proven for fraudulent trading?

Answer 3

Actual dishonesty with intent to defraud creditors or for any fraudulent purpose (subjective test)

Question 4

What is the civil remedy for fraudulent trading?

Answer 4

A court-ordered contribution to the company’s assets, compensating the creditors for losses caused (s 213(1) IA 1986)

Question 5

Can criminal charges be brought for fraudulent trading?

Answer 5

Yes; under Section 993 CA 2006, a person knowingly party to fraudulent trading may face up to 10 years’ imprisonment and/or fines

Question 6

Why are fraudulent trading claims rare?

Answer 6

Because they require proof of subjective intent to defraud and actual dishonesty, which is difficult to establish

Question 7

What secondary sanction often follows a civil order for fraudulent trading against a director?

Answer 7

The court will likely also make a disqualification order under Section 10 CDDA 1986

Question 8

What statute creates civil liability for wrongful trading?

Answer 8

Section 214 IA 1986 (liquidation) and Section 246ZB IA 1986 (administration)

Question 9

Who can bring a wrongful trading claim?

Answer 9

A liquidator under Section 214 IA 1986 or an administrator under Section 246ZB IA 1986

Question 10

Against whom may wrongful trading claims be brought?

Answer 10

Directors, including de jure, de facto, non-executive, and shadow directors (s 251 CA 2006)

Question 11

What are the two key elements for wrongful trading liability?

Answer 11

(1) At some time before insolvency, the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation/administration; (2) the director allowed the company to continue trading, worsening creditors’ position (s 214(2) IA 1986)

Question 12

How is ‘insolvency’ defined for wrongful trading purposes?

Answer 12

Insolvency is determined by the balance sheet test only (assets < liabilities + winding-up expenses), not by cash flow (s 214(6) IA 1986)

Question 13

What is the effect of wrongful trading on a director?

Answer 13

The court may order the director to contribute to the company’s assets to compensate unsecured creditors for losses attributable to continued trading (s 214(1) IA 1986)

Question 14

What defence is available to a director facing a wrongful trading claim?

Answer 14

If the director took every step with a view to minimizing potential losses to creditors after knowing insolvency was unavoidable (s 214(3) IA 1986)

Question 15

How is the ‘every step’ defence assessed?

Answer 15

By the ‘reasonably diligent person’ test: a hypothetical director with the general knowledge, skill, and experience reasonably expected, and the actual knowledge, skill, and experience of the particular director (s 214(4) IA 1986)

Question 16

Can a director resign to avoid wrongful trading liability?

Answer 16

No; resignation does not absolve liability if the director knew insolvency was unavoidable before resignation and did not take every step to minimize losses

Question 17

What relief is unavailable in wrongful trading proceedings?

Answer 17

Section 1157 CA 2006 relief for negligence or breach of duty is not available in wrongful trading proceedings (Re Produce Marketing Consortium Ltd [1989] BCLC 513)

Question 18

What temporary suspension of wrongful trading liability occurred during COVID-19?

Answer 18

Wrongful trading provisions were suspended from 1 March 2020 to 30 September 2020, and again until 30 April 2021, to allow directors to keep businesses running without personal liability risk

Question 19

What are voidable transactions in insolvency?

Answer 19

Transactions that a liquidator or administrator can challenge to ‘claw back’ value: transactions at undervalue (s 238 IA 1986), transactions defrauding creditors (s 423 IA 1986), preferences (s 239 IA 1986), and certain floating charges (s 245 IA 1986)

Question 20

Define a ‘transaction at an undervalue’ under s 238 IA 1986.

Answer 20

A gift or transaction where the company receives significantly less consideration in money or money’s worth than the value given away, to the company’s detriment (s 238(1) IA 1986)

Question 21

What is the ‘relevant time’ for challenging a transaction at an undervalue?

Answer 21

The two years ending with the ‘onset of insolvency’—administration or liquidation—regardless of whether the counterparty is connected (s 240(1)(a) IA 1986)

Question 22

What insolvency condition must be proven for TUV claims?

Answer 22

That the company was insolvent at the time of the transaction or became insolvent as a result; for transactions with connected persons, insolvency is presumed unless rebutted (s 240(2) IA 1986)

Question 23

What defence can a counterparty use in a TUV claim?

Answer 23

That the company entered the transaction in good faith for the purpose of carrying on its business and there were reasonable grounds to believe the transaction would benefit the company (s 238(5) IA 1986)

Question 24

What remedies may a court grant for a TUV?

Answer 24

Any order restoring the position as if the transaction had not occurred, commonly requiring the counterparty to pay the undervalue difference to the insolvency office-holder (s 238(3) IA 1986)

Question 25

What protection exists for subsequent purchasers in TUV claims?

Answer 25

A purchaser acting 'in good faith and for value' is not prejudiced by a TUV order; a rebuttable presumption of bad faith arises if the purchaser knew of the surrounding circumstances or was connected to the original parties (s 241(2), (2A) IA 1986)

Question 26

Define a 'transaction defrauding creditors' under s 423 IA 1986.

Answer 26

A transaction intended to put assets beyond the reach of creditors or otherwise prejudice their interests, regardless of insolvency or timing

Question 27

Who may bring a TDC claim?

Answer 27

A liquidator, an administrator, a supervisor of a voluntary arrangement, or a victim of the transaction (s 424 IA 1986)

Question 28

What unique feature distinguishes TDC from other voidable transactions?

Answer 28

No time limit before insolvency; intent to defraud any existing or future creditors suffices, making the evidential burden higher but offering a longer look-back period (s 423 IA 1986)

Question 29

What remedy can be granted for a TDC?

Answer 29

Any order the court thinks fit to restore the position as if the transaction had not occurred, similar to TUV and preference orders (s 423(2), s 425(1) IA 1986)

Question 30

Define a 'preference' under s 239 IA 1986.

Answer 30

A transaction where the company does anything or allows anything to be done that puts a creditor (or their surety/guarantor) in a better position on insolvency than they would otherwise have been, influenced by a desire to prefer (s 239(1) IA 1986)

Question 31

What is the 'relevant time' for challenging preferences?

Answer 31

Six months before the 'onset of insolvency' for unconnected persons (s 240(1)(b)), extended to two years for connected persons (s 240(1)(a) IA 1986)

Question 32

What insolvency condition must be proven for preference claims?

Answer 32

That the company was insolvent at the time of the preference or became insolvent as a result (s 240(2) IA 1986)

Question 33

What subjective element is required for a preference to be voidable?

Answer 33

Proof that the company was 'influenced by a desire' to prefer that creditor (s 239(5) IA 1986)

Question 34

What presumption applies when preferences are given to connected persons?

Answer 34

A presumption that the company was influenced by a desire to prefer arises, shifting the burden to the preferred person to prove otherwise (s 239(6) IA 1986)

Question 35

What defence can be used in a preference claim?

Answer 35

That the transaction was not influenced by a desire to prefer, which must be shown with evidence (absence of subjective intent)

Question 36

What orders may the court make for a void preference?

Answer 36

Any order restoring the position as if the preference had not occurred, commonly requiring repayment of sums to the insolvency office-holder (s 239(3), s 241(1) IA 1986)

Question 37

What statute invalidates certain floating charges?

Answer 37

Section 245 IA 1986

Question 38

What is the 'relevant time' for avoiding floating charges?

Answer 38

Twelve months before the 'onset of insolvency' for unconnected parties (s 245(3)(b)), extended to two years for connected parties (s 245(3)(a) IA 1986)

Question 39

What insolvency condition must be proven for s 245 claims?

Answer 39

That the company was insolvent at the time of the floating charge’s creation or became insolvent as a result, unless the chargee is connected (s 245(4) IA 1986)

Question 40

What exception allows a floating charge to be valid under s 245?

Answer 40

If the floating charge secures 'new money' or fresh consideration provided on or after its creation, or if it replaces existing debt with new debt after the charge was created (s 245(2) IA 1986)

Question 41

How do rules for overdraft charges illustrate the 'new money' exception?

Answer 41

Under Re Yeovil Glove Co Ltd [1965] CH 148, each subsequent advance under an overdraft after the floating charge’s creation counts as 'new money,' validating the charge to that extent

Question 42

What is the effect of an unregistered floating charge?

Answer 42

Void against a liquidator, administrator, and other creditors; the debt becomes immediately payable (s 859H CA 2006)

Question 43

What transaction types can be challenged even if the company was solvent?

Answer 43

Transactions defrauding creditors under s 423 IA 1986, since insolvency is not a precondition