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Flashcards in insolvency Deck (14):
1

what section defines insolvency?

S123 insovency act

  • (1) cash flow insolvency – can’t pay debts how toas they fall due.
  • (2) balance sheet insolvency – taking into account your assets and liabilities, you have more liabilities than assets

 

2

What case assessed the meaning of balance sheet insolvency (s123(2))

BNY Corporate Trustee Ltd v Neuberger Berman Services Ltd [2013] UKSC 28

  • further away the potential liability is, less the court will be pursuaded it is not balance sheet insolvent. 

3

which section allows the liquidator or administrator to act as the company to bring action against directors?

S212 Insolvency Act

Can bring an action against any director if they have:

·         misapplied or become accountable of any of the property or

·         breach of any fiduciary or any duties.

 

4

How do you judge a breach of duty by a director in insolvency?

  • fraudulently preferring payment of one creditor at the expense of the others. (Re DKG Contractors ) ( S239 Insolvency Act)
  • Need to have intent to defraud to be caught under s239 IA. ( Re Pantone)
  • Would a reasonable person have thought they acted for the benefit of the creditors collectively ( Colin Gwyer v London Wharf)
  • Firstly did they take the creditors interest into consideration(subjective). If no evidence, objectively did they take the creditors interest into consideration (Hellard v Carvalho)

5

When does the interest of the directors swap from shareholders to creditors under S172(3)?

  • The interest will not change if the possibility of insolvency is way into the future ( BTI v Sequana)
  • Interest changes if the insolvency is'precarious solvent' or on 'the verge of solvency' ( BTI v Sequana)
  • a potential huge liability is not enough ( Dickinson v NAL)
  • needs to be solvent to bring a claim (Northampton v Cardoza)

6

when is someone liable of fraudulent trading?

S 213 Insovency act

  •  if it appears that the business has been carried on with the intent to defraud then any director that is knowingly a party is liable for any of the debts so incurred.
  • It is a criminal offence.

Morphitis v Bernasconi

  • business - question of fact

Morris v State Bank of India

  • knowingly party - intended, reckless or deliberately not knowing. 

Re Overnight

  • if there is more than one director liability is joint and several. 

 

7

when is somebody liable for wrongful trading under the section only?

 

s 214 Insolvency Act 

  • (2)
    • (a) company has gone into liquidation
    • (b) that person knew or ought to have concluded there is no reasonable prospect that the company would avoid going to insolvent liquidation and
    • (c) that person was a director at the time. 

 

  • 214 (3) - 2(b) doesnt apply if they took every step with a view to minimising potenial los that they ought to have taken. 
  • (4) - Reasonably to be assessed by:
    • (a)  objective person
    • (b) subjectiver
  • (5) - liable for what he does not carry out but should have.

8

Applying case law , when is somebody liable for wrongful trading?

  • objective criteria is assessed on the type of company. (Re Produce Marketing consortium)
  • If they are a non playing director, not alert to financials and basics ( Re Produce Marketing consortium)
  • ss4 of 214 applies to what ought to be available to you, not what was avaiulable to you ( Re produce Marketing consortium)
  • not if it was a genuine commercial attempt at the time to save the company. Cannot use hindsight ( Sherbourne Associates)
  • if you are non acting director (Re Brian Pierson)
  • Not if they reasonably think they can trade to profit at the time. (Re CubeLock) 
  • Using foresight is not permissible for liable. Was it reasonable at the time? ( Ward v Perks)
  • trading without assets. abusing limited liability ( Singla v Hardman) (Roberts v Frolich) 

9

what are your defences to wrongful trading?

  • took every step with a view to minimising potential loss he ought to have taken. (s214 (3))
  • if there is no causation between the loss and the wrongful trading ( Grant v Ralls)
  • the wrongful trading must amount to an increase in net deficiency ( Brooks v Armstrong)
  •  

10

Damages for wrongful trading?

  • director can make a contribution to the assets (s214(1))
  • damages are compensatory not punitve ( Re Prodeuce marketing Consortium)
  • Wrongful trading must have caused the loss ( Re Continental assurance)

11

what is shadow director?

Section 251 Insolvency Act and Companies Act

  • (1)   In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

12

what is the criteria for being a director?

Re HydroDam

  1. given clear instructions to directors
  2. directors acted in accordance to those instructions
  3. accustomed to obeying those orders.

SOS v Deverell 

  • have to sshow accustom to act but not subservient.

Ultraframe

  • The defacto director has to control a majority of the board

13

when is somebody a de facto director?

Re Richborough Furniture Ltd [1996] 1 BCLC 503*

  • Everything he did could have been done by senior employee, didnt need to be a director to do the tasks he undertook. 
  • Held: De facto director has to be either a sole person directing the company’s affairs or acting on an equal footing with other directors.

 

Secretary of State v Laing [1996] 

  • Just because you were de factor director doesn’t mean still are. Not permanent.

Secretary of State v Hickling [1996]

  • Held: if unsure, person is given benefit of the doubt.

Secretary of State v Tjolle [1998] BCC 282*

  • There was an actual director. And then there was A lady who was held out to be director to clients but wasn’t a director. no access to financial information. Everything she could have done could have been done by non directors. Represented as director.
  • Held: Refused to allow her de facto director. Wasn’t on equal footing with actual director because she didn’t have access to finance and didn’t have any input into business strategy. Her title was a motivational title only imposed by an autocratic boss.

 

Re Kaytech International plc [1999] 2 BCLC 351 (CA)

  • Can’t have single test for establishing if someone is de factor director.
  • COA: Test: Was there an assumption of responsibility to have a real influence on corporate governance. This was running the company, not business.

 

Holland v HMRC [2011] BCC 1 (SC)*

  • Situation more extreme than hydrodam.
  • Company called p limited. Which PD ltd was a sole corporate director of P limited.  Mr Holland was sole director of P limited. Was Holland de facto director of PD LTD? he is the only person there
  • SC: 3/2 – He was not de facto director.
  • Collins – until 1980, concept of de facto director was purely somebody who’s  appointment of someone defective. They had been appointed but lacked formalities. After 1980s used for people who were never appointed. Therefore must be constrained. Parliament hadn’t widened the definition, it was judicial.
  • Held should be very restrictive excluding H.
  • Dissent (walker) – if Holland didn’t take it no one would be liable because no one else there. Definition is rogues charter.

 

Smithton Ltd v Townsley [2014] EWCA Civ 939

  • Mr Townsley was held simply to be arranging a share swap, deal maker. Not a director. Arranging a deal.
  • Collins is a ratio of Holland. Its about determining the capacity.
  • Held: Mustn’t artificially make attributions of responsibility. evidential question, did the defendant act in the capacity of a director or was he acting in another capacity.

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