Topic 14: Voidable Transactions And Directors’ Liabilities In Insolvency

Question 1

What is the primary concern regarding directors of an insolvent company?

Answer 1

Directors may be held personally liable to compensate the company and its creditors if found guilty of fraudulent or wrongful trading.

Question 2

What is the definition of fraudulent trading?

Answer 2

Carrying on business with intent to defraud creditors or for any fraudulent purpose.

Question 3

Who can bring a claim for fraudulent trading?

Answer 3

A liquidator or an administrator.

Question 4

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

Answer 4

Actual dishonesty.

Question 5

What is the standard for assessing dishonesty in fraudulent trading cases?

Answer 5

It is assessed on a subjective basis, considering what the person knew or believed.

Question 6

What is the two-stage test established by the court for fraudulent trading?

Answer 6

1. Demonstrate the director’s subjective state of knowledge. 2. Show that the director’s conduct was dishonest according to ordinary decent people.

Question 7

What are the potential remedies for a person found liable under s 213 / 246ZA?

Answer 7

Ordered to contribute to the company’s assets as the court thinks proper.

Question 8

What distinguishes wrongful trading from fraudulent trading?

Answer 8

Wrongful trading does not require proof of dishonest intent.

Question 9

What is the purpose of s 214 and 246ZB IA 1986?

Answer 9

To ensure directors minimize potential losses to creditors when insolvency is inevitable.

Question 10

Who may bring a claim for wrongful trading?

Answer 10

Liquidators and administrators.

Question 11

What must be proven for a director to be liable for wrongful trading?

Answer 11

That the director allowed the company to continue trading when they knew or ought to have known there was no reasonable prospect of avoiding insolvency.

Question 12

What is the ‘point of no return’ in the context of wrongful trading?

Answer 12

The time before the commencement of winding up or insolvent administration when directors knew or ought to have concluded insolvency was inevitable.

Question 13

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

Answer 13

A director may escape liability by proving they took every step to minimize potential loss after knowing insolvency was inevitable.

Question 14

What does the ‘reasonably diligent person’ test assess?

Answer 14

Whether a director ought to have concluded that insolvency was unavoidable and whether they took steps to minimize losses.

Question 15

What advice should directors follow to minimize wrongful trading risk?

Answer 15

• Hold frequent board meetings
• Take professional advice
• Ensure up-to-date financial information is available

Question 16

What happens if a director is found liable for wrongful trading?

Answer 16

The court can order them to contribute to the company’s assets, increasing funds for unsecured creditors.

Question 17

Under what circumstances may a court relieve a director from liability under s 1157 CA 2006?

Answer 17

If the director acted honestly and reasonably.

Question 18

What is the liability imposed on directors for wrongful trading?

Answer 18

Personal liability that marks an exception to the principle of limited liability.

Question 19

What is the difference in liability scope between fraudulent trading and wrongful trading?

Answer 19

Fraudulent trading can be claimed against any person knowingly involved, while wrongful trading is limited to directors.

Question 20

What is a contribution order under s 214 / 246ZB?

Answer 20

A court order against a director which may also lead to a disqualification order under s 10 CDDA 1986

This order addresses the financial contributions directors may need to make when a company enters insolvency.

Question 21

What does s 1157 CA 2006 allow a court to do regarding directors?

Answer 21

Relieve a director from liability in proceedings for negligence, breach of duty, or breach of trust if they acted honestly and reasonably

Relief is not available in wrongful trading proceedings.

Question 22

What are voidable transactions?

Answer 22

Transactions that can be challenged by a liquidator or administrator under the IA 1986

These transactions include transactions at an undervalue, transactions defrauding creditors, preferences, and avoidance of floating charges.

Question 23

What is the aim of challenging voidable transactions?

Answer 23

To restore the company to the same position it would have been in had the transaction not taken place

This helps increase the funds available for creditors in the insolvent estate.

Question 24

What questions must be asked when challenging a voidable transaction?

Answer 24

1. Did the transaction involve a ‘connected person’ or ‘associate’?
2. Did the transaction take place within the ‘relevant time’?
3. Was the company insolvent at the time of the transaction?
4. Is there a presumption that shifts the burden of proof?

These questions guide the assessment of the transaction’s validity.

Question 25

Define 'connected persons' as per s 249.

Answer 25

Directors, associates of directors, and associates of the company ## Footnote This definition is crucial for assessing transactions involving related parties.

Question 26

What is a transaction at an undervalue according to s 238 IA 1986?

Answer 26

A gift or a transaction where the consideration is significantly less than what the company provided ## Footnote An example is selling an asset worth £100,000 for only £50,000.

Question 27

What is the significance of the 'onset of insolvency'?

Answer 27

It determines when the relevant time for assessing transactions begins ## Footnote For administration, it's the date of filing or notice; for liquidation, it's the date of winding up commencement.

Question 28

What is the court's discretion under s 238(3)?

Answer 28

To make orders restoring the position as if the company had not entered into the transaction ## Footnote Common orders include requiring the counterparty to pay the amount of the undervalue.

Question 29

What are the requirements for a transaction to be set aside as a transaction at an undervalue?

Answer 29

1. The company made a gift or entered into a transaction for significantly less value. 2. It took place within the ‘relevant time’. 3. The company was insolvent at the time or became so as a result of the transaction. ## Footnote The burden of proof may shift when dealing with connected persons.

Question 30

What is the defence against a transaction at an undervalue claim?

Answer 30

The company entered into the transaction in good faith for business purposes and believed it would benefit the company ## Footnote This defence can protect many transactions from being challenged.

Question 31

Who can apply to set aside a transaction under s 423?

Answer 31

1. A liquidator or administrator. 2. A supervisor of a voluntary arrangement. 3. A victim of the transaction ## Footnote There is no 'relevant time' limitation for these claims.

Question 32

What is the purpose of s 239 IA 1986?

Answer 32

To prevent a creditor from gaining an improper advantage over others when a company is insolvent ## Footnote This section addresses preferences granted to creditors.

Question 33

What constitutes a preference under s 239 IA 1986?

Answer 33

1. The person is a creditor of the company. 2. The company does something that puts that person in a better position in insolvency than others ## Footnote An example is paying an unsecured creditor before others.

Question 34

When can a preference be avoided?

Answer 34

1. Given within the ‘relevant time’. 2. The company was insolvent at the time or became so as a result. 3. The company was influenced by a desire to prefer ## Footnote The relevant time is 6 months for general creditors and 2 years for connected persons.

Question 35

What is a rebuttable presumption in the context of preferences?

Answer 35

If a preference is given to a connected person, there's a presumption that the company was influenced by a desire to prefer them ## Footnote This shifts the burden of proof to the preferred person.

Question 36

What is the purpose of the security granted under commercial pressure by a lender?

Answer 36

To avoid calling in the company’s overdraft ## Footnote This occurs when the debtor's desire to prefer the lender is negated by genuine commercial pressure.

Question 37

What does s 239(3) allow the court to do regarding preferences?

Answer 37

Make an order to restore the position as if the company had not given the preference.

Question 38

What is a common court order regarding unsecured creditors paid ahead of others?

Answer 38

For the preferred creditor to pay the money received from the company to the liquidator or administrator.

Question 39

What does s 245 IA 1986 aim to prevent?

Answer 39

A creditor obtaining a floating charge to secure an existing debt for no new consideration.

Question 40

In what situations does s 245 apply?

Answer 40

Only in liquidation or administration.

Question 41

How does s 245 avoid floating charges?

Answer 41

Automatically, without the need for legal proceedings unless there's a dispute.

Question 42

What was a high-profile example of a contentious floating charge?

Answer 42

The liquidation of BHS and the challenge of a floating charge held by Phillip Green’s Arcadia Group.

Question 43

What is the 'relevant time' for creating a floating charge to be invalid?

Answer 43

12 months preceding the onset of insolvency.

Question 44

How is the 'relevant time' extended for floating charges granted to connected persons?

Answer 44

Extended to 2 years.

Question 45

What must be proven for a floating charge to be invalid if not granted to a connected person?

Answer 45

The company was insolvent at the time of the floating charge’s creation or became insolvent due to the transaction.

Question 46

What makes a floating charge valid despite the above requirements?

Answer 46

If 'new money' or other fresh consideration is provided to the company in return for the grant.

Question 47

What is an example of a void floating charge?

Answer 47

A floating charge granted to secure an existing unsecured creditor's repayment when the company is insolvent.

Question 48

What is the complexity surrounding the grant of a floating charge to secure an existing overdraft?

Answer 48

Due to case law and the reduced effect of s 245(2).

Question 49

What happens if a floating charge is void under s 245?

Answer 49

Only the security is void, not the debt itself.

Question 50

When is a floating charge void against a liquidator or administrator?

Answer 50

If it is not duly registered with Companies House under s 859H CA 2006.

Question 51

What other reasons can make a floating charge voidable?

Answer 51

As a transaction at an undervalue or a preference under s 238 and 239.