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Business > Voidable transactions and Claims against directors > Flashcards

Voidable transactions and Claims against directors Flashcards

1
Q

what is the purpose behind claiming voidable transactions or claiming against company directors?

A
  • to claw back assets and increase the pool of assets available for distribution to unsecured creditors
  • the court can order reversing the transactions or providing financial restitution of the company
  • the aim is to restore the company to the position it would have been in had the transaction not taken place
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2
Q

who can bring proceedings for voidable transactions and against whom?

A
  • liquidators and administrators can bring proceedings
  • against the beneficiary of the transaction - not the directors responsible
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3
Q

what are the 4 types of voidable transactions?

A

1) transaction defrauding creditors

2) transaction at an undervalue

3) preference

4) avoidance of floating charges

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4
Q

who is a connected person or associate for the purposes of voidable transactions? (6)

A

connected person =

  • director of company
  • associate of director
  • associate of company

associate =

  • spouse
  • relative - including sibling, aunt/uncle, nephew/niece
  • business partner
  • employee/employer of company or director
  • another company controlled by director
  • another company controlled by a person or company who also controls the transacting company in question
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5
Q

what is a transaction defrauding creditors and what is required to prove it? (2)

A

(1) there was a transaction at an undervalue

(2) the intention or purpose of the transaction was to put the assets beyond the reach of the company’s creditors or otherwise prejudice their interests

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6
Q

advantages / disadvantages of a transaction defrauding creditors claim?

A

advantages:

  • there is no ‘relevant time’ during which the transaction must have taken place for a liquidator/administrator to bring it
  • it can therefore be used where a TUV claim cannot be brought because the transaction took place before the relevant time

disadvantages:

  • the high evidential burden of proving the company intended to put assets beyond the reach of creditors
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7
Q

what is a transaction at an undervalue? (3 requirements)

A
  1. the company made a transaction at an undervalue (gift or transaction for significantly less than what company gave)
  2. within the relevant time
  3. and the company was insolvent at the time or became insolvent as a result of the transaction
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8
Q

what is the relevant time for a TUV?

does the time differ if the TUV was made with a connected person?

A
  • in the 2 years before the onset of insolvency (before commencement of administration or liquidation)
  • regardless of whether with a connected person
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9
Q

what is the insolvency requirement for a TUV?

A
  • the applicant must prove that the company was insolvent at the time of the TUV or became insolvent as a result
  • this is presumed where the TUV is made to a connected person (burden shifts on them to disprove insolvency)
  • insolvency is measured based on the cash flow or balance sheet tests
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10
Q

what is a defence to a TUV claim?

A

even if all requirements are met, the court will not make an order to set the transaction aside if it is satisfied that:

  1. the company entered into the transaction in good faith and for the purpose of carrying on its business, and
  2. there were reasonable grounds for believing the transaction would benefit the company

e.g., giving a new security to dissuade a genuine threat of a bank terminating facilities and bringing a liquidation petition and the directors reasonably considered this would help the company solve its financial difficulties and prevent an insolvency procedure

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11
Q

what are the sanctions for a TUV and what are the court’s limitations on imposing sanctions?

A

court can make any order it thinks fit to restore the company to the position it would have been in had the TUV not been made

BUT: the order should not prejudice a subsequent good faith purchaser for value - bad faith is presumed where the subsequent purchaser:

  • had notice of the circumstances making the transaction a TUV, OR
  • was a connected person to the company or the seller

so the burden shifts to subsequent purchaser to show good faith

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12
Q

what is a preference? (4 requirements)

A
  1. preference = company does something which puts a creditor / surety / guarantor in a better position in the event of the company’s liquidation than they otherwise would have been
  2. given in the relevant time
  3. the company was insolvent or became insolvent as a result
  4. there was a desire to prefer the creditor
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13
Q

what is an example of a preference?

A
  • paying an unsecured creditor before other creditors
  • granting an unsecured creditor a security
  • NOT: if the company pays a secured creditor before an unsecured creditor
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14
Q

what is the relevant time for a preference?

A
  • not a connected person = 6 months before onset of insolvency
  • connected person = 2 years before onset of insolvency

(onset of insolvency = when application/notice was made for administration or liquidation)

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15
Q

what is the insolvency requirement for a preference? is there a presumption of insolvency?

A
  • the applicant must prove that the company was insolvent at the time of the preference or became insolvent as a result of it
  • insolvency = based on balance sheet test or cash flow test
  • there is no presumption of insolvency for a connected person
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16
Q

what is the desire to prefer the creditor?

A

the applicant must prove there was a desire to prefer the creditor

  • this is a subjective test
  • desire is not intention (easier to prove)
  • the directors must have positively wished to put the creditor in a better position

desire to prefer is presumed where preference is given to a connected person (burden shifts on them to disprove that he company was influenced by a desire to prefer them)

17
Q

what is a defence to a preference claim?

A

absence of a desire to prefer one creditor

e.g., genuine commercial pressure by a creditor where directors were influenced by a desire to continue trading and avoid defaulting on a loan or overdraft

18
Q

what are the sanctions for a preference and what are the court’s limitations on imposing sanctions?

A

court can make any order it thinks fit to restore the company to the position it would have been in had the preference not been made

BUT: the order should not prejudice a subsequent good faith purchaser for value - bad faith is presumed where the subsequent purchaser:

  • had notice of the circumstances making the transaction a preference, OR
  • was a connected person to the company or the seller

so the burden shifts to subsequent purchaser to show good faith

19
Q

when is a floating charge avoided?

A

FC is AUTOMATICALLY AVOIDED when:

  1. a creditor obtains a FC to secure an existing loan for no new consideration
  2. it was made in the relevant time
  3. the company was insolvent at the time or became insolvent as a result of the FC (unless FC to an unconnected person)
20
Q

what is the relevant time for avoiding a floating charge?

A
  • not connected person = 12 months before onset of insolvency
  • connected person = 2 years before onset of insolvency
21
Q

what is the insolvency requirement for avoiding a floating charge? is there a presumption?

A
  • the company was insolvent at the time or became insolvent as a result of the FC
  • but for connected persons: there is no insolvency requirement at all (no presumption)
22
Q

what floating charges cant be avoided if they were created in the relevant time? i.e., defence?

A

a floating charge is valid to the extent that new money or fresh consideration is provided to the company or existing debts are extinguished in return for the FC

23
Q

what is the position of floating charges granted to secure an overdraft?

A
  • each draw from an overdraft after creation of a charge is new money
  • repayments into a bank account discharges the oldest advances first
  • So if the overdraft is fully drawn and then the bank increases the overdraft and demands a floating charge for the whole overdraft facility, then the floating charge is valid for the amount not yet drawn down (new increased amount + any old amount not drawn down) but not for the old original amount drawn down)
  • For the floating charge to apply to the entire overdraft facility (old and new amount combined), the company should pay off the original overdraft amount which was drawn down
24
Q

what proceedings can a liquidator or administrator bring against directors of the company personally?

A

1) fraudulent trading

2) wrongful trading

25
Q

what is fraudulent trading?

A

a liquidator/administrator can bring a claim against:

  1. ANYONE knowingly party (directors/banks)
  2. to carrying on a company’s business with the intent to defraud creditors (1 defrauded creditor is enough)
  3. there was actual dishonesty
26
Q

what are examples of cases where a fraudulent trading claim can be brought?

A
  • directors continue trading and incur further debt when the company is facing financial difficulty
  • a bank took a security from a company knowing it was in financial difficulty
27
Q

what is actual dishonesty?

A

actual dishonesty must be proven for fraudulent trading claim

  • assessed subjectively based on what a particular person knew or believed
  • knowledge includes blind-eye knowledge of relevant facts but deliberately avoiding confirming them

–> very high standard of proof difficult to prove (why wrongful trading claim is better)

28
Q

what are the sanctions and remedies for creditors if a claim for fraudulent trading succeeds? what are the limitations of these sanctions?

A

(1) person found liable for fraudulent trading can be ordered to make a contribution to the company’s assets

limitations:

  • court cannot include a punitive element - the contribution must be a compensation of loss
  • any sums recovered are held on trust for the creditors generally not the individual defrauded creditor

(2) disqualification order from being a director

(3) criminal sanctions

29
Q

what is a wrongful trading claim? (3 requirements)

A

a liquidator/administrator can bring a claim for wrongful trading against a director

  1. the company has gone into insolvent liquidation now (balance sheet only)
  2. the director allowed the company to continue trading at a time when the director knew or ought to have known that there was no reasonable prospect the company would avoid going into insolvent liquidation (point of no return)
  3. the continued trading made the company’s position worse
30
Q

what does ‘insolvent liquidation’ mean for a claim of wrongful trading?

A

the company’s assets are insufficient to pay its liabilities (balance sheet test)

31
Q

how does the court assess if the director knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation?

A

the court applies the reasonably diligent person test to determine the facts and conclusions known and the steps that would have been taken by a reasonably diligent person having:

  1. the general knowledge, skill and experience that is reasonably expected of a person carrying out the director’s functions (objective), and
  2. the actual knowledge skill and experience of that particular director (subjective)

and applies the higher of the 2 standards to determine if the director should have known this was the point of no return and not to continue trading

example: creditors demanding money and threatening litigation, profits decreasing, the most recent financial statement shows the company’s assets are less than its liabilities, the director is a chartered accountant, etc

32
Q

what is the defence to directors faced with wrongful trading or during the point of no return?

A

The director took every step with a view to minimising the potential loss to the company’s creditors after they first knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation

examples:

  • voicing concerns at BMs
  • holding regular BMs
  • seeking independent financial and legal advice
  • ensuring adequate up-to-date financial information
  • suggesting reductions in costs
  • not incurring further credit
  • consulting an insolvency practitioner for advice
  • negotiating with creditors to restructure liabilities
33
Q

how does the court assess if the director took every step with a view to minimising the potential losses to creditors

A

the court uses the reasonably diligent person test to assess the steps that a reasonably diligent person in the director’s position would have taken, having the facts and conclusions the director ought to have know, and having the higher of:

  1. the general knowledge, skill, and experience that is reasonably expected of a person in the director’s position (objective test),
  2. the subjective knowledge, skill, and experience that this specific director has
34
Q

what are the remedies for a claim of wrongful trading?

A

(1) contribution order for liable director to make a contribution to the company’s assets

  • can order for multiple directors to contribute on a joint and several basis or apportion liability based on culpability
  • not penal
  • for compensation for loss caused to company assets because of director’s conduct from the point of no return

(2) disqualification order against director

the court does not have the power to relieve a director from liability for wrongful trading under its CA 2006 power to relieve directors from liability for negigence, breach of duty, and breach of trust

35
Q

what is your advice to directors to avoid a claim of wrongful trading?

A

Minimise the risk of wrongful trading by:

  • Hold regular board meetings to review the company’s financial position and keep comprehensive meeting minutes
  • take ‘every step’ + record this in BM minutes + keep evidence of these steps
  • Consider whether it is appropriate to incur new credit and liabilities
  • A director cannot escape liability by simply resigning without previously taking every step with a view to minimising the potential loss to the company’s creditors, since a claim for wrongful trading can be brought against any person who was a director at the relevant time
  • The best course of action for a company is to seek professional advice as soon as possible - but the absence of warnings from advisers does not relieve directors of the responsibility to review the company’s position critically
36
Q

what is the difference between a wrongful trading vs fraudulent trading claim? (4)

A
  • very high standard of proof needed for FT as intent and dishonestly must be proven, whereas this is not a requirement in WT
  • FT can be brought against anyone but WT claims can only be brought against directors
  • FT can carry criminal sanctions but WT is only a civil claim
  • company must be insolvent for WT but no need for FT

Business (19 decks)

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