Voidable transactions and directors

Question 1

Why should directors be careful in their actions when a company faces the prospect of insolvency?

Answer 1

Can be personally liable if guilty of fraudulent/wrongful trading

Question 2

Who can bring a claim for fraudulent trading?

Answer 2

Administrators or liquidators

Question 3

What can the court impose if someone is found guilty of fraudulent trading?

Answer 3

Criminal and civil sanctions

Question 4

What is the test for fraudulent trading?

Answer 4

• Any person
• Who is knowingly party to the carrying on of any business of the company
• With intent to defraud creditors or any fraudulent purpose

Question 5

What must be proven for a fraudulent claim to be successful?

Answer 5

Actual dishonesty

Question 6

How is actual dishonesty assessed?

Answer 6

Subjective
Includes suspicion + deliberate decision to avoid confirming they exist

Question 7

What is the two stage test for fraudulent trading?

Answer 7

1. Liquidator demonstrates director’s subjective knowledge
2. Shows director’s conduct was dishonest applying objective standard of ordinary decent people

Question 8

What are the remedies for fraudulent trading?

Answer 8

• contribution to company’s assets
• disqualification order
• criminal sanctions

Question 9

Who can bring a claim for wrongful trading?

Answer 9

Liquidators and administrators
Can assign claim to a third party

Question 10

Who can an action for wrongful trading be brought against?

Answer 10

Any person who was at the relevant time a director
Includes de jure, de facto and shadow directors and non-executive directors

Question 11

What is the first limb of the wrongful trading requirements?

Answer 11

Company has gone into liquidation/administration and
- At some time before commencement
- The director knew or ought to have concluded that
- There was no reasonable prospect would avoid going into insolvent liquidation/administration

Question 12

What must also be proven in the first limb of wrongful trading?

Answer 12

o Director allowed company to continue trading during this and
o Continued trading made company’s position worse

Question 13

What is the second limb of the wrongful trading requirements?

Answer 13

2. Every step Defence - They took every step with a view to minimising potential loss to the creditors

Question 14

When does the court apply the reasonably diligent person test?

Answer 14

court applies to determine whether
* Liquidator/administrator has established that director ought to have concluded no reasonable prospect and
* Whether director took every step to minimise potential loss

Question 15

What is the reasonably diligent person test based on?

Answer 15

General knowledge, skill and experience of a person carrying out the same functions
Actual knowledge, skill and experience
Court applies higher of two

Question 16

What are the remedies for wrongful trading?

Answer 16

• contribution to company’s assets
• disqualification order

Question 17

Will there be relief available for wrongful trading?

Answer 17

No

Question 18

What are the voidable transactions

Answer 18

Transactions at an undervalue
Transactions at an undervalue defrauding creditors.
Preferences
Avoidance of floating charges

Question 19

What is the aim of a voidable transaction challenge?

Answer 19

restore company to position as if transaction had not taken place

Question 20

What questions will a liquidator/administrator ask when challenging a transaction?

Answer 20

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

Question 21

Who are connected persons with the company?

Answer 21

directors, associates of directors and associates of the company

Question 22

Who are associates

Answer 22

spouses, business partners, employees, relatives, trustees, controlled company

Question 23

When is the onsent of insolvency?

Answer 23

Administration: date of filing of application or notice of intention to appoint or appointment
Liquidation: date of commencement of winding up

Question 24

What is the test for insolvency for voidable transactions?

Answer 24

Cash flow or balance sheet test

Question 25

What transactions are at an undervalue

Answer 25

gift or transaction for consideration significantly less than consideration provided

Question 26

When may granting a security be a TUV?

Answer 26

For no consideration or significantly less

Question 27

When will the court set aside a TUV?

Answer 27

* Did within relevant time – 2 years ending with onset of insolvency * Proved that the company was insolvent at the time or became insolvent as a result

Question 28

What is the effect of a TUV with a connected person?

Answer 28

insolvency is presumed unless connected person presumes company was solvent

Question 29

What are the defences to a TUV?

Answer 29

* Company entered transaction in good faith for purpose of carrying on business * At the time there were reasonable grounds for believing transaction would benefit the company

Question 30

What sanction is imposed for a TUV?

Answer 30

Court discretion to make any order to restore the position as if the company had not entered

Question 31

What is the special rule for sanctions imposed for a TUV?

Answer 31

Shouldn’t prejudice a subsequent purchaser provided they acted in good faith and for value

Question 32

When is there a rebutabble presumption that a subsequent purchaser involved in a TUV has not acted in good faith?

Answer 32

o Had notice of relevant surrounding circumstances and proceedings o Connected with or associate of company

Question 33

What are the requirements for a claim of TDC?

Answer 33

* Transaction at an undervalue and * Intention or purpose to put assets beyond the reach of creditors or prejudice their interests

Question 34

Who may make a TDC claim?

Answer 34

* Liquidator/administrator * Supervisor of voluntary arrangement or * Victim of transaction

Question 35

Is there a relevant time for TDC?

Answer 35

No

Question 36

Is insolvency required for TDC?

Answer 36

No

Question 37

When will a company have given a preference?

Answer 37

* Person is a creditor and * Company puts that person in a better position in the event of insolvent liquidation than they would otherwise have been

Question 38

When can a preference be made void?

Answer 38

* Given within relevant time – 6 months ending with onset of insolvency * Proved that company was insolvent at time or became as a result * Proved that company was influenced by a desire to prefer the creditor (subjective)

Question 39

What are the rules on preferences where they are made to a connected person?

Answer 39

- 2 years relevant time - rebuttable presumption that company was influenced, shifing burden to connected person

Question 40

What is the defence for preferences?

Answer 40

absence of desire to prefer

Question 41

What is the sanction for preferences?

Answer 41

order to restore position as if company had not given preference

Question 42

Who can bring a claim for avoiding a floating charge?

Answer 42

None - automatic

Question 43

When will a floating charge be invalid?

Answer 43

* Within relevant time – 12 months ending with onset of insolvency o 2 years where granted to connected person * Unless granted to connected person, company was insolvent at the time or became insolvent as a result

Question 44

What is the effect of a floating charge being voidable?

Answer 44

Only the security is void – not the debt itself