Voidable transactions and directors' liabilities in insolvency Flashcards
Who can bring a claim for fraudulent trading and who can it be brought against?
A liquidator or administrator can bring a claim against any person who is knowingly party to the carrying on of any business of the company with intend to defraud creditors or for any fraudulent purpose, by making an application to Court.
What must be proven for a claim for fraudulent trading to succeed?
Actual dishonesty, which needs to be proved as per the Ivey v Genting Casinos (2018) test.
-demonstrate director’s subjective state of knowledge
-show the conduct was dishonest applying the objective standards of ordinary decent people
What is wrongful trading?
The concept of wrongful trading was introduced in order to establish liability for directors who carry on business negligently rather than fraudulently.
Who can bring a claim for wrongful trading and who can it be brought against?
Liquidators or administrators can bring a claim against any person who was at the relevant time a director.
What is the first limb to satisfy for a wrongful trading claim?
-At some time before the commencement of the winding up or insolvent administration (‘point of no return’), the director knew or ought to have or concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.
What is the second limb to satisfy for a wrongful trading claim?
A director will have no liability for wrongful trading if they can satisfy the Court that, after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation, they took every step with a view to minimising the potential loss to the company’s creditors.
What should directors do to minimise the risk of a wrongful trading claim?
-Hold frequent BMs to review the company’s financial position
-Take professional advice
-Make sure they have updated financial information about the company’s finances
-Reduction in overheads
What are voidable transactions?
A voidable transaction is a transaction that can be challenged by a liquidator or bankruptcy trustee if it occurs when a company/person is insolvent or shortly before it/they becomes insolvent.
What is a transaction at an undervalue (TUV)?
A gift or a transaction for a consideration the value of which, in money or money’s worth, significantly less in value than the consideration provided by the company.
When may the Court set aside a transaction at an undervalue (TUV) in corporate insolvency?
If it took place within two years ending with the onset of insolvency and it is proved that the company was insolvent at the time or became so as a result.
If the transaction is with a connected person, insolvency is presumed.
When may the Court set aside a transaction at an undervalue in personal insolvency?
If it took place within five years preceding the day of presentation of presentation of bankruptcy petition and it is proved that the individual was insolvent at the time or became so as a result.
What is a transaction defrauding creditors?
A transaction at an undervalue with the intention or purpose of putting assets beyond the reach of creditors.
When may the Court set aside a transaction defrauding creditors in both corporate and personal insolvency?
When the transaction is for an undervalue with an intention to defraud creditors.
There is no need for the company to be insolvent and no time limit before insolvency to consider.
What is an advantage of a claim for a transaction defrauding creditors compared with a transaction at an undervalue claim?
No time limit with TDC claims and no need for company to be insolvent.
What is a preference by a company/individual?
When a company/individual puts a creditor in a better position than they would have been influenced by a desire to prefer.
When may the Court set aside a preference in corporate insolvency?
-Company puts creditor in better position and influenced by a desire to prefer (presumed with connected persons)
-Within 6 months prior to onset of insolvency/2 years if connected person
-Company insolvent at time/as a result
When may the Court set aside a preference in personal insolvency?
-Individual puts creditor in better position and influenced by a desire to prefer (presumed with associate)
-Within 6 months prior to presentation of bankruptcy petition/2 years if associate
-Individual insolvent at time/as a result
What is required for a liquidator to avoid a floating charge?
-Floating charge created for no new consideration
-Within 12 months prior to onset of insolvency/within 2 years if connected person
-Company insolvent at time/as a result (presumed with connected persons)
