Voidable transactions and directors' liabilities in insolvency Flashcards
1
Q
What type of liability may directors face in insolvent companies
A
Personal liability
2
Q
Name one type of trading that can lead to director liability
A
Fraudulent trading
3
Q
Name another type of trading that can lead to director liability
A
Wrongful trading
4
Q
Who has power to bring proceedings for fraudulent trading
A
Liquidators administrators
5
Q
What was enacted to prevent abuse of limited liability
A
Fraudulent trading provisions
6
Q
What is the concern regarding directors trading in financial difficulty
A
Increased losses to creditors
7
Q
What power does IA 1986 give the court regarding fraudulent trading
A
Impose sanctions
8
Q
Are fraudulent trading claims common or rare
A
Rare
9
Q
Why are fraudulent trading claims rare
A
Evidential requirements proving intent
10
Q
Who can make a fraudulent trading claim in liquidation
A
Liquidator
11
Q
Under which section of IA 1986 can a liquidator claim for fraudulent trading
A
Section 213
12
Q
Who can make a fraudulent trading claim in administration
A
Administrator
13
Q
Under which section of IA 1986 can an administrator claim for fraudulent trading
A
Section 246ZA
14
Q
Against whom can a fraudulent trading claim be brought
A
Any person
15
Q
What level of involvement is required for fraudulent trading liability
A
Knowingly party
16
Q
What intent is required for fraudulent trading liability
A
Defraud creditors fraudulent purpose
17
Q
Can banks be liable for fraudulent trading
A
Yes
18
Q
What type of liability does s 213 246ZA IA 1986 impose
A
Civil liability
19
Q
What is the purpose of civil liability for fraudulent trading
A
Contribute to funds for unsecured creditors loss
20
Q
Is there also a criminal claim for fraudulent trading
A
Yes
21
Q
Under which section of CA 2006 is the criminal claim for fraudulent trading
A
Section 993
22
Q
What must be proven for a fraudulent trading claim to succeed
A
Actual dishonesty
23
Q
Is dishonesty assessed subjectively or objectively
A
Subjectively
24
Q
What type of knowledge includes blind eye knowledge
A
Dishonesty
25
What does blind eye knowledge require
Suspicion deliberate avoidance of confirmation
26
What did Re Patrick and Lyon Ltd define fraud as
Real dishonesty real moral blame
27
What is the first stage of the modern fraudulent trading test
Directors subjective state of knowledge
28
What is the second stage of the modern fraudulent trading test
Conduct dishonest by objective standards
29
Must all creditors be defrauded for a successful claim
No at least one
30
What type of order can a liable person face under s 213 246ZA
Contribute to company assets
31
Can the court include a punitive element in the contribution order
No
32
What should the contribution order reflect
Loss caused to creditors
33
For whom are recovered sums held on trust
Unsecured creditors generally
34
What type of order is likely for a director found liable for fraudulent trading
Disqualification order
35
Under which section of CDDA 1986 is director disqualification
Section 10
36
What type of sanctions can be imposed under s 993 CA 2006
Imprisonment fines
37
What is the maximum imprisonment for criminal fraudulent trading on indictment
Ten years
38
What standard of proof is required for fraudulent trading
Very high
39
Are fraudulent trading claims more or less common than wrongful trading
Less common
40
Under which sections are wrongful trading claims brought
Section 214 246ZB IA 1986
41
What is the focus of the next element
Wrongful trading
42
Was wrongful trading liability introduced before or after fraudulent trading liability
After
43
Why was wrongful trading introduced
Ineffectiveness of fraudulent trading provisions
44
What type of conduct does wrongful trading target
Negligent business conduct
45
Who can bring a civil claim for wrongful trading in liquidation
Liquidator
46
Under which section of IA 1986 can a liquidator claim for wrongful trading
Section 214
47
Who can bring a civil claim for wrongful trading in administration
Administrator
48
Under which section of IA 1986 can an administrator claim for wrongful trading
Section 246ZB
49
Are there criminal provisions for wrongful trading
No
50
What is a major risk for directors of companies near insolvency
Wrongful trading liability
51
What is the purpose of wrongful trading provisions
Minimise losses to creditors in inevitable insolvency
52
What duty do directors have when insolvent liquidation is inevitable
Take every step to minimise losses
53
What can the court order directors to do for wrongful trading
Contribute to insolvent estate
54
What principle does wrongful trading liability create an exception to
Limited liability
55
Is proving wrongful trading easier or harder than fraudulent trading
Easier
56
Does wrongful trading require proof of intent or dishonesty
No
57
What is wrongful trading about
Failing to make right judgements failing to minimise losses
58
Against whom can a wrongful trading claim be brought
Any person who was a director
59
Does director include shadow de facto and non-executive directors
Yes
60
Is the scope of persons liable for wrongful trading wider or narrower than fraudulent trading
Narrower
61
How many limbs must be satisfied for wrongful trading liability
Two
62
What must the court be satisfied about regarding insolvency for limb one
Company entered insolvent liquidation administration
63
What must the director have known or ought to have concluded before winding up
No reasonable prospect of avoiding insolvent liquidation administration
64
What test is used to determine if a company is in insolvent liquidation for wrongful trading
Balance sheet test
65
Is the cash flow test used for insolvency in wrongful trading
No
66
If directors reasonably assess the company can avoid insolvency is limb one satisfied
No
67
If limb one is satisfied what must directors then consider
Limb two continued trading
68
What must be proven regarding continued trading after the point of no return
Continued trading worsened company position
69
Can wrongful trading liability arise before the point of no return
No
70
What is the defence against wrongful trading liability
Every step defence
71
When must a director have taken every step to minimise loss
After the point of no return
72
What are examples of evidence for the every step defence
Voicing concerns seeking advice reducing costs not incurring further credit taking insolvency advice
73
What test does the court apply to determine what a director ought to have known or done
Reasonably diligent person test
74
How many elements does the reasonably diligent person test have
Two
75
What is the first element of the reasonably diligent person test
General knowledge skill experience expected
76
What is the second element of the reasonably diligent person test
Actual knowledge skill experience of director
77
Which standard is applied in the reasonably diligent person test
Higher of the two
78
What should directors do to minimise wrongful trading risk
Hold frequent board meetings take professional advice have up to date financial information
79
Can directors escape liability by resigning
No might be wrongful trading
80
What can the court order a director liable for wrongful trading to do
Contribute to company assets
81
Is a contribution order for wrongful trading compensatory or penal
Compensatory
82
Can a contribution order be made against directors jointly and severally
Yes
83
Can the court apportion liability between directors
Yes based on culpability
84
Can the court make a disqualification order against a director liable for wrongful trading
Yes
85
Under which section of CDDA 1986 can a disqualification order be made
Section 10
86
Under which section of CA 2006 might relief from liability be sought ordinarily
Section 1157
87
Is relief under s 1157 CA 2006 available in wrongful trading proceedings
No
88
What is the point of no return in wrongful trading
Time before winding up when no reasonable prospect of avoiding insolvency
89
What does IA stand for regarding voidable transactions
Insolvency Act
90
Who can challenge voidable transactions
Liquidator administrator
91
What is the aim of challenging voidable transactions
Restore company increase funds for creditors
92
What term describes the reversal of voidable transactions
Clawback
93
Who is the target of clawback provisions
Counterparty to transaction
94
What type of person is a director regarding connected persons
Connected person
95
What is the relevant section for connected persons definition
Section 249
96
What is the relevant section for associates definition
Section 435
97
Are spouses associates of a director
Yes
98
Are business partners associates of a director
Yes
99
Are employees associates of a director company
Yes
100
Are relatives like aunts uncles associates
Yes
101
Is a company controlled by a director an associate
Yes
102
What does TUV stand for regarding voidable transactions
Transaction at an undervalue
103
Under which section of IA 1986 are TUVs covered
Section 238
104
What does a TUV involve
Loss of value significant inequality
105
What is the definition of insolvency for TUV purposes
Inability to pay debts s 123
106
Does insolvency for TUV include cash flow insolvency
Yes
107
Does insolvency for TUV include balance sheet insolvency
Yes
108
Is the definition of insolvency wider for TUV or wrongful trading
TUV
109
Who is an office holder who can bring a TUV claim
Liquidator administrator
110
What is the onset of insolvency for administration court procedure
Date of filing application
111
What is the onset of insolvency for administration out of court with NOI
Date of filing NOI
112
What is the onset of insolvency for administration out of court without NOI
Date of appointment
113
What is the onset of insolvency for members voluntary liquidation
Date of resolution
114
What is the onset of insolvency for creditors voluntary liquidation
Date of resolution
115
What is the onset of insolvency for compulsory winding up
Date of presentation of petition s 129
116
What are the two main types of TUV
Gift transaction at significant undervalue
117
Can granting security sometimes be a TUV
Yes if no or significantly less consideration
118
Can lawful dividend payments sometimes be a TUV
Yes
119
Within what time before onset of insolvency must a TUV occur to be avoided
Two years
120
Is the relevant time for TUV different for connected persons
No
121
What must be proved regarding company solvency for a TUV claim
Insolvent at time or as a result
122
Is insolvency presumed in a TUV with a connected person
Yes unless proven otherwise
123
What is a defence against a TUV claim
Good faith for carrying on business reasonable belief of benefit
124
What can the court order for a TUV
Restore the position
125
What is a common order for a TUV
Counterparty pays the undervalue amount
126
Should a TUV order prejudice a good faith purchaser for value
No
127
Is there a presumption against good faith for connected subsequent purchasers
Yes rebuttable
128
Under which section of IA 1986 are TDCs covered
Section 423
129
Must a TDC necessarily relate to insolvency
No
130
What is a requirement for a TDC claim
Transaction at an undervalue intent to defraud
131
Who can bring a claim for TDC
Liquidator administrator supervisor victim
132
Is there a relevant time limit for bringing a TDC claim
No
133
What can the court order for a TDC
Restore the position
134
How does the relevant time differ between TUV and TDC claims
TDC has no time limit
135
What does a TDC require that a TUV does not
Intent to defraud
136
Under which section of IA 1986 are preferences covered
Section 239
137
What is the purpose of s 239
Prevent improper advantage to creditor
138
Who can bring a claim for preference
Liquidator administrator
139
What is a preference
Putting creditor in better position in insolvent liquidation
140
Is paying a secured creditor before unsecured usually a preference
No
141
Within what time before onset of insolvency must a preference to an unconnected person occur
Six months
142
Within what time before onset of insolvency must a preference to a connected person occur
Two years
143
What must be proved regarding company solvency for a preference claim
Insolvent at time or as a result
144
What else must be proved for a preference claim
Desire to prefer
145
Is there a statutory presumption of insolvency for preferences to connected persons
No
146
Is there a rebuttable presumption of desire to prefer for preferences to connected persons
Yes
147
What is a defence against a preference claim
Absence of desire to prefer
148
What can the court order for a preference
Restore the position
149
Do s 241(2) and s 241(2A) apply to preferences
Yes
150
Under which section of IA 1986 is avoidance of floating charges covered
Section 245
151
What is the purpose of s 245
Prevent floating charge for no new consideration
152
Does s 245 apply in liquidation
Yes
153
Does s 245 apply in administration
Yes
154
Is legal action always needed to avoid a floating charge under s 245
No automatic avoidance
155
Within what time before onset of insolvency must the floating charge be created for avoidance
Twelve months
156
What is the relevant time if the floating charge is to a connected person
Two years
157
Must the company be insolvent for avoidance of a floating charge to an unconnected person
Yes at time or as a result
158
Is insolvency required for avoidance of a floating charge to a connected person
No presumption of insolvency
159
What can validate an otherwise voidable floating charge
New money or fresh consideration
160
Is a floating charge securing a new loan usually valid
Yes
161
What happens to the security if a floating charge is void under s 245
Security is void
162
Is the debt itself void if the floating charge is void
No
163
Must a floating charge be registered at Companies House
Yes s 859H CA 2006
164
Can a floating charge also be voidable as a TUV or preference
Yes
