BLP Lecture 14 Insolvency Slides 2024-25 PDF

10/06/2024 1 Learning outcomes Directors’ duties/personal liability Disqualification of directors...

10/06/2024 1 Learning outcomes Directors’ duties/personal liability Disqualification of directors Voidable transactions 2 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 8. Transactions at an undervalue 9. Preferences 10. Avoidance of Floating Charges 11. Transactions defrauding creditors 3 1  10/06/2024 1. Introduction A company is insolvent when it is “unable to pay its debts” for the purposes of s.123 IA 1986 This includes the cash flow test (inability to pay debts as and when they fall due) and the balance sheet test (the value of liabilities exceeds assets) 4 1. Introduction Insolvency Act 1986 – protects creditors of insolvent or prospectively insolvent company Period before insolvency Challenge transactions Liquidator / Take action against directors Administrator £ for creditors 5 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 6 2  10/06/2024 ss.213/246ZA – fraudulent trading (1) If in the course of the winding up/administration of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect. (2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper. 7 Fraudulent Trading Liquidator (s.213) or administrator (s.246ZA) any person knowingly party to the carrying on of any business with intent to for any fraudulent OR defraud creditors purpose must prove dishonesty 8 Fraudulent Trading Sanctions Criminal liability Civil liability s993 CA 06 ss.213/246ZA IA Contribute to Imprisonment company’s assets (up to 10 years) and/or fines s10 CDDA Disqualification of director 9 3  10/06/2024 ss. 214/246ZB - wrongful trading (1) Potential liability if before a company has gone into insolvent liquidation or administration, a director knew or ought to have concluded that there was no reasonable prospect of avoiding the insolvency (2) No remedy if court is satisfied that director took every step to minimise loss to creditors he ought to have taken (3) subjective and objective test BPP LAW SCHOOL 10 Wrongful Trading ss214/246ZB Liquidator or administrator Directors only (de facto, de jure and shadow) No reasonable Director knew or prospect company At the point ought to have can avoid an insolvent of no return concluded liquidation or administration 11 Key points on wrongful trading Are the directors in the wrongful trading zone? If so, they are under a duty to take every step to minimise loss to creditors Decision to continue to trade and if so, on what terms? Should a director resign? The role of the lawyer BPP LAW SCHOOL 12 4  10/06/2024 Wrongful Trading ss214/246ZB Sanctions Civil ss214/246ZB IA s10 CDDA Liability to contribute to Disqualification company’s assets of director 13 Misfeasance s212 Director breach of duty Ratify company insolvent or on company solvent brink of insolvency Shareholders Shareholders Creditors Ratification ? 14 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 15 5  10/06/2024 Voidable Transactions - General Challenge transactions Connected Company insolvent person at the time or as a result Relevant time Any presumption shifting the burden of proof? 16 7- 8. Voidable Transactions - General Connected persons Associates of Associates of directors s435 company s435 Company directors s249 17 Voidable Transactions – Amber Limited 3. sells stock winding up petition 2.floating charge 1. pays creditor £ for creditors 6 mths 4 mths 1 wk Can liquidator or administrator challenge these transactions under IA 1986? 18 6  10/06/2024 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 8. Transactions at an undervalue 19 Transactions at an undervalue s238 Liquidator or administrator No consideration OR Significantly (gift) lower value RELEVANT TIME Company insolvent at 2 years prior to the the time or became onset of insolvency so as a result Insolvency presumed if with connected person 20 Transactions at an undervalue s238 Good faith and for purpose of carrying on business defence There are reasonable grounds for believing the transaction benefits company Such order as the court thinks fit to sanction restore position 21 7  10/06/2024 Amber Limited – TUV s238 Six months before the presentation of a winding up petition, Amber Limited sold stock at half-price to a company controlled by a close friend of the managing director. Can the office-holder successfully challenge this sale as a transaction at an undervalue under s.238? 22 Amber Limited – TUV s238 TUV – yes, half price so significantly lower value CP/A – No – just friend Relevant time – yes, within 2 years Insolvent – not presumed as no CP/A so office-holder must prove it Defence – perhaps – good faith for carrying on business, benefit to co. Order – if defence unsuccessful, pay remaining value of stock 23 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 8. Transactions at an undervalue 9. Preferences 24 8  10/06/2024 Preferences - s239 Company puts a creditor (or surety of company‘s obligations) In a better position than they would have been In the event of the company going into an insolvent liquidation 25 Preferences s239 Liquidator or administrator Company insolvent at the time or became so as a result RELEVANT TIME company influenced 6 months prior to by desire to onset of insolvency prefer creditor 2 years if to connected Rebuttable presumption that there was persons/associates a desire to prefer if to connected person/associates 26 10. Preferences s239 Unable to prove desire to prefer Defence Such order as the court thinks fit to Sanction restore position 27 9  10/06/2024 Amber Ltd – preference s239 One week before the presentation of the winding up petition, Amber Limited paid off in full one of its unsecured creditors, Red Limited, a company controlled by Amber Limited’s managing director, whilst debts to other creditors remained unpaid. Can the office-holder successfully challenge this payment as a preference under s.239? 28 Amber Ltd - Preferences s239 Preference – yes, Red paid in full (would only have received at most a dividend from liquidator) CP/A – Yes Red = associate of Amber Relevant time – yes, within 2 years Insolvent – likely (1 week before) Desire to prefer – presumed as Red = associate Order – Red to repay amount it received 29 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 8. Transactions at an undervalue 9. Preferences 10. Avoidance of Floating Charges 30 10  10/06/2024 Floating Charges s245 Liquidator or administrator Created at RELEVANT Company insolvent at TIME – 12 months the time or became prior to onset of so as a result insolvency 2 years if to connected person No need to prove insolvency if to connected person but must prove insolvency if granted to unconnected person Debt still valid Charge is void May be voidable as Preference Except to extent of new money paid or goods and services supplied to company 31 Floating Charges s245 Void except to extent of new money paid or goods or services supplied to company on or after creation of the charge Co. pays Co. draws Co. pays in 50K 75K in 25K FC insolvency FC secures 50 “new” money 75 75 O/D 100 only 25 50 32 Amber Ltd – Avoidance of floating charge s245 Four months before the presentation of a winding up petition, Amber Limited’s bank insisted on grant of a floating charge to secure its existing overdraft of £10,000. At the same time, the overdraft facility was increased to a maximum of £25,000. Amber Limited drew on the new limit fully. 33 11  10/06/2024 Amber Ltd - Floating Charges s245 CP/A – No Relevant time – yes, within 12 months Insolvent – must be proved by office-holder New money? – charge valid for £15K BUT – if Amber paid 10K into its bank account after the grant of the charge, it will be valid for entire £25K 34 Lecture Map 1. Introduction 2-4. Director’s liability for fraudulent and wrongful trading and misfeasance 5. Disqualification of Directors 6-7. Voidable Transactions - General 8. Transactions at an undervalue 9. Preferences 10. Avoidance of Floating Charges 11. Transactions defrauding creditors 35 Transactions defrauding creditors s423 Liquidator Supervisor of voluntary Victim or administrator arrangement Transaction at undervalue No relevant time Intention/purpose to put assets beyond reach of creditors Sanction Such order as the court thinks fit to restore position 36 12  10/06/2024 Learning outcomes Directors’ duties/personal liability Disqualification of directors Voidable transactions 37 13