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Directors' Liabilities and Voidable Transactions - Coggle Diagram
Directors' Liabilities and Voidable Transactions
Voidable transactions
Transactions defrauding creditors
Requirements
There has been a transaction at an undervalue and
The intention/purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests
Claim can be brought by either liquidator, administrator, supervisor of a voluntary arrangement or victim of the transaction
Sanctions
Court may make such order as it sees fit to restore the position to what it would have been but for the transaction in question
Preferences
Claim can be brought by liquidator/administrator
A company gives a preference if
That person is a creditor of the company, and
The company does anything or allows anything
to be done which has the effect of putting that
person in a better position in the event of the
company going into insolvent liquidation than
he/she would otherwise have been in
(i.e paying an unsecured creditor in priority
to the others)
A preference is voidable if:
It was given within the relevant time
(6 months preceding the onset of
insolvency being the commencement
of the relevant insolvency procedure)
(relevant time extended to 2 years for
preferences to connected persons
and associates
It is proved that the company was
insolvent at the time of the transaction
or became so as a result of it
It is proved that the company was
influenced by a desire to prefer the creditor
Defence available is in
absence of the desire to prefer
Sanctions
Court has a discretion to make an order to restore the position
Transactions at an undervalue
Claim may be brought by liquidator/administrator
Can be for:
A gift
A transaction for consideration the value of which is significantly less in value than tha consideration provided by the company
Granting of security for no/significantly less consideration
A dividend at an undervalue
Court will set aside a transaction where (1) the company performed a transaction at an undervalue, (2) that took place within the relevant time (2 years preceding the onset of insolvency) and (3) it is proved by the applicant that the company was insolvent at the time of the transaction or became so as a result of it
Defence
No order will be made if the court is satisfied that (1) the company entered into the transaction in good faith and for the purpose of carrying on its business and (2) at the time there were reasonable grounds for believing that the transaction would benefit the company
Sanctions
Court has discretion to make such order as it sees fit to restore the position as if the company had not entered into the transaction
Any such order should not prejudice a subsequent purchaser
HOWEVER
There is a rebuttable presumption that an acquisition by a subsequent purchaser was not in good faith where the subsequent purchaser either (1) had notice of the relevant surrounding circumstances and of the relevant proceedings or (2) was connected with or was an associate of either the company or the party which transacted at an undervalue
Avoidance of
floating charges
Prevents an unsecured creditor obtaining a floating charge to secure an existing loan for no new consideration at the expense of other unsecured creditors
For a floating charge to be invalid:
Must have been created within relevant time (12 months preceding the onset of insolvency) (extended 2 years for a connected person)
Unless the floating charge was granted to a connected person or an associate, must be proved that the company was insolvent at the time of the floating charge's creation or became insolvent in consequence of the transaction under which the charge was created
HOWEVER
A floating charge will be valid to the extent that 'new money' or other fresh consideration is provided to the company in return for the grant of the floating charge on or after its creation
Where a floating charge is
void, only the security is void
and not the debt itself
When a company becomes insolvent, directors need to be careful with how they act as they could be found personally liable to compensate the company and its creditors (liquidators/administrators have power to bring proceedings for compensation against directors personally) if found guilty of one of the following:
Fraudulent trading
A claim can be brought against:
(a) any person
(b) who is knowingly party to the carrying on of any business of the company
(c) with intent to defraud creditors or for any fraudulent purpose
Actual dishonesty
A subjective test
Must be proven for a claim to succeed
Provided at least one creditor has been defrauded, this will be enough to bring a claim
Remedies
Can be ordered to make such contribution to the company's assets as the court thinks proper
Can also make a disqualification order, criminal sanctions, imprisonment up to 10 years, fines
Wrongful trading
Directors under a duty to take every possible step to minimise potential losses to creditors
If they fail, directors can be personally ordered to contribute to the insolvent estate
A claim can be brought against any person who was at the relevant time a director
'Reasonably diligent person' test
Used to determine whether (a) a liquidator/administrator has established that a director ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation/administration and (b) whether the director then took every step to minimise the potential loss to the company’s creditors
With regards to the facts, having both (a) general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the director in question (objective test) and (b) the actual knowledge, skill and experience of that particular director (subjective test)
'Every step' defence
Assuming the company has reached the point of no return, a director may be able to escape inability if they can satisfy the court that they took every step with a view to minimising the potential loss to the company’s creditors (voicing concerns at board meetings, seeking independent financial legal advice)
Requirements
Court must be satisfied that the company has gone into insolvent liquidation and:
at some point before the commencement of the winding up or insolvent administration
the director knew or ought to have concluded that
there was no reasonable prospect that the company would avoid going into insolvent liquidation
Must be proven that:
A. the director in question allowed the company to continue to trade during the period in which they knew/ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation/administration and
B. that the continued trading made the company's position worse
Remedies
Court can order the director make such contribution to the assets of the company as the court thinks fit
Court has discretion to apportion liability between directors based on their culpability by ordering the more culpable directors to pay more
Can also make disqualification order