#14705 - Voidable Transactions - Business Law and Practice

Voidable Transactions

Wrongful Trading

When a director becomes aware that an insolvency liquidation is inevitable, they must do every thing in their power to minimise potential losses to the creditors (s.214). Only liquidator can bring a claim under this part against a director (s.214(1)).

The court must be satisfied that at the point of no return, the director knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation (s.214(2)).

A company goes into insolvent liquidation when the company cannot pay its debts (s.214(6)) which is established using the ‘balance sheet test’ (s.123(2)).

In considering what the director knew, the court will apply the ‘reasonably diligent person’ test under s.214(4) and will consider both:

The general knowledge, skill and experience expected of the director; and

The director’s actual skill, knowledge and experience,

and the court will apply the lower of the two standards.

Every Step Defence

A director may escape liability if they can satisfy the court that from the point of no return, they took every step with a view to minimising the potential loss to the company’s creditors (s.214(3)). Actions which could be taken include:

Voicing concerns at board meetings and ensuring the concerns are documented;

Suggest savings to be made on a day to day basis such has reducing overheads or suspending director’s salaries;

Request the board does not incur any new credit if possible;

Seek independent financial or insolvency advice.

The director cannot escape liability by simply resigning.

Consequences for the Director

The court can order the director to make personal contributions to the assets of the company (s.214(1)) which would increase the available assets to the creditors. The amount contributed will be based upon the additional depletion of assets caused by the director’s conduct.

The director can also be disqualified under s.10 CDDA for a period of up to 15 years. This can also be considered under s.6 CDDA if the director is unfit to manage a company.

Misfeasance

If a director breaches one of their duties, s.212 provides a summary procedure for dealing with this. A claim can be bought by any creditor or liquidator (s.212(3)) against any officer or director of a company (s.212(1)).

The director must have either: misapplied money or assets in a company, breached their statutory duties (ss.171-177); transacted at an undervalue or at a preference; or breached their duty to exercise reasonable care and skill (s.174).

Ratification & Reasonableness

If the shareholders ratify the breach under s.239 CA then this will absolve the directors from personal liability, unless the company is on the bring of insolvency in which case ratification cannot be used. This is because the duty held by the directors in favour of the shareholders transfers in favour of the creditors.

Where the court is satisfied that the director acted honestly and reasonably, the court can, having regard to all the circumstances excuse the director from liability (s.1157 CA). This can only apply where the claim is not bought by the creditors.

Consequences for Directors

The court will examine the conduct of the director and can make an order for repayment or contribution to the company’s assets. The court can also consider misfeasance when making a decision on unfitness under s.6 CDDA.

Transactions at an Undervalue

If the company enters into a transaction at an undervalue it can be held to be voidable under s.238. Only a liquidator with sanction from the court or creditors can make an application (s.238(1)).

A transaction at an undervalue is either a gift or a transaction for substantially less consideration (s.238(4)). In order for the transaction to be voidable, the liquidator will need to establish:

The transaction took place within the relevant time (s.238(2)) which is two years from the onset of insolvency (which is defined as when the company is unable to pay its debts - s.240(3)).

The company was insolvent at the time at the time of the transaction or became insolvent as a result of it (s.240(2)). If the transaction is with a connected person (s.249) or associate (s.435) then insolvency is presumed and the burden of proof shifts to the director to establish this (s.240(2)).

Defence

No order can be made if s.238(5) can be established: the company entered into the transaction in good faith and for the purpose of carrying on the business (s.238(5)(a)) and there were reasonable grounds to believe the transaction would benefit the company (s.238(5)(b)).

Consequences

If the liquidator is successful the court will likely make a restoration order (s.241(1)(d)) which aims to put the company back into the position they would have been in if the transaction had not been entered into (s.238(3)).

Transactions at a Preference

If a company allows a creditor to obtain an improper advantage over other creditors it can be voidable under s.239. Only a liquidator with sanction from the court or creditors can make an application (s.298(1)).

A company gives a preference if the company puts the creditor in a better position than they would have been in (s.239(4)). The liquidator will need to establish the following for the transaction to be voidable:

The transaction took place within the relevant time (s.239(2)) which is 6 months from...