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For a director to be liable, the court must be satisfied that:
o
At some point prior to winding-up (‘point of no return’);
o
The director knew, or ought to have conclude that;
o
There was no reasonable prospect of avoiding insolvency
Remember: Companies go insolvent when its assets are insufficient to pay
their debts and other liabilities
Insolvency is therefore judged on the ‘balance-sheet’ test rather than the
‘cash-flow’ test

Defences:
•

s
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246ZB (3) IA: The ‘Every-Step’ Defence:
o
A director may escape liability, if he can prove that after he
knew there was no reasonable prospect of avoiding insolvency,
he took every step with a view to minimising the potential loss
to the company’s creditors, such as:
▪
Voicing concerns at board meetings
▪
Seeking independent financial & legal advice
▪
Ensuring up-to-date financial info is available
▪
Suggesting reductions in overheads/liabilities
▪
Not incurring further credit/debt

s
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246ZB (4) IA: The ‘Reasonably Diligent Person’ Test:
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This test determines whether D is liable, two step test:
o
L or A has established that a director ought to have concluded
there was no reasonable prospect of avoiding insolvency; and
o
Whether a director took every step to minimise the loss to the
creditors
Under this test the court apply the higher standard of knowledge test upon
the director in question, choosing between;
o
The general knowledge, skill and experience that may be
expected of any person carrying out the same functions as
carried out by D in question (objective test); and
o
The actual knowledge, skill and expertise of the specific D in
question (subjective test)

Sanction:
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Persons found labile under section can be required to contribute to assets
of the company as the court thinks proper (not penal, only restoration)
s
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B1 IA)
Misapplication of money or assets in the company
Breach of statutory provision, for example;
o
Unlawful loans to directors
o
Undisclosed interest in transactions (s
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190 CA)
o
Failing to act within powers (s
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238 IA) or at a preference (s
...
e
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174 IA)

s
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4 & s
...
4)
& unfit conduct of directors of insolvent companies (s
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238:
Transaction
at
Undervalue
s
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245:
Avoidance
of floating
charge

Unconnected
Person
Connected
Person

Relevant
Time (prior
to onset of
insolvency)

Insolvency
required at
date? (or
because of
transaction)

2 years

Yes

No
Yes

Unconnected
Person

6 months

Connected
Person

2 years

Unconnected
Person

12 months

Yes

Connected
Person

2 years

No

No rel
...
423
Transaction defrauding
creditors

Presumption
available?
(if yes =
burden of
proof shifts)

No
Yes
Yes

No

Yes

s
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435 IA)
s
...
238 IA, s
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245 IA
s
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245(5) IA: ‘Onset of insolvency’ (administration: date of filing the
application, liquidation: date of MVL/CVL GM resolution (s
...
238 IA)
Who can bring a claim?
•

s
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238(4) IA: a gift; or a transaction for a consideration the value of which, in
money or money’s worth, is significantly less than the consideration
provided (a comparison between value and cost)

Sanction:
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AVOIDANCE OF FLOATING CHARGES (S
...
238(2) IA):
▪
2 years preceding the onset of insolvency (s
...
240(2) IA)
▪
Insolvency presumed for connected persons: may be
disproved by said connected persons)
s
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241 IA: provides a non-exhaustive list of the types of restoration order a
court may make under s
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241(2) IA: Any such order should not prejudice a subsequent purchaser of
the undervalued goods, provided they acted in good faith
o
s
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239(4) IA: A company gives preference to a person if:
1) That person is a creditor; and
2) The company does anything or allows/suffers anything to put
that creditor in a better position
The court may set aside the transaction as undervalue if;
o
It took place within the ‘relevant time’ (s
...
240(1)(b) IA) (unconnected persons)
▪
2 years preceding onset of insolvency (s
...
240(2) IA)
▪
No statutory presumption of insolvency
o
It is proved that the company was ‘influenced by a desire to
prefer the creditor’ (s
...
239(6) IA)

Defence:
•

s
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239(5) IA:
o
Need not prove intention (objective) merely only desire
(subjective)

Claims under s
...
238 IA) will also fulfil the requirements of
s
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423(3) IA: It must additionally be proven under s
...
238 IA are preferred

Who can bring a claim?
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When and how can the Preference be avoided?
•

Charge is void if it is not registered at CH under s
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239 IA

TRANSACTIONS DEFRAUDING CREDITORS (S
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239(1) IA: Only a liquidator or administrator may make an application to
court challenging a preference

s

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