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Voidable Transactions Notes

LPC Law Notes > Business Law and Practice Notes

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

1. 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.

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