From: A. Trainee
To: G. Lewis and J. Woodhall
Re: Insolvency Litigation
Further to your documentation received, I have looked into the queries mentioned in the memorandum. I have researched into the corporate insolvency and litigation with particular reference to the actions of Insolvency Practitioners (IP), specific sanctions they require before taking those actions and impact of Jackson Reforms in Insolvency Litigation along with the Research Log. I have provided detailed information below.
1) Insolvency Practitioners actions for :
Transactions at Undervalue
The claims of transactions at undervalue can be pursued by liquidators and administrators under s.238 Insolvency Act 1986. A company enters into administration or goes into liquidation because a transaction restricts a company to pay its debts or the company cannot pay its debts at the time of transaction. At that moment, the liquidator or administrator can apply to the court for an order to avoid every transaction made at an undervalue with a connected person, if the transaction was made in the two years’ time before the company goes into administration or liquidation as mentioned under s.240 IA 1986.
Transactions at Preferences
The administrator or liquidator can take action for the transaction of preference under s.239 Insolvency Act 1986. When a company credits to one creditor in full and no payment is paid to the other creditor, unnecessary gratuitous payments are made to the employees. The amount paid for the services in the company is significantly more than its original value and the company grants security in respect of existing debts.
At that moment, a preference can only be resolved if the company enters into administration or goes into liquidation. The Preference is initiated within six months prior to liquidation or administration or two years for the transactions with connected persons as mentioned under s.240 IA 1986. When a company cannot pay its debts due to preferences, it may prevent further payment due to being under preferences. Then administrator or liquidator makes an application to the court for an order.
The liquidator has the power to bring action for wrongful trading under s. 214 Insolvency Act 1986. When a company goes into liquidation, liquidator has a duty to examine the reasons for a failure of a company, investigate the directors or shadow directors who have not acted reasonably and to prove sustained trading by the directors even after the establishment of liquidation. The liquidator has to set up a date to show the insolvency of that company. Moreover, liquidator has to prove to the court that director’s actions to continue trade even after liquidation was unreasonable. However, if wrongful trading is proved, liquidator will get a court order to directors who will be ordered to pay to the company in liquidation.
Transactions Defrauding Creditors
The liquidator or administrator can bring an action for transactions defrauding creditors under s.423 and 424 Insolvency Act 1986. When the company is in liquidation or bankruptcy, the liquidator or administrator first have to attain orders from the court to take any action. Though, a company does not have a compulsion to undergo formal insolvency process. An application can also be made by a ‘victim’ (creditors) of the transaction or supervisor of a voluntary arrangement against the company.
Breach of Directors’ Duties
The liquidator can bring an action against breach of directors’ duties under s.212 Insolvency Act 1986. When a company goes into insolvency, the liquidator has a duty to investigate claim against a director for his breach of duties. That claim by liquidator will be considered as an asset of the company and will be followed and practiced for creditors’ benefit.
2) Sanctions required by IPs:
Under compulsory liquidation, sanction may be granted to the liquidator by the court, the liquidation committee1 or when there is