Question 1

Devon Heaven Ltd, trading as a holiday lettings agency, was incorporated early in 2015.  The company is now in compulsory winding up: the winding up order was made on 10th May 2018 on a creditor’s petition presented on 28^th February 2018. Petrock has been appointed liquidator.

Devon Heaven Ltd had an issued share capital of £100.  Trading was initially funded by a loan from Southwest Bank plc (guaranteed by Devon Heaven Ltd’s directors) and further personal loans from Devon Heaven’s directors. 

The company made a small profit during its first Spring/Summer season in 2015, but made losses through Autumn and Winter 2015-16.  Again a small profit was made during the Spring/Summer of 2016, but further (larger) losses were made during the Autumn/Winter.  At the end of 2016 the directors took the decision to keep trading in the expectation of larger profits during the summer of 2017 and consistently sought early payment of holiday balances from customers while delaying paying creditors to improve cashflow.  Unfortunately business was slow throughout 2015, and although the directors borrowed further money (from family members) in order to advertise more widely the business continued to decline and traded at a loss throughout the year and into 2018.

Petrock has discovered that on 5^th November 2017 the company paid off its bank loan.  On 8^th January 2018 the company transferred its office equipment to another company, Cornland Cottages Ltd, which has the same shareholders and directors as Devon Heaven Ltd.

Advise Petrock:

• Whether action should be brought against the directors for wrongful or fraudulent trading,
• What action, if any, should be taken in respect of the transactions on 5^th November 2017 and 8^th January 2018, and
• Whether there are any matters that he should bring to the attention of the disqualification unit and the significance of these matters.

Answer guidance

For the first point you need to consider IA 1986, s. 213 (fraudulent trading) and s. 214 (wrongful trading). Explain both, clearly distinguishing between them. Work through the provisions, considering cases such as Re Produce Marketing Consortium Ltd [1989] 2 BCLC 520, and apply carefully and explicitly to the facts. Remember for s. 214 to consider what the directors knew or should have known, and when. Reflect on who brings the action, and the measure of any liability.

For the transactions, you should be focusing on preferences (IA 1986, s. 239) for the first transaction – considering potential preferences of both the bank and the directors -  and transactions at an undervalue (IA 1986, s. 238) for the second transaction. Explain the requirements of each provision, and apply to the facts. Be careful with the dates when discussing the relevant times, recognising that the period runs to the petition date, not the date of the winding up order.

On the final point you need to consider disqualification under CDDA 1986. Focus on disqualification for unfitness under CDDA 1986, s. 6, and look at potential unfit behaviour, in particular trading at creditors’ risk. Cases such as Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 should be considered. You should also recognise that a successful claim of wrongful trading can also lead to disqualification under CDDA 1986, s. 10.

Question 2

The Cork Report (‘Insolvency Law and Practice’, Cmnd 8558, 1982) expressed the view that corporate insolvency law should be “simple and easily understood [and] ... free from anomalies and inconsistencies.” 

Critically discuss the extent to which this aim is achieved in relation to transactions prior to the commencement of the winding up that are challengeable by the liquidator.

Answer guidance

It would be helpful, in order to put your discussion in its context, to explain what the Cork Report was, what it sought to do, and the overall law reform that resulted from the report. Don’t spend too long on this though – focus on transaction avoidance.

Explain which transactions fall within the scope of the question. Depending on the emphasis of your course, this should cover transactions at an undervalue (IA 1986, s. 238), preferences (IA 1986, s. 239), and voidable floating charges (IA 1986, s. 245). You should explain the meaning of ‘commencement of the winding up’ and the relevance of this to the applicability of these provisions, and why therefore IA 1986, s. 127 (dispositions) is not within the scope of the question. Other provisions such as transactions defrauding creditors (IA 1986, s. 423) and extortionate credit transactions (IA 1986, s. 244) should also be mentioned.

Rather than explaining each provision in depth, consider factors relevant to their complexity, inconsistency etc. To do this well you will need to consider what each provision is aiming to achieve – what is the mischief at which it is aimed. With that in mind, consider whether each provision does enough (and just enough) to achieve that aim.  Particular areas worthy of discussion are the ‘good faith’ defence (s. 238(5)) and the ‘desire to prefer’ (s. 239(5)). Cases such as Re MC Bacon Ltd [1990] BCLC 324 need to be discussed. Further areas that should be examined (and contrasted between provisions) are the rules for relevant times, the position of the connected person, and the different presumptions.