Appendix 3 – Legal Risks in Turnaround Finance

Important notice: This schedule is merely an indicative schedule of the additional legal issues of turnaround finance. It is illustrative only, and is not intended to be comprehensive. Specialist legal advice should be taken as part of all turnaround finance transactions.

Legal
Issue

Legislation
(ref below)

IA
– Insolvency Act

CA
– Companies Act

And
common law

Explanation
of circumstances giving rise to concern in Turnaround Finance
Potential
Risk (Y/N)

Transaction
voidable

Personal
liability for directors and shadow directors

Misconduct
resulting in directors disqualification

Litigation
against finance provider

Transaction
at an Undervalue

s238
IA 86

Transaction
creates a gift or undervalues consideration.

y

n

y

y

Preference

s239
IA 86

Transaction
puts one creditor in preferential position.

y

n

y

y

Extortionate
credit transactions

s244
IA 86

Transaction
requires grossly exorbitant payments or grossly contravenes ordinary
principles of fair dealing.

y

n

y

y

Avoidance
of floating charge

s245
IA 86

If
floating charge registered after new monies introduced, floating charge
could be voidable.

y

n

n

n

Transactions
defrauding creditors

s423
IA 86

Transaction
creates a gift or undervalues consideration and transaction puts assets
beyond reach of creditors and/or prejudices the interests of creditors.

y

n

y

y

Substantial
property transactions

s320
CA 85

Transactions
with directors (and connected parties) of greater than 10% of the company’s
net asset value and/or £50,000 require approval of a general meeting
of a company.

y

y

y

y

Fraudulent
trading

s213 IA
86

Trading
carried on with intent to defraud creditors.

y

y

y

y

Wrongful
trading

s214
IA 86

Directors
allow company to continue trading while (knowingly) insolvent.

n

y

y

y

Restriction
of re-use of business name

s216
IA 86

Transaction
facilitates new company re-using a restricted business name of liquidated
company.

n

y

y

y

Fraud
and deception

s206-s211
IA 86

Transaction
creates fraud and/or deception.

n

n

y

y

Sale
lang=EN-GB style=’font-family:Arial’> to a connected party

Statement
of Insolvency Practice 13 (SIP 13)

Transaction
funds a buy out of the business and assets to a connected party that
does not comply with SIP 13.

?

?

?

y

Misfeasance
and breach of duty

Common
law and s212 IA 86

Committing
an act of misfeasance or breach of fiduciary duty or a breach of some
other duty, including breach of the above listed sections.

Y

y

y

y

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