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Creditor's position in the case of company's insolvency - Coursework Example

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Creditor's position in the case of company's insolvency Introduction The instant case involves the question of the recovery of loans advanced to Norma-Creations Ltd by Cashbank ? 100,000 on “fixed charge” basis on fixed assets and “floating charge” basis on stock in trade and ?…
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Creditors position in the case of companys insolvency
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Download file to see previous pages mpany had already started showing signs of insolvency prior to availing of the said loans. Section 213 of Insolvency Act 1986 and section 993 of Companies Act 2006 (CA) refer to fraudulent trading. Section 214 of Insolvency Act 1986 refers to wrongful trading. These are the provisions which can be invoked against the company, its directors and others concerned for relief to the creditors.2 Besides, other provisions of Insolvency act are to be followed for realisation and pro-rata payments to all the classes of creditors of the company. Section 993 of the CA stipulates that it is an offence to continue to carry on business of a company intentionally to defraud creditors of the company or any other person or for any fraudulent purpose. Every person who is a party to above said acts is deemed to have committed an offence.3 Section 213 of Insolvency Act stipulates that if fraudulent trading is found to have been committed as above during the course of the winding up of a company, those who were knowingly parties to the above said offence shall be liable to contributions to the company’s assets as may be ordered by the court on the application of the liquidator.4 Section 214 of Insolvency Act stipulates that it is a wrongful trading committed by a director of a company and therefore a court can make a declaration that he is liable to make contribution to the assets of the company, if he has failed to make proper conclusions and take steps necessary for discontinuing the business knowing full well that the company’s going into insolvent liquidation was unavoidable. It is subject to the condition that company has gone into liquidation and that the person was a director of the company at that time. However, section 214 (3) stipulates that the court shall not pass any such declaration if the director has taken all possible steps to minimise potential loss to the creditors of the company. The director also includes a shadow director. This section is without prejudice to section 213 above.5 Fixed charge and Floating charge It is a means of creating security over specified or unspecified asset or property. Fixed charge is one which is fastened on an ascertained and defined property or a property capable of being ascertained and defined. In this case, the chargor is not free to deal with the property without the consent of the chargee. A floating charge is one which fastens on assets which the chargor can freely deal with, without the consent of the chargee. Thus fixed charge is generally on fixed asset, long-term asset or immovable property whereas floating charge is on movable property such as stock in trade. However, to decide whether one is a floating charge or fixed charge, it depends on the instrument of charge which spells out the intention of the parties regarding their mutual rights and obligations over the assets charged. Therefore mere labelling as fixed or floating will not prevent a court from treating a charge otherwise.6 Directors’ duty towards creditors Director’s duty is to act in good faith so as to promote success of the ...Download file to see next pagesRead More
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