13 - BL - Corp insolve & Dir Flashcards
What are the implications for the directors if a company becomes insolvent?
They may be personally liable to compensate the company and its creditors if found guilty of:
- Fraudulent trading 👺
- Wrongful trading 😳
Who can bring a claim of Fraudulent trading?
A Liquidator or Administrator 💦
Who can a claim of Fraudulent trading be brought against?
- any person
- who is knowingly party to the carrying on of any business of the company
- with intent to defraud creditors or for any fraudulent purpose
Do all the creditors need to have been defrauded for a claim of Fraudulent trading be brought?
No
Is the dishonest criteria objective or subjective?
Subjective - what the particular person knew or believed. 🤔
Knowledge includes blind-eye knowledge - (suspicion of the relevant facts with a decision to avoid confirming that they did exist).
What are the remedies for Fraudulent Trading?
- A person can be ordered to make such contribution to the company’s assets as the court thinks proper. 💰
- Not punitive - contribution should only reflect the loss caused to the creditors.
- Any sums recovered are held on trust for the unsecured creditors generally and not for the defrauded creditor.
- Where the person is also a director, the court is likely also to make a disqualification order. ❌🎩
- Criminal sanctions can be imposed by the court. 👮
The penalties are
- imprisonment (of up to 10 years on indictment) and/or
- fines.
Who can bring a claim of Wrongful trading?
Liquidator or Administrator 💦
Are there criminal sanctions for wrongful trading?
No
What are the duties of directors in respect of wrongful trading?
- When directors become aware (or ought to become aware) that an insolvent liquidation/administration is inevitable,
- they are under a duty to minimise the potential losses to the company’s creditors.
What must be shown to demonstrate that the directors failed in their duty in respect of wrongful trading?
the director in question:
- allowed the company to continue to trade
- during the period in which they knew or ought to have known that
- there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration, and
- that the continued trading made the company’s position worse.
What is the defence against wrongful trading?
the director took every step with a view to minimising the potential loss to the company’s creditors.
What standard is applied when considering the ‘ought to have known’ element
reasonably diligent person, with the higher of:
- general knowledge of a director, or
- actual knowledge of the director
What if the directors fail in their duty in respect of wrongful trading?
The court can order the directors to contribute (as the court see proper) to the insolvent estate.
- Not punitive - contribution should only reflect the loss caused to the creditors.
Is intent or dishonesty required to prove wrongful trading?
No
Against whom can a claim for wrongful trading be brought?
Directors and shadow directors