Directors' Liability in Insolvency Flashcards
Who can Sue for Fraudulent Trading?
- Liquidators.
- Administrators.
Who can be Sued for Fraudulent Trading?
- The Director; and
- Anyone involved in the Firm’s allegedly Fraudulent Activity.
What are the Elements of Fraudulent Trading?
Actual Knowledge of the Activity:
- The Person was Knowingly Party to the Firm’s Activity.
Intent to Defaud:
- The Activity was Intended to achieve a Fraudulent Purpose.
- This implies Actual Dishonesty.
What constitutes Dishonesty for Fraudulent Trading?
Subjective Belief or Knowledge:
- Determine the Defendant’s Actual Belief or Knowledge when about the facts when the Act was done and its consequences.
- Reasonableness is only relevant to informing whether Belief or Knowledge were genuine, even then, it is not determinative.
Objective Dishonesty:
- Judge whether the Defendant’s Conduct, given its Belief or Knowege, was Dishonest by the standards of ordinary decent people.
What are the Penalties for Fraudulent Trading?
Civil Liability:
- Disqualification Order.
Criminal Liability:
- Unlimited Fines.
- Imprisonment for up to 10 Years.
What is the Remedy for Fraudulent Trading?
Contribution to the Firm’s Assets as the Court sees fit.
Compensatory, not Punitive.
Who can Sue for Wrongful Trading?
- Liquidators.
- Administrators.
Statute allows Wrongful Trading Claims to be Assigned to Third Parties.
Who can be Sued for Wrongful Trading?
The Board at the relevant time, including:
- Shadow Directors.
- De Facto Directors.
- Executive Directors.
- Non-Executive Directors.
What are the Elements of Wrongful Trading?
Entry into Insolvent Liquidation or Administration:
- The Firm has entered Insolvent Liquidation or Administration.
- This means the Firm entered either Procedure when its Assets exceed its Liabilities and Insolvency Expenses.
Awareness of Insolvency:
- The Director(s) knew, or ought to have known, that the Firm had no reasonable prospect of avoiding Insolvency.
- The moment the Director(s) realised, or ought to have realised, the Firm’s position is the ‘Point of No Return’.
Failure to Cease Trading and Minimise Losses:
- The Director(s) allowed the Firm to continue Trading past the Point of No Return; and
- In doing so, worsened the Firm’s position.
Regarding Wrongful Trading, what is the Every Step Defence?
From the Point of No Return, the Director(s) took every step it ought to have to minimise Losses to Creditors.
Examples include:
- Reducing Liabilities.
- Avoiding New Credit.
- Considering Insolvency.
- Maintaining Accurate Financial Records.
- Expressing Concerns at Board Meetings.
- Actively Monitoring the Firm’s Financial Position.
- Obtaining Independent Legal and Financial Advice.
What are the Applications of the Reasonably Diligent Person Test?
To determine whether the Director(s):
- Had Constructive Knowledge of the Point of No Return; or
- Satisfy the Every Step Defence.
What are the Elements of the Reasonably Diligent Person Test?
Objective Limb:
- What would a Reasonably Diligent Person, with the general skill, knowledge, and experience expceted of a Director, have done?
Subjective Limb:
- What could be expected of the particular Director, given its actual skill, knowledge, and experience?
The Court takes the higher standard.
What is the Penalty for Wrongful Trading?
Disqualification Order.
What is the Remedy for Wrongful Trading?
- Contribution to the Firm’s Assets as the Court sees fit; to which end,
- The Board can be held Jointly and Severally Liable.
§1157 Disapplies.
Compensatory, not Punitive.
§1157 grants Relief if the Director acted honestly and reasonably.
