Fraudulent and wrongful trading Flashcards
What is a fraudulent trading?
A claim against any person knowingly party to the carrying on of any business of the company with intent to defraud creditors or for any fraudulent purpose.
What must be proven in cases of fraudulent trading?
Actual dishonesty needs to be proven, which is difficult.
On what basis is dishonesty assessed in fraudulent trading cases?
Dishonesty is assessed on a subjective basis – what the person knew or believed.
Ivey v Genting Casinos
What must be demonstrated regarding a director’s knowledge in fraudulent trading?
The director’s subjective state of knowledge must be demonstrated.
What can those liable for fraudulent trading be forced to do?
Make a contribution to the company’s assets.
Can the court include a punitive element in the penalties for fraudulent trading?
No, the court has no power to include a punitive element.
What other orders can be likely made against those found liable for fraudulent trading?
A disqualification order and criminal sanctions may be brought
Why is there much more wrongful trading in practice?
Due to the high burden of proof for fraudulent trading.
What is wrongful trading?
A claim brought by a liquidator or administrator against a director for allowing a company to continue trading while insolvent.
Who can bring a wrongful trading claim against whom?
Liquidator/administrator can bring a claim against any person who was a director at the relevant time.
What are the requirements for wrongful trading?
- The company has gone into insolvent liquidation.
- The director knew or ought to have known that
- there was no reasonable prospect of avoiding insolvent liquidation.
Therefore must be proved that the director allowed the company to continue trading in the period where they knew/ought to know that there was no reasonable propsect that the company would avoid going into insolvency
What is the insolvency test for wrongful trading?
Balance sheet ONLY
What is the reasonably diligent person test?
- Objective - the generaly knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of that director
- Subjective - the actual knowledge, skill and experience of that director
The court will apply the higher standard.
What are some defences against wrongful trading claims?
If the director can prove they took every possible step to minimise potential losses to creditors.
What steps can a director take to defend against wrongful trading claims?
- Voicing concerns at board meetings.
- Seeking advice.
- Ensuring adequate financial information.
- Suggesting reductions in overheads/liabilities.
- Negotiating with creditors.
Detail in the board meetings what steps being taken
What remedies are available for wrongful trading?
- Contribution for contribution.
- Disqualification order.
Is relief available from negligence proceedings in wrongful trading?
No, relief is not available even if the director acted honestly and reasonably.
