Liability of Directors - Fraudulent Trading Flashcards
Which sections of the Insolvency Act 1986 apply here?
s213(2) and s246ZA
Who can a claim for 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
What is the difference between s213 and s246ZA?
213 = liquidation 246ZA = administration
What type of liability is imposed by s213 and s246ZA?
Civil liability to contribute to the funds available to the body of unsecured creditors suffering loss caused by the carrying on of the company’s business with intent to defraud
Where is the corresponding criminal claim for fraudulent trading found?
s993 Companies Act 2006
What must be proven for a claim for fraudulent trading to succeed?
Actual dishonesty
Case for definition of dishonesty for s213?
Re Patrick and Lyon Ltd [1933]
Re Patrick and Lyon Ltd [1933]?
Test for dishonesty for fraudulent trading under s213
What is the test of Re Patrick and Lyon Ltd [1933]?
Real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame
Case for knowledge including ‘blind eye knowledge’?
Morris v State Bank of India [2005]
Morris v State Bank of India [2005]
Case confirming blind-eye knowledge is considered knowledge
What is blind-eye knowledge?
A suspicion of the relevant facts together with a deliberate decision to avoid confirming that they did exist
Must all creditors be defrauded for a fraudulent trading claim to stand?
No, one is sufficient - Re Gerald Cooper Chemicals Ltd [1978]
Re Gerald Cooper Chemicals Ltd [1978] ?
Case confirming defrauding one out of several creditors is sufficient
Remedies?
A person found to be liable under s 213 / 246ZA can be ordered to make such contribution to the company’s assets as the court thinks proper NOT PUNATIVE
Morphitis v Bernasconi [2003]
The court does not have the power to include a punitive element in the amount of any contribution to be made. The contribution should only reflect and compensate for the loss caused to the creditors
The court does not have the power to include a punitive element in the amount of any contribution to be made. The contribution should only reflect and compensate for the loss caused to the creditors
Morphitis v Bernasconi [2003]
What also happens if a fraudulent trading order is made against a director?
The court is likely also to make a disqualification order under s 10 CDDA 1986
What are the criminal sanctions under s993 Companies Act 2006?
The penalties are imprisonment (of up to 10 years on indictment) and/or fines.
Why are fraudulent trading claims s213 significantly rarer that wrongful trading claims under s214?
In practice, a very high standard of proof is required for a successful claim in fraudulent trading, which is likely to be extremely difficult for a liquidator or an administrator to establish
