Liability of Directors - Fraudulent Trading

Question 1

Which sections of the Insolvency Act 1986 apply here?

Answer 1

s213(2) and s246ZA

Question 2

Who can a claim for fraudulent trading be brought against?

Answer 2

•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

Question 3

What is the difference between s213 and s246ZA?

Answer 3

213 = liquidation
246ZA = administration

Question 4

What type of liability is imposed by s213 and s246ZA?

Answer 4

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

Question 5

Where is the corresponding criminal claim for fraudulent trading found?

Answer 5

s993 Companies Act 2006

Question 6

What must be proven for a claim for fraudulent trading to succeed?

Answer 6

Actual dishonesty

Question 7

Case for definition of dishonesty for s213?

Answer 7

Re Patrick and Lyon Ltd [1933]

Question 8

Re Patrick and Lyon Ltd [1933]?

Answer 8

Test for dishonesty for fraudulent trading under s213

Question 9

What is the test of Re Patrick and Lyon Ltd [1933]?

Answer 9

Real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame

Question 10

Case for knowledge including ‘blind eye knowledge’?

Answer 10

Morris v State Bank of India [2005]

Question 11

Morris v State Bank of India [2005]

Answer 11

Case confirming blind-eye knowledge is considered knowledge

Question 12

What is blind-eye knowledge?

Answer 12

A suspicion of the relevant facts together with a deliberate decision to avoid confirming that they did exist

Question 13

Must all creditors be defrauded for a fraudulent trading claim to stand?

Answer 13

No, one is sufficient - Re Gerald Cooper Chemicals Ltd [1978]

Question 14

Re Gerald Cooper Chemicals Ltd [1978] ?

Answer 14

Case confirming defrauding one out of several creditors is sufficient

Question 15

Remedies?

Answer 15

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

Question 16

Morphitis v Bernasconi [2003]

Answer 16

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

Question 17

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

Answer 17

Morphitis v Bernasconi [2003]

Question 18

What also happens if a fraudulent trading order is made against a director?

Answer 18

The court is likely also to make a disqualification order under s 10 CDDA 1986

Question 19

What are the criminal sanctions under s993 Companies Act 2006?

Answer 19

The penalties are imprisonment (of up to 10 years on indictment) and/or fines.

Question 20

Why are fraudulent trading claims s213 significantly rarer that wrongful trading claims under s214?

Answer 20

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