Remedies for Mismanagement of Companies Flashcards
Insolvency Act 1986, s.213
In winding up the court may, on the application of the liquidator, declare persons who were knowingly party to the carrying on of business with intent to defraud creditors liable to make such contribution to the company’s assets as the court thinks property
Companies Act 2006, s.993
S.213 is also a criminal offence
This has impacted how the court’s interpret “intent to defraud” as including some dishonesty
Re William C Leith Bros Ltd (No.1) [1932] 2 Ch 71
“… if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud” per Maugham J
R v Grantham [1984] QB 675 CA
“What the judge in the present case was doing was… directing the jury that it was possible for them, if they thought fit, to come to the conclusion that the appellant was acting dishonestly and fraudulently if he realised at the time when the debts were incurred that there was no reason for thinking that funds would become available to pay the debt when it became due or shortly thereafter. We do not think that the judge was in error in this direction.” per Lord Lane CJ
Re Sarflax Ltd [1979] Ch 592
Case: In April 1971 S Ltd, being sued in Italy, ceased trading and transferred most of its assets to its parent company, payment for the assets being by way of set off against debt owed by S Ltd to parent company; over next two years remaining assets realised and proceeds paid to creditors; in September 1973 S Ltd wound up and in November judgment given to Italian creditor
Decision: Not fraudulent trading as simply preferring one creditor over another was within a man’s rights of discharge (time limit means unable to consider preferences)
Morphitis v Bernasconi [2003] Ch 552 CA
Case: Company wished to carry on business but end its liability under a lease; on legal advice business of the company transferred to a new company; for twelve months old company continued to incur liability under lease and landlord was dissuaded from taking proceedings; after twelve months old company wound up; lease disclaimed and landlord proved for losses from disclaimer; liquidator sued directors and solicitor for fraudulent trading
Decision: Not fraudulent trading as the Act is not engage in every case where an individual creditor of a company had actually be defrauded, but only where that business had been carried on with intent to defraud its creditors; the business had been carried on through 1993 with an intent to protect the former directors from the penalties; although intention to mislead the landlord there was not intention to defraud
N.B. Advantage of legal advice suggests not dishonest, seems bizarre as they obviously knew what they were doing
Re Maidstone Building Provisions Ltd [1971] 3 All Er 363
Rule: Secretary may be made liable
Re Gerald Cooper Chemicals Ltd [1978] Ch 262
Case: J Ltd lent £150,000 to GCC Ltd to build a factory to produce indigo; became clear GCC Ltd insolvent and would never produce indigo but GCC Ltd contracted to sell indigo to H and received £125,000 in advance; same day £110,000 repaid to J Ltd; when GCC Ltd in liquidation proceedings brought against J Ltd for fraudulent trading
Quote: “I agree that a lender who presses for payment is not party to a fraud merely because he knows that no money will be available to pay to him if the debtor remains honest. The honest debtor is free to be made bankrupt. But in my judgment a creditor is party to the carrying on of business with intent to defraud creditors if he accepts money which he knows full well has in fact been procured by carrying on the business with intent to defraud creditors for the very purpose of making the payment. Counsel for the respondent said truly that s.213 creates a criminal offence and should be strictly construed. But a man who warms himself with the fire of fraud cannot complain if he is signed.” per Templeman J
Re Augustus Barnett & Sons Ltd [1986[ BCLC 170
Case: Directors of AB, subsidiary of Rumasa SA, were advised they risked fraudulent trading unless additional finance obtained; funds obtained from another subsidiary of Rumasa and Rumasa itself gave assurances of support for AB, widely publicised at press conference; Rumasa later needed its support and AB in liquidation; proceedings brought against Rumasa for fraudulent trading i.e. proceedings brought against shareholder
Decision: There was no allegation that the board of the company had carried on the company’s business with intention to defraud creditors so there was no basis that Rumasa could be asserted as carrying on of the company’s affairs with a fraudulent purpose; no reasonable cause of action
Insolvency Act 1986, ss.214(1)-(4)
(i) in an insolvent liquidation the court may, on the application of the liquidator, declare a person liable to make such contribution to the company’s assets as the court thinks proper if
(ii) at some time before commencement of winding up, at a time when the person was a director, he knew of ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation unless
(iii) the court is satisfied that thereafter he took every step with a view to minimising the potential loss to creditors he ought to have taken
(iv) what a director ought to know or have concluded or does depends on:
- what a reasonable director carrying out similar functions in that type of company would know, conclude or do and
- the general knowledge, skill and experience of that director
(2 tests)
Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520
Case: From 1981 PMC traded at a loss; its annual accounts were often prepared late and the accounts for the year ending 30 Sept 1985, which should have been ready by 31 July 1986, were not available until Jan 1987; at the end of 1986 PMC was exceeding its overdraft limit and a number of cheques were returned unpaid; in Feb 1987 auditors warned the directors of the possibility of fraudulent trading liability; PMC went into creditors’ voluntary liquidation on 2 Oct 1987; liquidator sought order that its directors contribute £107,946
Decision: Liquidator one; rate of assessment for future at the date that accounts should have been produce by (what would have/should have been known based on these accounts)
Rules:
- Tips to avoid WT:
- Prepare accounts on time
- Get professional advice
- Be open and honest with creditors (administration order facilitates this if creditors are unhappy or voluntary arrangement) - Measure of compensation is extent to which assets depleted by directors’ conduct
Insolvency Act 1986, s.214(6)
“Insolvent liquidation” is assessed on balance sheet insolvency
Insolvency Act 1986, s.214(1)
Directors can be made liable
Insolvency Act 1986, s.214(7)
Shadow directors can be made liable
(i.e. persons “in accordance with whose directions or instructions the directors of the company are accustomed to act”: s.251)
Re a Company (No005009 of 1987) ex parte Copp [1989] BCLC 13, 14-18
Case: Summons brought by Co, receiver under a debtor dated 20 May 1987 in favour of NWB; liquidators of the company (CI) that granted the debenture; Company went into creditors voluntary liquidation on 24 Aug 1987 which was little more than 3 months after date of debenture; Variety of claims that the summons seeks to strike out (on the ground that they are scandalous/frivolous/vexatious/abuse of court process)
Decision: Claim not struck out as arguable that bank are shadow director (however, allegation dropped before trial)
