Fraudulent Trading Flashcards
(10 cards)
What must be proven for a civil claim in fraudulent trading under the Insolvency Act 1986?
A. The director intended to defraud creditors
B. The director continued trading during administration
C. The director acted negligently
D. The company owed more than five thousand pounds
A. The director intended to defraud creditors
Explanation: Civil liability under section 213 or 246ZA requires actual dishonesty and an intent to defraud creditors or act for a fraudulent purpose.
Which of the following parties can be liable for fraudulent trading?
A. Only directors of the company
B. Shareholders who voted against liquidation
C. Only the company’s creditors
D. Any person knowingly party to the business with intent to defraud
D. Any person knowingly party to the business with intent to defraud
Explanation: Liability can extend to anyone knowingly involved, not just directors. This includes employees or third parties like banks.
Under the criminal offence of fraudulent trading in section 993 of the Companies Act 2006, what is the maximum penalty?
A. Five years’ imprisonment
B. Disqualification only
C. Unlimited fine
D. Ten years’ imprisonment and/or fine
D. Ten years’ imprisonment and/or fine
Explanation: The criminal offence carries a maximum of ten years in prison or a fine, or both, under section 993 of the Companies Act 2006.
What is the standard of dishonesty applied in fraudulent trading cases?
A. First subjective, then objective
B. Based only on company policy
C. Purely objective
D. Purely subjective
A. First subjective, then objective
Explanation: Courts consider what the person actually believed (subjective), then assess their conduct by standards of ordinary decent people (objective), following Ivey v Genting.
What is a key difference between fraudulent trading and wrongful trading?
A. Wrongful trading applies only in liquidation
B. Fraudulent trading does not require intent
C. Fraudulent trading requires actual dishonesty
D. Wrongful trading carries criminal penalties
C. Fraudulent trading requires actual dishonesty
Explanation: Fraudulent trading is harder to prove as it involves intent to defraud. Wrongful trading does not require dishonesty, just knowledge that insolvency was unavoidable.
A liquidator discovers that a manager, not a director, knowingly helped secure loans while aware the company could not repay. What can the liquidator do?
A. Do nothing because it was not a director
B. Bring a claim under wrongful trading
C. Sue for breach of fiduciary duty
D. Bring a claim under section 213 for fraudulent trading
D. Bring a claim under section 213 for fraudulent trading
Explanation: Section 213 allows claims against any person knowingly involved in the fraudulent activity, not just directors.
A liquidator wants to bring a fraudulent trading claim but cannot prove dishonesty. What should they do instead?
A. Bring a criminal prosecution
B. Bring a preference claim
C. Bring a wrongful trading claim
D. Apply for a disqualification order only
C. Bring a wrongful trading claim
Explanation: If dishonesty is too hard to prove, a wrongful trading claim (which does not require it) is often the fallback option.
John, a director, continues trading and taking customer deposits knowing the company has no money and cannot fulfil orders. What claim is most appropriate?
A. Wrongful trading
B. Fraudulent trading
C. Preference claim
D. Transaction at an undervalue
B. Fraudulent trading
Explanation: John knew the company could not deliver and continued to accept money, showing intent to defraud, which fits fraudulent trading.
A bank manager continues to authorise large loans to a company while knowing the business is insolvent and there is no realistic chance of repayment. What type of knowledge can be imputed to the bank in a fraudulent trading claim?
A. Blind-eye knowledge
B. Objective knowledge
C. Actual intent
D. Constructive knowledge
A. Blind-eye knowledge
Explanation: Blind-eye knowledge applies when someone suspects wrongdoing but chooses to ignore it. The bank may be liable through its employee’s actions
A director is found liable under section 213 for fraudulent trading. What is the likely additional consequence beyond compensating creditors?
A. Imprisonment under civil law
B. Disqualification as a director
C. Automatic bankruptcy
D. Claim under wrongful trading
B. Disqualification as a director
Explanation: A finding of fraudulent trading usually leads to a disqualification order under section 10 of the Company Directors Disqualification Act 1986.
