Owing money - insolvent companies

Question 1

IA 1986 Fraudulent and Wrongful Trading

Question 2

S213 Fraudulent Trading

Answer 2

Section 213 Fraudulent trading

• a person who is knowingly party to the carrying on of a business with the intent to defraud creditors or anyone else is guilty of an offence.
• (max sentence 7 years in jail and unlimited fine, and liable to contribute to the assets – lifting the corporate veil.)
• Applies to companies which are insolvent.
• Most common fraud is to order goods on credit with no intention of paying for them

Question 3

Re Patrick Lyon 1933

Answer 3

In Re Patrick Lyon Ltd (1933), the court said that there had to be conduct which was deliberately and actually dishonest according to the notions of ordinary decent business people. An intention to defraud creditors may be inferred from trading when the company’s officers know that it is insolvent.

Question 4

Re Bank of Credit and Commerce International SA 1998

Answer 4

In Re Bank of Credit and Commerce International SA [1998] the court held that to be guilty, they had to know that the business was being carried on with the intent to defraud.

Question 5

Both hard to prove

Question 6

S214 Wrongful Trading

Answer 6

If the director knew or should have known that the company had no reasonable prospect of not going into insolvent liquidation and did not take every step that ought to have been taken by that director to minimise the loss to the company’s creditors, then the director is liable to contribute to the assets. This is not a crime – but the director is liable to contribute (and can be banned from being a director). Re Produce Marketing Consortium Ltd (No 2)

Question 7

Re Produce Marketing Consortium Ltd No 2

Answer 7

If the director knew or should have known that the company had no reasonable prospect of not going into insolvent liquidation and did not take every step that ought to have been taken by that director to minimise the loss to the company’s creditors, then the director is liable to contribute to the assets. This is not a crime – but the director is liable to contribute (and can be banned from being a director). Re Produce Marketing Consortium Ltd (No 2)