Wrongful and Fraudulent trading Flashcards
(22 cards)
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
How is dishonesty assessed for fraudulent trading?
Dishonesty is assessed on a subjective basis ie what the particular person knew or believed
2-stage test (Ivey v Genting Casinos)
the liquidator needs to demonstrate the director’s subjective state of knowledge and;
show that the director’s conduct was dishonest applying the objective standards of ordinary decent people
What contribution can a person guilty of fraudulent trading be ordered to make?
A person found to be liable can be ordered to make such contribution to the company’s assets as the court thinks proper. Cannot be punitive - the contribution should only reflect and compensate for the loss caused to the creditors. If they are a director, they are likely to be disqualified.
Criminal sanctions for fraudulent trading
imprisonment (up to 10 years on indictment) and/or fines
Why are wrongful trading claims more common?
very high standard of proof is required for a successful fraudulent trading claim
Wrongful trading seeks to
establish liability for directors who carry on business negligently rather than fraudulently
What kind of claim is wrongful trading and who can bring it?
Wrongful trading is a civil claim, which can be brought against a director by a liquidator or administrator.
when directors become aware (or should be aware) that an insolvent liquidation/administration is inevitable, they are under a duty to take
every step possible to minimise the potential losses to the company’s creditors
What does wrongful trading impose on a liable director?
Personal liability - the court can order the directors to contribute to the insolvent estate by way of compensation for the losses that the general body of creditors have suffered as a result of the directors’ conduct
A claim may be brought against any person who was at the relevant time
a director, including: de jure, de facto and shadow directors, non-executive directors and executive directors
Which test is used for insolvency in wrongful trading procedures?
the ‘balance sheet test’
Defence for wrongful trading
the every step defence - director may be able to escape liability if they can satisfy the court that, after they first knew or should have concluded that the company had reached or could no longer avoid the ‘point of no return’, they took every step with a view to minimising the potential loss to the company’s creditors
For wrongful trading, what skills and knowledge are given to the reasonably diligent person?
EITHER:
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as were carried out by the director in question (an objective test); and
the actual knowledge, skill and experience of that particular director (a subjective test).
The court then applies the higher of the two standards.
What steps should directors take to minimise the risk of a wrongful trading claim?
Hold frequent board meetings to review the company’s financial position and write up minutes of each meeting
Take professional advice ASAP
Obtain up to date financial information about the state of the company’s finances and discuss at BMs
How is liability for wrongful trading apportioned between directors?
An order to contribute may be made against the directors on a joint and several basis.
However, the court has a discretion to apportion liability between directors based on their culpability.
Can the court relieve the director from wrongful trading if they acted honestly and reasonably and ought fairly to be excused?
No
voidable transactions
certain transactions that have taken place within specified statutory periods prior to the insolvency of a company
Who may bring a claim for fraudulent trading?
liquidator or administrator
What must be established for a successful claim for fraudulent trading against a director?
An intent to defraud creditors which involves actual dishonesty, assessed on a subjective basis.
Explain the ‘reasonably diligent person test’
The court applies the ‘reasonably diligent person’ test in order to determine whether a director ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration and whether the director then took every step to minimise the potential loss to the company’s creditors.
‘point of no return’ for wrongful trading
the time before the commencement of the winding up or insolvent administration at which the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation/administration
