Company - Insolvency

Fraudulent trading
K concealed the true financial position from the Aviation Authority whom would only grant a license if there were adequate financial resources.
The case shows that a ‘fraudulent purpose’ does not have to be the sole or dominant purpose, in the present case the fraud was in order to gain a license.

Fraudulent trading
There are three offences:
- intent to defraud the creditors
- intent to defraud the creditors of any person
- for any fraudulent purpose

Fraudulent trading
– To be liable under s.214 IA & s.993 CA three elements must be proven:
- that the business of the company carried on with intent to defraud the creditors of the company, with intent to defraud the creditors of any person, or for any fraudulent purpose.
- that the defendant participated in the carrying on of the business in that manner, and
- that the defendant participated knowingly, that is, with knowledge that the business was carried on with the intent or purpose specified/ mentioned above

Meaning of 'knowingly'
Intent must be there at the time, it is not sufficient to carry on trading and then with hindsight determine. Overall there is no consideration of hindsight

Meaning of intent to defraud:
“real dishonesty involving, according to current notions of fair trading among commercial men at the present day, real moral blame”
P issued himself debentures and delayed liquidation to ensure he was outside the time period of those transactions being voidable

Meaning of intent to defraud:
“in the nature of things it is almost invariably associated with the obtaining of an advantage for the person who commits the fraud, it is the effect upon the person who is the object of the fraud who ultimately determines its meaning”

Meaning of intent to defraud:
G accepted advance payment for goods knowing there was no prospect of supply. Even though the cheque was returned, this still constituted fraud committed in the course of carrying on a business. When the money was accepted there was intent to defraud.

Meaning of intent to defraud:
“Sunshine Test”
“There is nothing to say that directors who genuinely believe that the clouds will roll away and the sunshine of prosperity will shine upon them again and disperse the fog of their depression are not entitled to incur credit to help them over the bad time”
It is difficult to decide when trading should stop, if there is actually a chance the fog will disperse?

Meaning of intent to defraud:
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

Meaning of parties carrying on business:
requires a positive step. Anyone taking a positive step will be liable
A company secretary is not considered a 'party'

Wrongful trading:
When is it wrong to carry on trade whilst insolvent?
- tthe companies legislation does not impose on directors a statutory duty to ensure that their company does not trade whilst insolvent, nor does that legislation impose an obligation to ensure that the company does not trade at a loss
This allows management to carry on business, otherwise, if insolvency was a potential, there would be no choice but to wind up

Wrongful trading:

Held, that the directors would be ordered to contribute GBP 75,000.

When deciding whether a director of an insolvent company knew or ought to have known, within the meaning of the Insolvency Act 1986 s.214 , that there was no reasonable prospect of the company avoiding an insolvent liquidation, the court would judge the director by the standards of a person fulfilling that function with reasonable diligence. Regard would also be had to the functions of that director and the nature of the company's business.

The court would, however, assume that the director possessed certain minimum knowledge, being that knowledge which he would acquire if the company complied with its statutory obligations. Thus, a director will be treated as possessing information which he ought to have ascertained, and which was capable of being ascertained by him.

On the facts the directors could and should have been aware that there was no reasonable prospect of PMC avoiding an insolvent liquidation and they would be ordered to contribute to its assets.

As the function of the court under s.214 of the 1986 Act was compensatory rather than penal the amount of contribution would be fixed at GBP 75,000.

A parent company successfully applied for a claim against it to be struck out on the ground that there had been no allegation that the board of the subsidiary in liquidation had carried on business with intent to defraud creditors. The subsidiary had been able to continue on trading only because of statements by the parent of continued financial support, including letters of comfort, agreeing to financial support.

Knowledge of fraud includes blind eye knowledge which requires a suspicion of the relevant facts with a deliberate decision to avoid confirming that they did exist

The court held that there was no power to make punitive award in assessing the amount of contribution, there must be a causal link between the amount ordered and the loss suffered by the creditors

In wrongful trading.,.
where the court cannot because of the company's inadequate records, establish when the directors should have been aware the company could not survive, the court can fix a start date.
The measure of compensation has been identified as the debts incurred subsequent to that date