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Company Law
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Misfeasance
Misfeasance is covered in s212 IA 1986. It covers a broad scope including misapplication or
retention of money of the company, breach of the fiduciary or other duties, accountable for the
money of the company, etc. It does not create any new liability or rights, rather it is a summary
procedure available in liquidation.
The claim can be brought by a liquidator, official receiver or a creditor (s212(3)). It can be brought
against directors (current and former, de facto and appointed), promoters (who helped create the
company) and liquidators (s212(1)).
Holland v Revenue and Customs and another - a “director” does not include shadow director.
Misfeasance covers the entire spectrum of directors’ duties - the claim entails breach of director’s
duties.
In order for a successful claim, the liquidator (applicant) must show the breach caused loss to the
company. Even if misfeasance has been established, the court has discretion to relieve the director
from liability in full or in part.
Re E D Games Ltd [2009] EWHC 223 (Ch) - relief is discretionary.
s.1157 CA 2006 - officer can rely on this section to seek relief from liability if they meet the
requirements
- honestly and reasonably
- Circumstances mean director ought to have been fairly excused from liability
If the relief is not granted: (s212(3))
- Repay, restore or account for any misappropriated money or property to the company
- Compensate the company for any misfeasance or breach of duty
Fraudulent Trading
Fraudulent trading is explained in s 213 IA 1986 which carries civil offence. S993 CA 2006 carries
criminal offence with intention to defraud requirement.
The claim can be brought by the liquidator (s213(2)). The test is similar to s993. The liability
extends to beyond directors - people with some management in the role of the company’s
business.
s.213(2) – claim can be brought against any person who is knowingly party to the carrying on of
any business of the company (s.213(1)) with intent to defraud creditors or for any fraudulent
purpose
Re BCCI (No.15)
Held - bank was knowingly party to the carrying on of the business with an intent to defraud.
General manager in London was party to the fraudulent trading.
Required degree of knowledge = blind eye knowledge
Liability will only arise if there is an intention to defraud.
Re General Cooper v Chemicals -
, Creditors can be party to fraudulent trading if they accepted money with knowledge that it has be
procured for carrying on the business with the intent to defraud the creditors and for the purpose
of paying their debts.
Morphitis v Bernasconi - sufficient that only one creditor is defrauded in a transaction
In addition, actual dishonesty needs to be established. Re Patrick Lyon Ltd (1933), per Maugham J
- “actual dishonesty involving, according to current notions of fair trading among commercial men,
real moral blame.”
The court can order the person who is found to be liable for fraudulent trading for contribution
(213(2))
Morphitis v Bernasconi [2003] -The contribution should reflect and compensate the loss caused to
the creditors by carrying on of the business with an intent to defraud
Re Esal (Commodities) Ltd [1997] 1 BCLC 705 - Any sums recovered are held on trust for the
unsecured creditors
Additional Sanctions:
- criminal sanctions (s993 CA 2006 : 10 years and / or fine)
- Disqualification of directors (s10 CDDA 1986 - wrongful trading / fraudulent trading)
- Disqualification (s2 - indictable offence or s4 CDDA 1986 - fraudulent trading)
RS Sales v Global and Maks
Wrongful trading
The high burden of proof for intent to defraud for fraudulent trading led the court committee to
introduce an alternative. It is a civil liability, and dishonesty or intent is not required.
Liquidator can bring a claim (s214(1)). Court or creditors approval is required. It can only be made
against a director including shadow directors (s214(1)). Re Hydrodam judge was prepared to treat
an indirect parent company as a shadow director - directors of the company were the companies
themselves (corporate bodies).
Conditions to bring a claim (s214(2)) :
- the company has gone into insolvent liquidation
[i] at some point before the commencement of the winding up of the company
[ii] that person knew or ought to have concluded that there was no reasonable prospect [iii] that
the company would avoid going into insolvent liquidation, and
- that person was a director of the company at the time.
s.214(4) – the reasonably diligent director test :
- the general knowledge, skill and experience that may reasonably be expected of a person
carrying out the same functions as are carried out by that director in relation to that company
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