Business Law and Practice notes - BPP Law School - High Distinction Level notes!
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Companies Act 2006
Company Directors Disqualification Act 1986.
Insolvency Act 1986.
Small Business, Enterprise and Employment Act 2015.
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All of the provisions relate to a situation where a company enters into a formal insolvency procedure.
aim to enable the restoration of funds that should have been available to meet the claims of the
creditors as a whole.
Most of the statutory provisions apply when a company is either in a liquidation or
administration.
o The provisions do not apply to a company which is in administrative receivership or
other type of receivership (except for proceedings relating to transactions defrauding
creditors under s.423 which can be brought whether or not the company is in an
insolvent procedure).
Liquidators & administrators can look back to a specific period before a formal insolvency procedure
begins & request the court to make the necessary orders with a view to restoring the company’s
position to what it would have been if the company had not entered into the transaction.
The orders sought may include the unwinding of the transaction and hence the transactions are
called voidable transactions.
Some companies may seek compensation that the company’s position is restored in monetary
terms. The court has the power to make such order as it thinks fit.
Liquidators and administrators have the power to bring proceedings for compensation against the
directors personally (for fraudulent trading and wrongful trading - and liquidators only, for
misfeasance).
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Liability of directors for fraudulent & wrongful trading-
The concern is that directors may continue to incur further debts at a time when the company is in
financial difficulty - with the result that losses to creditors are increased.
The question arises as to whether the administrator or liquidator have grounds to bring proceedings
against the directors for fraudulent and/or wrongful trading
--
Fraudulent trading: s213 & 246ZA IA ‘86-
claims for wrongful trading are more brought more often
Fradulent trading claims are rare
,S213 & s246Z impose civil liability to contribute to the funds available to the body of unsecured
creditors suffering loss due the carrying on of the company business with intent to defraud
+ Criminal sanctions under s993 CA ‘06
-
Who can bring a claim-
Liquidators (s213 IA) & administrators (s.246ZA)
Administrators and liquidators can now assign fraudulent trading claims to a third party as a way
of raising funds for the insolvent estate and thereby, avoid the risk of litigation (similarly
introduced by the SBEEA 2015, amending the IA 1986).
-
Against who is the claim brought?-
s213(2) & s246ZA(2) - Can be against any person who is knowingly party to the carrying on of any
business of the company with intent to defraud creditors - s213(1) & s246ZA(1)
-
Requirement for liability under s213(1) & s246ZA(1)-
Actual dishonesty must be proved – this is a hard threshold to pass
-
Defence-
Dishonesty is assessed on a subjective basis i.e. what the particular person knew/ believed.
if the directors genuinely believed, however unrealistically, that ‘things would get better’ and
the company would trade out of its difficulties, this would provide an effective defence,
sometimes known as the ‘sunshine defence’.
-
Sanction-
A person liable under s 213 & s246ZA - can be ordered to make such contribution to the company’s
assets as the court thinks proper
No punitive element can be added – it should only reflect & compensate the loss of creditors
The court is likely to make a disqualification order against the director too – s10 CDDA ‘86
criminal sanctions can be imposed by the court - s.993 CA ‘06, to punish a person knowingly
party to fraudulent trading, whether or not the company is being wound up. The penalties are
imprisonment (of up to 10 years on indictment) and/or fines.
--
, Wrongful trading: s214 & s246ZB-
Due to the high standard of proof, fraudulent trading is rare.
So wrongful trading was introduced
Wrongful trading liability imposes personal liability on directors and marks an exception to the principle
of limited liability under which those who run a company cannot be liable for its unpaid debts.
S214 = Liquidations , s246ZB = Administrators
Purpose = ensure that when directors become aware (/ ought to) that an insolvent liquidation (or
insolvent administration) is inevitable, they are under a duty to do everything possible to minimise the
potential losses to the company’s creditors.
Failure = Court can, under ss.214 and 246ZB, 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,
o Hence, increase the funds available for distribution to unsecured creditors
No requirement to show intent / dishonesty - so it is easier for a liquidator/ administrator to prove
wrongful trading than it is fraudulent trading.
-
Who can bring a claim-
Liquidators s.214(1) - & administrators s 246ZB(1)
Administrators and liquidators can now (under the SBEEA 2015) assign wrongful trading claims to a third
party as a way of raising funds for the insolvent estate and thereby, avoid the risk of litigation.
-
Against who is the claim brought?-
Any person who was at the relevant time a director (includes shadow directors as defined in s.251 CA
‘06, de facto and non-executive directors).
Contrast this with fraudulent trading where a claim can be brought against any person who has
the intention to commit a fraud.
-
Requirement for liability: s214(2) & s246ZB(2)-
For a director to be liable for wrongful trading, the court must be satisfied that:
at some time before the commencement of the winding up or insolvent administration (‘point
of no return’)
the director knew or ought to have concluded that
there was no reasonable prospect that the company would avoid going into insolvent
liquidation / insolvent administration
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