Advice Fran, Gram and Hen as to any potential liability they might face as regards:

FRAUDULENT TRADING

WRONGFUL TRADING

Please Consider:   Re Produce Marketing Consortium Case

Fraudulent trading- There has been civil liability claims on company directors who have been found indulging in activities that amount to fraudulent trading. When considering the case of Re Produce Marketing Consortium Case, it was discovered that section 213 of Insolvency act 1986 governs situations of fraudulent trading, situation in which it appears that business has been carried out with the intent to defraud creditors .In a case, where fraudulent trading is proved the judge on the application of liquidator, might order that any person who were knowingly party to such continuation of business is liable to make such contributions, he is required to contribute to company assets (if liquidators are not fully compensated) in a manner the court thinks proper. However to prove fraudulent trading under section 213 of Insolvency act 1896, there’s a high burden of proof involved if one is to prove dishonesty on the part of another person to whom he has alleged. Fraudulent trading is also a criminal offence, which applies to those personnel’s that carry on business of a company with malafide intentions to defraud its creditors, shareholders or any other person involved. The following outcomes could result-

Gram and Hen as company directors were falsifying the company records and were well aware that the company would reach the point of insolvent liquidation. If proved, they would be liable under fraudulent trading law to have committed both criminal and civil offences. They may get maximum prison sentences for 5 years each for their offences and may have to contribute to the assets of the company, if liquidators are not fully compensated for their losses.

Fran had earlier distanced himself and was not involved in falsifying accounts inorder to incur more debt. Hence, there is no evidence against Fran to convict him for fraudulent trading

Wrongful trading- was introduced to complement the concept of fraudulent trading. Unlike fraudulent trading, wrongful trading doesn't need finding of 'intent to defraud' (heavy burden of proof) but only balance of probabilities or simple proof. Wrongful trading is therefore a less serious and more common offence than fraudulent trading.

Wrongful trading is an action that can only be taken by company liquidators; once incompetency leading to insolvent liquidation is proved particular individuals potentially become liable for the debts of their companies. Wrongful trading is civil wrong under section 214 of Insolvency act 1986, this section has a wide scope and also applies where a company is being winding up & it appears, that a director or couple of directors knew before the start of liquidation that there was no reasonable chance of company avoiding insolvent liquidation. In such cases, one has to refer to the judgment given in Re Produce Marketing Consortium Case-

“In my judgment, there is nothing wrong in the fact that directors incur credit at a time when, to their knowledge, the company is not able to meet all its liabilities as they fall due. What is manifestly wrong is if directors allow a company to incur credit at a time when the business is being carried on in such circumstances that it is clear the company will never be able to satisfy its creditors. However, 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 to get over the bad time.”

This establishes that unless the director took every reasonable measure to minimize potential loss for the creditor, the director(s) might be liable to contribute such money to the assets of the company as the court thinks proper. As wrongful trading is a civil wrong case it requires civil burden of proof (simple proof) e.g the director is particularly well qualified, they will be expected to perform in line with those standards is enough to convict. The director needs to have general knowledge, experience of the post.

The mode in which the directors would be liable to contribute in the companies’ asset is also shown in Re Produce Marketing Consortium Ltd (1989), in which two directors (Mr. David, Mr. Murphy) were held liable to pay the indemnity from the point they ought to know that the company could not avoid insolvent liquidation. So the following outcomes could result if convicted for wrongful trading.

Gram and Hen are clearly personally liable to contribute in companies assets to under section 214 of IA 1986.They are liable for increasing companies debt from 10,000 to 100,000 in a period of three years.

Fran as a director would also be liable to contribute under the same section (s.214), because he didn't took reasonable steps to minimize company loss and gave it less priority. He would be liable to compensate the liquidators.