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