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Malpractice before and during liquidation - Coggle Diagram
Malpractice before and during liquidation
Offences of fraud, deception etc
S.206-211 IA1986 create a range of offences that impose criminal liability on certain persons who engaged in specified conduct
Fraud in anticipation of the company being wound up
Transactions in fraud of creditors
Misconduct in the course of winding up
Falsification of company books
Material omissions from statements relating to the company's affairs
False representations to creditors
Summary remedy
S. 212 applies where in the course of winding up, it appears that a liquidator or current/former office of the company has misapplied or retained or become accountable for any money or other property of the company or been guilty of any misfeasance or breach of any fiduciary or other duty
S.212 does not create a legal wrong - it simply provides a procedurally simple remedy for breaches of existing company law
Allows certain persons (namely an official receiver, a liquidator or any creditor or contributory) to bring a claim in situations where normally the claim would have to be brought by the company itself
Following an examination of the conduct of the defendant, the court can compel the defendant
To repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks fit
To contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of duty as the court thinks fit
Fraudulent trading
S.213 applies where in the courts of a winding up or while a company is in administration, it appears that any business of the company has been carried on with intent to defraud creditors of the company, creditors of any other person or for any fraudulent purpose
3 elements require to be proven
First it must be established the business of the company has been carried on
With intent to defraud creditors of the company
With intent to defraud creditors of any other person
For any fraudulent purpose
Second, it must be established that the defendant participated in the business being carried on in a fraudulent manner. The key term is participated in
Third, it must be shown that the defendant knowingly participated in the fraudulent conduct
Only a liquidator or administrator may apply to the court, if the court is of the opinion that the defendant has engaged in fraudulent conduct, it can order the defendant to make such contributions to the company's assets as the court thinks proper
Fraudulent trading under CA2006
The concept of fraudulent trading also exists under s.993 of the CA2006
The conduct that can constitute fraudulent trading under s.993 is largely the same as that under IA1986 but there are 2 key differences
IA1986 provisions only apply where the company is in liquidation or administration
IA1986 provisions impose civil liability whereas s.993 imposes criminal liability
If fraudulent trading has occurred in relation to a company in liquidation or administration, then both sets of provisions can apply, meaning civil and criminal liability can be imposed
Wrongful trading
S.214 provide that a person will have engaged in wrongful trading if 3 conditions are satisfied
The company has gone into insolvent liquidation or insolvent administration
At some time before the commencement of the winding up of the company or before the company entered administration, that person knew or ought to have concluded that there was no reasonable prospect that the company avoid going into insolvent liquidation or entering insolvent administration
That person was a director or shadow director of the company at that time
The second condition can prove tricky to apply in practice as it is based on what the defendant knew or ought to have known. Guidance states that the facts which a director ought to know or ascertain and the conclusions which he ought to reach are those which would be known, ascertained or taken by a reasonably diligent person having both
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 the company
The general knowledge, skill and experience that the director has
Minimising the potential loss
The court will not make a declaration against a director if it is satisfied that the director took every step with a view to minimising the potential loss to the company's creditors as he ought to have taken
The directors must prove, on the balance of probabilities that they took every step to minimise the loss for all the company's creditors
The type of steps the directors should take will be based on the facts but could include
Keeping themselves informed of the company's financial position
Reviewing the company's financial position with professional assistance
Raising concerns with the board and suggesting solutions
Minuting board discussions and recording board decisions
Advising creditors of the risks of advancing further credit
Remedies
A liquidator or administrator may apply to the court if they feel wrongful trading has occurred
If the application is successful, the court may declare that the defendant is liable to make such contribution to the company's assets as the court thinks proper
When determining the amount of the contribution, wrongful trading provisions are primarily compensatory rather than penal. Prima facie the appropriate amount that a director is declared to be liable to contribute is the amount by which the company's assets can be discerned to have been depleted by the directors conduct
A director who has engaged in wrongful trading can also be disqualified for up to 15 years
Restriction on re-use of company names
S.216 aims to combat the use of these phoenix companies
S.216 applies to a person where a company (the liquidating company) has gone into insolvent liquidation and that person was a director or shadow director of that company at any time in the 12 month period leading up to the date of liquidation
Unless that person obtains the leave of the court, they cannot, for a period of 5 years beginning on the date of the company's liquidation
Be a director of any other company that is known by a prohibited name
In any way, whether directly or indirectly be concerned or take part in the promotion, formation or management of a company with a prohibited name
In any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on under a prohibited name
A prohibited name is
A name by which the liquidating company was known at any time in 12 month period prior to its liquidation
A name which is so similar to a name falling within 1 as to suggest an association with that company
S.216 provides that a person will be permitted to use a prohibited name in 2 instances
Where that person obtains the leave of the court to use the prohibited name
In such circumstances as may be prescribed such as where the business or substantially the whole of it is to be acquired from the insolvent company under arrangements made by its liquidator
Liability
A person who breaches s.216 commits a criminal offence, they can be personally liable for the debt and liabilities of the new company incurred while they were involved in its management in contravention of s.216