Unlawful trading cases
Main articles: Trading while insolvent, Fraudulent trading, and Wrongful trading
Before a company formally enters an insolvency procedure, the directors (including de facto directors and shadow directors) will commit a criminal offence if they dishonestly keep the company running to defraud creditors, and will be liable to pay compensation if keep trading when they ought to have known a company would not avoid liquidation. The first, fraudulent trading provision lies in the Insolvency Act 1986 section 213,[179] A director must have actually been dishonest, in the sense of the criminal law case R v Ghosh[180] that it was dishonest by ordinary standards and she recognised that.[181] The amount a director may have to pay is not in itself punitive, but only the amount to compensate for the losses incurred in the period when he dishonestly kept the company running. In Morphites v Bernasconi[182] Chadwick LJ held, obiter, that it was not the intention of Parliament to enact a punitive element for damages. Instead, under the Companies Act 2006 section 993, there is a specific offence of fraudulent trading, carrying a fine of up to £10,000.[183] Beyond the directors, anyone who is knowingly party to the fraud will also be liable. Before someone can be an accessory to fraud, there must be an initial finding or allegation that a principal was also fraudulent. So in Re Augustus Barnett & Son Ltd[184] Hoffmann J struck out a liquidator's suit for fraudulent trading against the Spanish wine manufacturer, Rumasa SA, and parent of Barnett & Son, because although it had given a comfort letter for its subsidiary's debts, and although the subsidiary was advised that a fraudulent trading charge may arise, that had not actually been alleged yet. Fraudulent trading depends on "real moral blame" attributable to someone.[185]
By contrast, wrongful trading is a cause of action that arises when directors have acted negligently. The Insolvency Act 1986 section 214 states that directors (including de facto and shadow directors[186]) are culpable for wrongful trading if they continue to trade when "at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation". To determine whether someone "ought" to have concluded this, a director is judged by the skills one ought to have for their office, and a higher standard if the director has special skills (such as an accountancy qualification). In Re Produce Marketing Consortium Ltd (No 2)[187] two directors presided over the insolvency of a Spanish and Cypriot orange and lemon business. One had experience in bookkeeping. Knox J held that although in small companies procedures and equipment for keeping records will be less than in large companies, under section 214 "certain minimum standards are to be assumed to be attained" like keeping the accounts reasonably accurate. Here the accounts were done late even as debts were mounting. While the basic measure of compensation payable by directors for wrongful trading is assessed according to the loss a director creates from the point in time where insolvency was plainly unavoidable, in assessing the level of damages awardable, the court has the discretion to take into account all factors that it feels is appropriate. In Re Brian D Pierson (Contractors) Ltd[188] Hazel Williamson QC held that the directors of a golf course business were culpable for wrongful trading, but reduced their contribution by 30 per cent, given that poor weather had made profitable golf business more difficult than normal.
Main articles: Trading while insolvent, Fraudulent trading, and Wrongful trading
Before a company formally enters an insolvency procedure, the directors (including de facto directors and shadow directors) will commit a criminal offence if they dishonestly keep the company running to defraud creditors, and will be liable to pay compensation if keep trading when they ought to have known a company would not avoid liquidation. The first, fraudulent trading provision lies in the Insolvency Act 1986 section 213,[179] A director must have actually been dishonest, in the sense of the criminal law case R v Ghosh[180] that it was dishonest by ordinary standards and she recognised that.[181] The amount a director may have to pay is not in itself punitive, but only the amount to compensate for the losses incurred in the period when he dishonestly kept the company running. In Morphites v Bernasconi[182] Chadwick LJ held, obiter, that it was not the intention of Parliament to enact a punitive element for damages. Instead, under the Companies Act 2006 section 993, there is a specific offence of fraudulent trading, carrying a fine of up to £10,000.[183] Beyond the directors, anyone who is knowingly party to the fraud will also be liable. Before someone can be an accessory to fraud, there must be an initial finding or allegation that a principal was also fraudulent. So in Re Augustus Barnett & Son Ltd[184] Hoffmann J struck out a liquidator's suit for fraudulent trading against the Spanish wine manufacturer, Rumasa SA, and parent of Barnett & Son, because although it had given a comfort letter for its subsidiary's debts, and although the subsidiary was advised that a fraudulent trading charge may arise, that had not actually been alleged yet. Fraudulent trading depends on "real moral blame" attributable to someone.[185]
By contrast, wrongful trading is a cause of action that arises when directors have acted negligently. The Insolvency Act 1986 section 214 states that directors (including de facto and shadow directors[186]) are culpable for wrongful trading if they continue to trade when "at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation". To determine whether someone "ought" to have concluded this, a director is judged by the skills one ought to have for their office, and a higher standard if the director has special skills (such as an accountancy qualification). In Re Produce Marketing Consortium Ltd (No 2)[187] two directors presided over the insolvency of a Spanish and Cypriot orange and lemon business. One had experience in bookkeeping. Knox J held that although in small companies procedures and equipment for keeping records will be less than in large companies, under section 214 "certain minimum standards are to be assumed to be attained" like keeping the accounts reasonably accurate. Here the accounts were done late even as debts were mounting. While the basic measure of compensation payable by directors for wrongful trading is assessed according to the loss a director creates from the point in time where insolvency was plainly unavoidable, in assessing the level of damages awardable, the court has the discretion to take into account all factors that it feels is appropriate. In Re Brian D Pierson (Contractors) Ltd[188] Hazel Williamson QC held that the directors of a golf course business were culpable for wrongful trading, but reduced their contribution by 30 per cent, given that poor weather had made profitable golf business more difficult than normal.
