Insolvency Act of 1986 - Essay Example

Name : xxxxxx Tutor : xxxxxxx Title : Insolvency Act of 1986 Institution : xxxxxxx @2011 Introduction The insolvency act of 1986 offers an official policy to issues relating to individual and company liquidation in the United Kingdom. The act basically presides over maters that are allied to individual insolvency and individual voluntary agreements and all organizational guidelines which are linked to company bankruptcy1.insolvency act of 1986 mainly comprised the findings which were in the cork report. The fundamentals of the act have been restructured by the enterprise act 2002 which started operating on the 1st April 2004 and it initiated among other aspects out of court direction route. Fraudulent trading According to section 213 of the insolvency act of 1986 fraudulent trading can be defined as: “If in the way of the closure of a company it is evident that the activities were performed with an aim to deceive the creditors or any other individual or in the aim of deceitful reason, the parties involved and those who had prior knowledge about the fraud may be ordered by the court to legally responsible and they may also be ordered to make donations to the company’s properties “2. In other words the individual who has been approved beyond reasonable doubt to have committed the fraud is ordered to compensate sum money by the judge. The money is then distributed to among the creditors of the corporation by the corporation’s liquidator. It ought to be renowned that in order to be considered to have committed a fraudulent trading the necessities of the questionable morals must comprise of fraud. In reality fraudulent trading is usually recognized in cases where the administrators of a company, will incur additional debts in a deliberate manner with no view of repaying it’s the creditors of their debts. A case of fraudulent trading may be filled in situations where a corporation ceases to operate, but prior to bankruptcy, the managers sells the company’s properties and use the earnings to pay a section of the creditors with the aim of been favored by the creditors for another business they plan to set up. The 1986 insolvency act deals with fraudulent trading as a civil or criminal offense which is punishable by the law. In most cases fraudulent trading is carefully and thoroughly looked into by the director’s disqualification unit when making a decision in kicking off ineligibility actions against an executive. Fraudulent trading mainly involves dishonesty on the director’s side. It is an illegal offence that is liable to be punished by incarceration or fine been imposed to the individual. In some cases the individual may be fined and at the same time be incarcerated. It applies in cases where the company is wound up or not. The maximum number of years that an individual can be imprisoned for the offence of fraudulent trading is ten years. It is evident that section 213 of the insolvency acts seeks mainly addresses a dishonest intent from a director of a company. Thus managers who operate their organisation recklessly cannot be grouped under this category thus section 214 seeks to address this dodge. Example one of case of fraudulent trading The R v Grantham (1984) QB 675 is an example of a fraudulent trading case. Mr. Grantham had a case to answer in regard to fraudulent trading, divergent from the companies act 1948 section 332(3) which is the current section 213 of the insolvency act 1986. The juries were informed there is a possibility of dishonest and intention to defraud if they thought Mr. Grantham acquired a debt and he was aware that there the company was not able to repay it. He was convicted to have connoted fraudulent trading. He later petitioned that the jury was not informed clearly. Lord lane LCJ, Boreham J and Stuart-smith rejected Mr. Grantham plea and according to the judges there were no faults in the ruling. Example two of a case of fraudulent trading Another example of the case is the case about Re Augustus Barnet & son limited it was a supplementary company with the major retail store in UK. Rumasa applied for a strike out application3. Hoffmann J agreed with Rumasa plea for a strike out application. The judge ruled on the basis that according to the companies act of 1948, s. 332 which stated that in the closure of a company if it was evident that, any of the operations of the company were conducted in way to deceive the company’s creditors, the court may decide, in a way that it thinks is right, rule that any one who had prior knowledge of the business operations which were conducted in a manner to defraud the creditors shall be accountable, exclusive of any restriction of accountability, this may apply to all or any of the debts or other liabilities of the corporation in a way the court decides is proper. Hoffmann maintained that since the section necessitated a conclusion of someone carrying on a corporation with an intention to deceive, the knowing parties were to be held responsible if and only if the intention to deceive or defraud the creditors was successful. The mindset of the recluse was unrelated. The court would have taken an action in the fraud but not s.332. According to the judge since there was no allegation of fraud on Barnett directors, the parent could be no accessory. Problems in section 213 There are many difficulties that are evident in s. 213 of the insolvency act. One of them is the fact that most juries do not comprehend the complex situations associated with most business transactions. Another problem with the act is fraudulent trading is complex to identified since it necessitates prove of dishonesty from the individual who is been accused of committing the crime. Most problems and difficulties which are prevalent in the modern day world have solutions. The problems and difficulties in section 213 can be solved by educating the juries with the complex situations which are mainly associated with most business transaction. This will ensure that the juries offer a fair and correct ruling of the cases which are presented to them. Clear and concise measures should also be put in place so as to detect fraudulent trading this will reduce the complexity associated with detecting fraudulent trading. The critic of section 213 is that it has flaws. The sections need to be amended so as to solve the flaws. Wrongful trading Wrongful trading is a standard that is incorporated in the UK insolvency law and entails definite standards of managers. It was established to facilitate contributions to be attained for the greater advantage of creditors from individuals who are accountable for mismanagement of the bankrupt company. In reality wrongful trading is termed as a less serious and is more common offence as compared to fraudulent trading. According to section 214 of the insolvency act of 1986 wrongful trading is generally termed as: If in the closure of the company it comes into view that the company has gone into bankruptcy insolvency and prior to that closure a person knew that the company was going to close up or had contemplated that there were minimal levels at which the company would avoid going into bankruptcy and that the individual was the one heading the company at the time. The court may decide that the individual is accountable and should make the necessary contribution towards the company properties in a way that the court feels is proper and appropriate, unless the court is content that the individual to all the necessary measures with an aim of diminishing the impending loss to the corporation creditors as he was supposed to 4. Section 214 of the insolvency act of 1986 covers an extensive range, since it applies to de jures directors that is the directors who were selected into the post officially and there appointments into the post were recorded with companies’ house. The section is also applicable to de facto directors or shadow directors. The necessary measures to be considered include: prior consultation with bankers, a timely and periodic cash flow forecast, and discussion with professional advisers, periodic preparation of profit and loss accounts forecasts, timely organization accounts and ensuring timely filing of legal accounts. Wrongful trading can consequently lead to both individual accountability and an ineligibility order. In terms of prosecution wrongful trading cannot be considered as a criminal offence. The offender may be either imprisoned or fined, and at times both penalties may be implied on the offender. Example one of cases of wrongful trading Re continental assurance co of London plc [2007] 2 BCLC 287; [2001] All ER (D) 229 which is also referred to as Singer v. Beckett is a UK insolvency law case on wrongful trading which is grouped under s.214 of the Insolvency Act 19865. The company had gone into insolvent bankruptcy. The company’s liquidators suggested that the directors of the company should be held accountable and were responsible of wrongful trading (s. 214). They claimed that the company had continued with its operations even after a predicament meeting, the meeting was supposed to clarify the fact that the company would not continue to operate since there was no logical prospect of recovering from insolvency. The liquidators also claimed that there was misfeasance (s. 212) over the years of incompetent fiscal and accounting records and I this proofed to be a major challenge to determine if the company was insolvent or not. In addition, payments which were made to two other companies that are IATA and ABTA also clearly demonstrated misfeasance. According to judge park J, the liquidators had unsuccessfully demonstrated an instance of wrongful trading or misfeasance. The director’s dealings were suitable given their obtainable information and opinions. They had thoroughly made cautious deliberations at the crisis meeting. Also according to Park J if the liquidators were truthful in regard to misfeasance, not all the directors would be accountable but the finance director was the one to be accountable. The misfeasance claim was based in regard to violation of manager’s responsibilities to the company, and consequently the liquidators ought to have shown a loss which had been incurred by the company. Despite making payments to IATA and ABTA the company did not incur any loss. Example two of cases of wrongful trading Re Brian D Pierson (Contractors) Ltd [1999] BCC 26 is a UK insolvency law and company law case, concerning misfeasance and wrongful trading6. The company found themselves in a difficult situation after the contracting parties failed to remunerate on their two projects. The company still remained in operation. By 1996 the company had gotten into insolvent liquidation. The company liquidators appealed the director’s contribution for engaging in wrongful trading from June 1994. The court ruled on the basis that whether by the year 1994 the directors were supposed to have had a clear and concise knowledge of avoiding bankruptcy. Judge hazel Williamson QC ruled that there was in deed wrongful trading from the month of June in the year 1994, but he clearly stated that some of the company losses were mainly caused by the bad weather conditions. The ruling was consequently condensed by 30%. According to the judge under the insolvency act 1986 s 214, one cannot be just a reluctant director; the function associated with the post of the director necessitates a lot of deliberations of the company’s dealings to be implemented. Additionally, the lack of caution from ones consultants cannot be used as a reason for engaging in wrongful trading. Problems with section 214 The problems associated with section 214 of the insolvency act are numerous. One of them is the complexity associated with determining whether an individual is guilty of wrongful trading or not. This problem can be solved by putting in place clearly outlined measures to determining an individual participation in wrongful trading. The second problem is that most of the juries who are called upon to rule on cases related to wrongful trading have insufficient knowledge of the business since the businesses are complex. Thus the rulings may be at times unfair. To ensure that this problem is solved the juries should be educated and be informed on the complex business activities so that they can make fair ruling in the cases associated with wrongful trading. The critic of section 214 of the insolvency act is that it has faults within it. Thus a review is needed so as so solve the faults. Conclusion From the above discussion and a review of the cases it is evident that the contention that the dividing line between incompetence and dishonesty is insufficiently clear in relation the S213 and S214 Insolvency Act 1986. Thus the two sections ought to be reviewed so as to make clarify between incompetence and dishonesty of the directors in a company. Bibliography 1. Insolvency service website 2. Insolvency act 1986 section 213 gives clear definition of fraudulent trading. 3. Re Augustus Barnet & son limited this was a supplementary company with the major retail store based in UK. 4. Insolvency act of 1986 section 214 give a clear and concise definition of wrongful trading. 5. Re continental assurance is an example of a case which was ruled on the basis of wrongful trading. 6. Re Brian D Pierson (Contractors) Ltd is a UK company that built and maintained golf courses. Read More