Fraudulent and Wrongful Trading: Dishonesty and Incompetence - Essay Example

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This paper will argue that the distinction is not only clear, but difficult to miss because the scope of the application of both sections is rather different. Furthermore, they contain elements which cause them to be inherently different in nature, enabling them to differentiate between the different seriousness of dishonesty and incompetence…
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Fraudulent and Wrongful Trading: Dishonesty and Incompetence
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Download file to see previous pages Section 213: Fraudulent Trading
Section 213 of the IA 1986 requires actual dishonesty on the part of the director(s) – as in, dishonesty as defined by the ordinary standards of the criminal law (R v Ghosh (1982). The requirement is rather high – the case of Re a Company requires that “real moral blame” be attached to a director (Re a Company (No 001418 of 1988) (1990)): a claim lies “only if there was conduct which was deliberately and actually dishonest according to the notions of ordinary decent business people” (Re EB Tractors Ltd (1986), French et al 2006, 665). Additionally, it is not necessary to prove that the fraudulent company member knew that there was no reasonable chance of them benefitting financially from their behaviour (R v Grantham (1984) per Lord Lane CJ). In the case of Re Gerald Cooper Chemicals Ltd (1978), it was held that a creditor who knowingly accepts money which has been fraudulently obtained by the company will be held a party to the conducting of the business in a fraudulent manner. The response of the law and the courts is rather harsh if a company member is found to have undertaken fraudulent trading (Re Todd Ltd (1990), and the Companies Act 2006 even provides the possibility of criminal liability. These aspects have, however, caused a high burden of proof for intent to defraud, and this has served to restrict the application of section 213 somewhat. ...
These aspects have, however, caused a high burden of proof for intent to defraud, and this has served to restrict the application of section 213 somewhat. The standards as set out in Re Patrick and Lyon Ltd (1933) hence require that actual dishonesty be evident; mere unreasonable acts are generally not sufficient (Re L Todd (Swanscombe) Ltd (1990)). The dishonesty of the acts which fall within section 213 require intent and awareness; that members are “knowingly...parties to the carrying on of a company’s business with intent to defraud” (Review Committee 1982: 1758). This allows directors who are merely reckless in continuing a failing business to escape the harshness of section 213 (Dignam and Lowry 2006: 17.67). The test is, however like section 214’s hybrid objective/subjective test, though this has often been hailed as the appropriate test for both sections of the IA 1986 (Keay 2006: 123). Section 213 also applies to members of the company who possess knowledge of the fraudulent activities of others – extending even to “blind-eye knowledge, which requires a suspicion of the relevant facts existing coupled with a deliberate decision to avoid confirming that they did exist” (Dignam and Lowry 2006: 17.60, Morris v State Bank of India (2005)). This broad application of the section serves two purposes: (1) it eases the potentially narrow application of the section due to its high standard of fault, and (2) enforces the concept that any person connected to fraudulent activity within the company will not escape liability (R v Smith (1996), Dine and Koutsias 2007: 321). Section 214: wrongful trading Section 214 of the IA 1986 highlights the criteria necessary to establish those who can be held responsible for mismanaging ...Download file to see next pagesRead More
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