Insolvency Law: Wrongful and Fraudulent Trading - Essay Example

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Directors’ duties arising under the Insolvency Act 1986 are best described as an extension of directors’ ordinary duties. Insolvency or pending insolvency exposes directors to an expanded standard of care and broadens the range of possible claimants from shareholders to creditors. …
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Insolvency Law: Wrongful and Fraudulent Trading
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Download file to see previous pages the purpose of defrauding creditors or “for any fraudulent purpose, Section 213(2) applies.6 Section 213(2) provides that the court may make a declaration pursuant to an application by a liquidator that “any persons knowingly parties to the carrying on of the business” pursuant to Section 213(1) “are liable to make contributions (if any) to the company’s assets as the courts thinks proper”.7 Section 993 of the Companies Act 2006 creates a criminal offence in the case of fraudulent trading calculated to defraud creditors when a company is either insolvent or on the brink of insolvency. Upon conviction, the offender is liable to up to ten years imprisonment and/or a fine.8 Section 6 of the Disqualification of Directors Act 1986 also permits the court to make a disqualification order in respect of a director of a company that became insolvent if his/her conduct was such that it “makes him unfit to be concerned in the management of a company”.9 It is clear that the purpose of these statutory provisions is to guard against illicit trading in circumstances where limited liability prevents company creditors recovering debts from a company that is financially distressed. Thus any director or corporate executive trading “as usual” will likely cause creditors’ irreparable harm.10 Thus laws establishing liability either criminally or civilly are intended to prevent dishonest as opposed to incompetent trading. The word knowingly suggest that fraudulent trading laws are intended to protect creditors and suggest that consciously accruing debts when it is reasonable to assume that the company cannot pay its debts is fraudulent. It is therefore reasonable to assume that the test for determining whether or not a director or executive is acting fraudulent requires...
Insolvency Law: Wrongful and Fraudulent Trading

This paper analyzes the problems attending the ambiguity implicit in the duties and liabilities relative to fraudulent and wrongful trading pursuant to the Insolvency Act 1986. Fraudulent Trading Statutory provisions establishing liability for fraudulent trading employ words like “knowingly”3 and “unfit”.4 The use of these terms of reference in respect of the expanded duties of directors when a company is distressed speaks to liability and a standard of conduct. Obvious questions arise as to whether a corporate director’s standard of knowledge and skill will automatically determine that he was competent and thus dishonest.

Both wrongful and fraudulent trading exposes directors, de facto or shadow directors to enormous liability in the context of financially distressed companies. Unfortunately, this is a time where company directors are suffering significant stress where they may seek to attempt to salvage the company for the benefit of shareholders and company employees and for themselves. However, the law mandates that they become singularly focused on the interests of creditors. The justification for this approach is based on the notion that the shareholders have lost whatever stake they had in the company and all that remains is the interests of creditors. However, conventional wisdom dictates that looking after the company’s best interest is also for the benefit of the creditors. ...Download file to see next pagesRead More
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