English Banking Law - Case Study Example

English banking law This paper seeks to establish procedural apparatus that are available under English Law to address wrongs that are committed by directors of corporate entities owing to their incompetence and dishonesty arising within the context of the Insolvency Act 1986 S213 and S214 respectively. The English Banking Law has provided through the Insolvency Act 1986 safeguards against intentional fraudulent and wrongful trading by directors in the event a company or a corporation is declared insolvent thus causing loss to share holders and the interests of the creditors (Hannigan, 2009). S213 provides for fraudulent trading in the essence that, directors are hence held reliable for their activities both criminal and in civil Law as stated through (CA 2006 S.993). This usually acts as a measure of protecting creditors and public interests from being fraud by fraudulent trading from the company directors. The section also guards against persons who knowingly continue to trade using the company assets in disregard of the courts directions on insolvency proceedings. S213 primarily was introduced to address compensatory mechanisms for people who have suffered loss as a result of fraudulent trading made by the directors of the corporation. S214, provides for wrongful trading through curbing and deterring all the irresponsible conducts that directors involve through abusing privileges provided under the Company’s Act which further limits their liability to the company in case of a loss or insolvency. S214 deals with issues where the company has undergone into aspects of insolvents liquidation (Muchlinski, 2008). In this aspect, wrongful trading usually does not require a director to prove any intent of defraud but, it requires the director of the company at sometime before engaging into agreement to have concluded that there would not arise any act of insolvent liquidation and continue to trade. S214 of Insolvency Act requires that, before the corporation is declared insolvent, the directors ought to have known that the situation was hopeless and the company was unable to come out of its financial problems. It is at this point that, only a reasonable director of the company should have stopped to trade since if he does continue to trade there would be high chances of contributing to debts and liabilities of the company as provided by S214 (Joffe et al, 2007). In the case of Re produce marketing consortium Limited (1989)5BCC 569, the company went into liquidation. One of the directors knew that despite the company’s account not being ready on time, the company would be liquidated by February 1987. Consequently the directors should have known that the company would be insolvent. It was immaterial that the company’s accounts had not been prepared on time. The directors had prior knowledge that the turn over would be insufficient. Thus, the directors had to contribute 75, 00,000 to the company assets to minimize loss to the creditors. In this case, it is shown clearly that the director was incompetent because he knew that the company’s account would not be due when required. There was wrongful trading by the director under S214 that provides for wrongful trading through curbing and deterring all the irresponsible conducts that directors involve through abusing privileges provided under the Company’s Act which further limits their liability to the company in case of a loss or insolvency. Alternatively, the directors of the company are held responsible of being dishonest for wrongfully preparing the company’s accounts knowingly that the turn over would not be sufficient (Muchlinski, 2008). In another case , Med-G ourmet Restaurant Limited and in the matter the insolvency Act 1986,case no 7680 of 2010, where there are two competing sets of administrators, one set preferred by the directors and another by the creditors the choice of the creditors prevail. This was further stated in the case of Oracle (North West) Limited V pinnacles services (UK) limited (2009) BCC 59. However, the creditors do not have absolute right to pick the administrators. This was further supported by Judge Maddocks in the case of Fielding Serry &another (2004) Bcc 315. He stated that the creditors will have there way but there do not have an absolute right to the choice of liquidators. In the light of this case the director’s breeched s213 of the Insolvency Act 1986 whereby they wanted to impose who the administrators would be. But, the court ruled in favor of the creditors that, where there is a conflict of interest between the creditors and the directors of the company the creditors should prevail. The directors thus were incompetent because they ought to have known what the true position of the Insolvency Act was in account to s.213 that clarifies, for fraudulent trading in the essence that, directors are hence held reliable for their activities both criminal and in civil Law as stated through (CA 2006 S.993). In the case of Bank of India Christopher Sugar Company &6 others (2005) EWCA cil 693, All ER 242(22 June 2005 section 213 of the insolvency Act was put under scrutiny. the bank was held liable for fraudulent trading through the knowledge of a senior employee who was not a member of the board of directors. The court set out rules for any organization to avoid being attributed with knowledge of the improper conducts of employees or agent’s current or former and thereby held to account for resulting losses. In order for an application to succeed under section 213, the applicant must show knowledge on part of the party assisting in carrying on business fraudulently. It was thus left to the courts to determine whether the employee who entered into six transactions with BBCI knew that they abetting BBBI to defraud its creditors. Arguing from the case above, patten J found that Mr S had the relent knowledge in respect of four of the six transactions and thus found the employee liable for fraudulent trading under section 213 (Muchlinski, 2008). In Re sherbone Associates Limited (1955) BCC 40, a company traded as an advertising agency and was run by three directors. The respondents was the chief executive and also in charge of accounts. The company incurred losses of 89, 000, and 00 in 1987. The company went on experiencing losses and one of the directors left the company. The company went into liquidation in February 1989 with debts amounting to 178, 788, 00. The chief executive died before the trial commenced. It was held that a claim under section 214survived the death of the directors and could be held against his estate. It was, however, could not be established that the director knew or ought to have known that there was no reasonable prospects that the company could not go into liquidation. The directors action could not amount to fraudulent conduct, consequently an action under section 214 could not be sustained (Poole and Roberts,1999). Taking a case study of one of the unreported cases of Barclays bank plc and Sugar Company, here we learn that, there are a few elements of fraudulent that occur within the directors of the Sugar Company. It is realized that one of the members of Sugar Company did go to the bank and took some amount of money in the name of the organization. The bank then issued one of the directors with a cheque of big amount of money. On the day of paying back the money, the bank waited but in vain no money was returned. The bank then decided to take action and follow up the company since one of its directors whom his name is unknown did take the cheque with the company name. The issue becomes difficult since none of the directors of the company agrees of taking the money. This issue gets at hand and the bank decides to take action to prosecute the company to closure until it pays back the money (Davies, Gower and Davies, 2008). The issue is then taken to court and when it establishes and sorts out the issue in regard to s213 insolvency Act 1986, it realizes that the requisite knowledge concerns fraudulent trading whereby the company through one of its members had carried out fraudulent with the intention of defrauding creditors of the company (bank). It also realizes that in the company, there was a person who knowingly knew what kind of fraud was to take effect and the other directors of the company could not understand what was happening. It was later discovered that the members of the company were unaware of one of the members fraudulent trading. Their flip side of the concern is that the company lacked good and proper governance and practical procedures to solve their financial problems (Law Commission, 1997). In the light of the discussed issue the Court of Appeal held that, s213 did require a special rule of attribution. It thus pointed that the director who was involved in the incident did involve in the action with the intention to fraud the company with the use of its name. It was an act of dishonest for the director to take the money without involving the other members and later refusing to say when the bank came to take its valuable. In terms of dishonesty of one of the directors of the company, in regards to dishonesty, once established knowledge leading to any fraudulent activity is established, it was supposed to be taken as evidence of dishonesty where in the if the knowledge was attributed under special rule the evidence of dishonesty on the part of members towards the other would have been established. It would have been better to involve the board members of the company since they would have sorted out the issues through using provided steps and measures which helps by monitoring and also reviewing that the company undertakes. It is through the policy of s213 that, even if the board members were not aware of fraudulent trading that was taking place in the bank; it would have come up with reasons being that the company itself was liable for the fraud that took place without the consent of other directors. Despite the bank taking the initiative of investigating and taking action to the court, the implications provided was thus not very limited and wouldn’t have been applied to try and curb fraud members (Arsalidou, 2009). It thus acted in an incompetence manner in regard to s213 of insolvency Act 1986. It is after this incident that the court seeks for a liquidator to help the bank get back its lost money. The directors thus suffer equally even to whom are very innocent with the incident. After the issue is resolved and directors of the company come together and agree of honesty and to be competent, they agree that wrongful trading is never the best way of achieving any goal but makes the company experience fraud (Poole and Roberts.1999). However, after the directors reached into a concession, they agreed in developing “intent to defraud” where, every director would be liable for their own wrongful activities done. Though the company was facing difficulties a few members still knew that the company was heading to insolvent liquidation and still went ahead with trading. In s214 Insolvency Act, the directors after the incident they knew that the company had entered into an insolvent liquidation and that it was hopeless and that it could not continue trading out of the situation. Therefore, if they required it to be reprieved then the directors could not have continued to trade since this would continue taking the company into risks and debts under s.214. According to s.214 insolvency Act, it does not directly affect the liabilities of the members of the company but to the directors as opposed to the s.213 where it applies to any individual who is involved in carrying out of the business thus this qualifies to limitation of liability of all the members in the company. In order for the company to attain honesty it is through establishing s.214 into the company since this will help in solving the companies act regardless of fraudulent trading and for wrongful trading without consulting or involving the other directors of the company. This section has outdone s.213 in the sense that, it helps in dealing with the member individually where they have involved in fraud are have continued in trading knowing well that the company is in insolvency liquidation or at the verge of terminating its services. While considering s.213 which deals with the whole members and directors of the company, it does not necessarily work to know who exactly did fraud the company but renders every individual reliable for mischief committed. The other aspect which makes s.213 weaker than s.214 is the follow up procedure where it is very easy to allocate one of the directors who have done wrongful trading or tried to fraud the creditors of the company (Lowry and Reisberg, 2009). The banking system in this case will have a clear understanding and follow up if the company have adopted the rightful channel that is the use of Insolvency Act 214 which enables follow up and easy tracing of the director who involved in dishonest act of trying to fraud other members and creditors of the company. In the earlier case mentioned if the company had earlier initiated s.214 into the company then it would have been easier to relocate the director who did fraud the company and also it would have been easy to recover the money without involving the court which advised on liquidation or for the whole members to contribute for the loss that one of the directors unmentioned committed (Reisberg, 2606). More so, regarding the bank giving out the cheque it should have tried sorting out if truly it was the company which required the money or it is an individual who wanted to fraud the company with the use of its name. This act portrayed that the bank was not competent and that it breeched out its ay of work by not seeking further advice thereby it could have been held responsible together with the member who received the cheque since it did read that the cheque was meant for a corporate company thus it would have made some effort in contacting at least a few members as guarantors and witnesses rather than signing and issuing the money (Zeigel, 2004). In conclusion, it is proper for the company to try and employ both s.213 and s.213 Insolvency Act since this will assist in developing the company both from fraud and from any acts of misconduct through dishonest and incompetent members who have greed and are selfish from safeguarding the companies interest but rather there to fraud the creditors and leave the company at fraud and suffering from wrongful trading and fraudulent trading activities. It is thus the duty of all directors to take caution over the activities that happen in the company so that there will not arise any mischief activity from one of the directors who will make the company bankrupt and out of function (Reisberg, 2009). The directors should understand well that S213 provides for fraudulent trading in the essence that, directors are hence held reliable for their activities both criminal and in civil Law as stated through (CA 2006 S.993). This usually acts as a measure of protecting creditors and public interests from being fraud by fraudulent trading from the company directors. Also they should be aware that, S214, provides for wrongful trading through curbing and deterring all the irresponsible conducts that directors involve through abusing privileges provided under the Company’s Act which further limits their liability to the company in case of a loss or insolvency. S214 deals with issues where the company has undergone into aspects of insolvents liquidation. Through understanding this they will be a position to hundlre the company assets and resources in an incompetence manner which will enable the company develop and function within the desired rules and regulations (Iacobucci and Davis, 2000). References Arsalidou, A. (2009). Litigation Culture and the New Statutory Derivative Claim: Comp Law 205 at 207. Davies, Gower and Davies., (2008). Principles of Modern Company Law: 8th edn, London Hannigan, D. (2009). Drawing boundaries between derivative claims and unfairly prejudicial petitions: JBL 606-626 Law Commission. (1997). Shareholder Remedies: Cmnd 3769, Pt 6, para.6.15. Lowry, J., and Reisberg. (2009). Pettet’s Company Law: Company and capital markets law (3rd Edn, Longman, Harlow, pp.233-234 Muchlinski, P.T. (2008). Holding multinationals to account: recent developments in English: Litigation and the Company Law Review Co Law, p.168. Ottolenghi, S. (1990). From peeping behind the corporate veil to ignoring it completely: MLR 338. Poole, R., and P Roberts., (1999). Shareholder remedies: Corporate wrongs and the derivative action: JBL 99 Reisberg, A. (2006). Shadows of the Past and Back to the Future: Part II of the Companies Act 2006 (in) action (2009) 6 ECFR 209 at 225: Zeigel, J. (2004). Corporate governance and directors’ duties to creditors: Two contrasting philosophies: University of Toronto Reisberg, A. (2009). Pettet’s Company Law: Company and capital markets law: 3rd Edn, Longman, Harlow, pp.233-234. Iacobucci and K Davis., (2000). Reconciling derivative claims and the oppression remedy, 12 SCLR (2d) 87 Joffe et al., (2007). Minority Shareholders: Law, practice and Procedure: Oxford paras.5.121 and 5.122 Read More