Caught for fraudulent trading

Liquidators seeking to bring a claim under s.213 Insolvency Act 1986 (fraudulent trading) must be able to demonstrate that the relevant persons involved showed actual dishonesty. 

A recent case heard in the Chancery Division saw a company secretary and the sole director of a company face a s.213 petition for fraudulent trading. 

In the case of Overnight Ltd, the company secretary had, according to the presiding Judge, either known of the dishonest nature of some of the company’s transactions or had deliberately failed to make such reasonable enquiries as would have served to have exposed them. The sole director of the company was also found liable under this provision on the basis that he too had failed to probe into transactions which ought to have raised suspicions as to their nature. 

The key point of interest in this case relates to the Court’s calculation of how the loss sustained by the creditor ought to be divided. The Court made use of the wide discretion they have under the parameters of fraudulent trading rules to order the company secretary to be liable for the full amount of loss sustained by the creditor, whilst the sole director was made liable on a joint and several basis for 50 % of that figure. The differential in percentages awarded was as a result of the recognition by the presiding Judge that the sole director had not personally profited from the fraudulent trading. 

Merely a year after the initial case had been decided the matter was brought back to Court with the crux of the case revolving around whether interest should have been awarded on the loss sustained due to the fact that the liquidator had taken a period of six years to instigate proceedings for fraudulent trading from the date of the winding up of the company. The Court held that the delay was quite reasonable as it was only after the expiration of this period that the liquidator had discovered that there were sufficient assets from which recovery of the loss could be made. In the circumstances, the delay was not deemed to have been reasonable and therefore interest remained payable.