April 24, 2020

Wrongful Trading Part 2 – Is There Really a Suspension?

This post was written by: Jagdeep Sandher

In the last blog post on this topic we discussed the effects of the government suspension on wrongful trading under section 214 and 246Z insolvency Act 1986 and the pitfall under section 172(3) Companies Act 2006.

We suggested that the suspension, although welcome, should be taken with caution as a result of section 172(3). There are a number of other provisions within the Insolvency Act that Directors should be cautious of, these are:

  1. Misfeasance – section 212 of the insolvency Act 1986 provides a liquidator a summary remedy in the liquidation of the company, thus allowing it to seek the restoration of company property or funds and assess compensation or damages against its previous directors.

Misfeasance is a broad concept and encompasses the following:

  • The retention and or misapplication of company funds or property;
  • Becoming accountable for property or funds that belong to the company;
  • Being in breach of your fiduciary duties to the company (sections 170-177 Companies Act 2006).

The Companies Act 2006 states that directors duties are generally as follows:

    • To act within powers.
    • To promote the success of the company.
    • To exercise independent judgment.
    • To exercise reasonable care, skill and diligence.
    • To avoid conflicts of interest.
    • Not to accept benefits from third parties.
    • To declare an interest in a proposed transaction or arrangement.
  1. Fraudulent Trading – these rules can impose a civil liability on directors where it evident that the business of the company has been carried out so as to defraud company creditors, creditors of any other person or for any other fraudulent purpose. It should also be noted that this is a criminal offence.

The offence is committed by anyone who is knowingly party to the carrying on of the business and can extend to non-directors and third parties also. To evidence this, a person must have taken steps in the carrying on of that business.

An intention to defraud creditors occurs where a director or others do things that he knows will result in the existing creditors not being paid e.g. dissipating assets for less than their worth so creditors cannot be paid. It could also be where someone is induced to become a creditor where they were not already so at a time where the company is or is likely to become insolvent, e.g. purchasing goods on credit who are unaware of the state of the company’s finances.

  1. Office holder claims – these claims relate to transactions made by a company before it enters administration or liquidation whilst it is insolvent (transactions at an undervalue and preferences). The Court has the power to make an order restoring the position as if the company had not entered into the transaction. The court could also order that he director be personally liable to compensate the company if the transaction was entered into where he was also in breach of his directors duties under the Companies Act 2006 (see above).
  2. Transactions Defrauding creditors – if a transaction at an undervalue or a gift is made section 423 Insolvency Act 1986 allows an insolvency officer or a victim of the fraud to seek the Courts intervention to unwind the transaction if it was entered into to put assets beyond the reach of the creditor. This could also be deemed a breach of directors duties and as such a Director could be held liable personally.

As can be seen, it is certainly not plain sailing and although the headline grabber may give you some cause for comfort you should still be cautious in entering in to any transactions that could be called into questions at a later date.

*This blog is intended to provide the reader with a general understanding of things to consider and should not be relied upon as specific legal advice. Each matter will be fact specific and you should take advice if you are concerned about any of the matters raised in this article.