CHALLENGING PAST TRANSACTIONS
Actions Against Directors
Insolvency Act 1986 - Prevents reckless and negligent conduct where directors continue to incur debts where
there is no prospect of saving the company thereby increasing creditors’ losses.
FRAUDULENT TRADING
Claimant
S.213 – Liquidator or S.246ZA – Administrator
Third party assignee (raise funds and avoid risk of litigation).
Defendant
S.213(2) and S.246ZA(2): Any person knowingly party to the carrying on of any business of the company.
S.213(1) and S.246ZA(1): With intent to defraud creditors or for any fraudulent purpose.
Requirements
Actual dishonesty must be proved, very high standard so claims are rare.
Defence
Dishonesty assessed on subjective basis, so if genuinely believe, however unrealistically, that ‘things
would get better’ so continue trading then can use this ‘sunshine defence’.
Sanction
S.213 and S.246ZA: Civil liability to contribute to funds available to unsecured creditors for loss caused
by the carrying on of the company’s business with intent to defraud (not punitive).
S.993: Criminal sanctions of imprisonment up to 10 years and fines.
S.10 Company Directors Disqualification Act 1986 (CDDA): Disqualification order.
WRONGFUL TRADING
Designed to be easier to prove than fraudulent trading – no requirement for intent or dishonesty. Ensures
directors mitigate losses as will be personally liable.
Claimant
S.214 – Liquidator
S.246ZB – Administrator
Third party assignee (raise funds and avoid risk of litigation).
Defendant
S.214(1) and S.246ZB(1): Any director (shadow, de facto and non-exec) at the relevant time..
Requirements
S.214(2) and S.246ZB(2): At the point of no return (before commencement of winding up / insolvency
procedure) the director knew or ‘ought to have concluded’ there was no reasonable prospect the
company would avoid going into ‘insolvent liquidation or administration’.
o Ought to have concluded –
Accounts show liabilities exceed assets
Litigation against company for unpaid sums
Bank refusing to extend overdraft
Suppliers refusing to make further deliveries until invoices paid
Failure to meet sales or cash flow targets
Collapse of a major customer or supplier
Change in the market
o Insolvent liquidation or administration –
Liabilities and cost of liquidation (S.214(6)) or administration (S.246ZB(6)) exceed assets.
Judged solely on balance sheet test (S.123(2) (not cash flow (S.123(1)(e)).
Actions Against Directors
Insolvency Act 1986 - Prevents reckless and negligent conduct where directors continue to incur debts where
there is no prospect of saving the company thereby increasing creditors’ losses.
FRAUDULENT TRADING
Claimant
S.213 – Liquidator or S.246ZA – Administrator
Third party assignee (raise funds and avoid risk of litigation).
Defendant
S.213(2) and S.246ZA(2): Any person knowingly party to the carrying on of any business of the company.
S.213(1) and S.246ZA(1): With intent to defraud creditors or for any fraudulent purpose.
Requirements
Actual dishonesty must be proved, very high standard so claims are rare.
Defence
Dishonesty assessed on subjective basis, so if genuinely believe, however unrealistically, that ‘things
would get better’ so continue trading then can use this ‘sunshine defence’.
Sanction
S.213 and S.246ZA: Civil liability to contribute to funds available to unsecured creditors for loss caused
by the carrying on of the company’s business with intent to defraud (not punitive).
S.993: Criminal sanctions of imprisonment up to 10 years and fines.
S.10 Company Directors Disqualification Act 1986 (CDDA): Disqualification order.
WRONGFUL TRADING
Designed to be easier to prove than fraudulent trading – no requirement for intent or dishonesty. Ensures
directors mitigate losses as will be personally liable.
Claimant
S.214 – Liquidator
S.246ZB – Administrator
Third party assignee (raise funds and avoid risk of litigation).
Defendant
S.214(1) and S.246ZB(1): Any director (shadow, de facto and non-exec) at the relevant time..
Requirements
S.214(2) and S.246ZB(2): At the point of no return (before commencement of winding up / insolvency
procedure) the director knew or ‘ought to have concluded’ there was no reasonable prospect the
company would avoid going into ‘insolvent liquidation or administration’.
o Ought to have concluded –
Accounts show liabilities exceed assets
Litigation against company for unpaid sums
Bank refusing to extend overdraft
Suppliers refusing to make further deliveries until invoices paid
Failure to meet sales or cash flow targets
Collapse of a major customer or supplier
Change in the market
o Insolvent liquidation or administration –
Liabilities and cost of liquidation (S.214(6)) or administration (S.246ZB(6)) exceed assets.
Judged solely on balance sheet test (S.123(2) (not cash flow (S.123(1)(e)).
