Purpose
Sections 213 and 246Z impose a civil liability to contribute to the funds available to the general body of unsecured creditors suffering loss caused by the carrying on of the company’s business with intent to defraud. Additionally, there are criminal sanctions under s.993 CA 2006.
Who may bring a claim?
Originally, only liquidators could bring fraudulent trading claims. The SBEEA 2015 amended the IA 1986 to enable administrators to bring these claims as well. The relevant statutory provisions are s.213 for liquidations and s.246ZA for administrations. In the statutory provisions which are given below, the first section refers to the relevant provision for liquidations and the second for administrations. Substantively, the provisions are the same. Administrators and liquidators can now assign fraudulent trading claims to a third party as a way of raising funds for the insolvent estate and thereby, avoid the risk of litigation (similarly introduced by the SBEEA 2015, amending the IA 1986).
Against whom can a claim be brought?
A claim can be brought against any person (ss.213(2) and 246ZA(2)) who is knowingly party to the carrying on of any business of the company with intent to defraud creditors or for any fraudulent purpose (ss.213(1) and 246ZA(1)).
Requirements for liability under ss.213(1) and 246ZA(1)
Actual dishonesty must be proved. In practice, a very high standard of proof is required, which is likely to be extremely difficult for a liquidator or an administrator to establish. It is for this reason that claims for fraudulent trading are rare and claims for wrongful trading are more often brought against directors.
Defence
Dishonesty is assessed on a subjective not objective basis i.e. what the particular person knew or believed. Therefore, if the directors of a firm genuinely believed, however unrealistically, that ‘things would get better’ and the company would trade out of its difficulties, this would provide an effective defence, sometimes known as the ‘sunshine defence’.
Sanction
A person found to be liable under ss.213 and 246ZA can be ordered to make such contribution to the company’s assets as the court thinks proper. The court does not have the power to include a punitive element in the amount of any contribution to be made. The contribution should only reflect and compensate for the loss caused to the creditors.
Where the court makes an order against a person under ss.213 or 246ZA, and that person is also a director, the court is likely also to make a disqualification order under s.10 CDDA 1986.
In addition, criminal sanctions can be imposed by the court under s.993 CA 2006, to punish a person knowingly party to fraudulent trading, whether or not the company is being wound up. The penalties are imprisonment (of up to 10 years on indictment) and/or fines.