Office holders Powers part 21

Under section 213 of the Insolvency Act 1986 the liquidator in a winding up is given the power to apply for a declaration regarding persons being knowingly parties to the carrying on of the business of the company being wound up in such a way as to amount to fraudulent trading. Fraudulent trading for this purpose is carrying on any business of the company with intent to defraud creditors of the company or creditors of any other person, or carrying on such business for any fraudulent purpose. If a person is declared party to fraudulent trading then they are liable to make such contributions (if any) to the assets of the company in liquidation as the court thinks proper.

This means that there are three things which the liquidator has to show. The first is that there was fraudulent trading in the sense that business was carried on with intent to defraud creditors (regardless of whose creditors those were) or for any fraudulent purpose. The second is to show that the person against whom the application is brought participated in the carrying on of that business. The third thing is to show that such person did so knowingly. In order to obtain relief all three things have to be shown.

Fraudulent trading is also a criminal offence under section 993 of the Companies Act 2006. Although the elements of what is being alleged are the same, of course in the ordinary way if criminal proceedings are being brought those have got to be proved beyond reasonable doubt, whereas civil proceedings are decided on the balance of probabilities (albeit that even on that standard, the general test is that the more grave the allegation the more clear the proof must be albeit to demonstrate that the more likely than not test has been satisfied).

Although frequently it will be directors who are subject to claims under this section, the wording is not limited and can cover any person (natural or legal, so that companies are covered by this) who can be said to have been knowingly a party within the tests previously set out. There is no requirement that any such person should have a managerial or controlling position within the company.

Carrying on business is interpreted widely and so a single transaction can suffice for this.

In order to decide on intent to defraud the state of mind of the person against whom the allegation is made is the relevant one. There has to be a either intent to defraud, or a reckless indifference as to whether people were defrauded. Dishonesty has to be shown against the person against whom proceedings are brought. As with any dishonesty allegation, full particulars have to be given so that in an application it is necessary to set out very clearly what it is that is relied upon to suggest that there has been intent to defraud.

If someone acts knowingly, they must have had the knowledge at the time they did whatever act it was that is being complained of. If they knew that the fraud was going on, then obviously there is knowledge. However so-called " Nelson8in blindness" can suffice for knowing action. If someone suspects that a fraud exists, one does and they deliberately avoid establishing that there is a fraud or finding out the details they do not want to know, that can amount to knowing conduct.

If the court makes a declaration, then it has to decide on what contribution should be made. That contribution will be for all of the creditors generally. The court will at what loss was caused by the fraudulent trading and what the effect of the individual's part in that loss was.