Wrongdoing in insolvency: part 2

Last week we looked at general principles regarding chapter X of the Insolvency Act 1986 and specified offences within that chapter. Now we start to look at the offences themselves.

Section 206 of the act deals with the offence of fraud, deception, etc, committed in anticipation of winding up. This, as we saw last week, is one of a number of offences where if the trigger events are demonstrated the offences are deemed to have been committed unless a statutory defence is established by the defendant on a balance of probabilities. The starting point is that the company is being wound up (whether by the court or by a resolution for voluntary winding up). If that happens, the relevant period for the purposes of looking at this offence is the 12 months which immediately precedes the start of the winding up. The people who are covered by this section are past or present officers of the company. Directors are among those included in the definition of officers, and the section makes it clear that shadow directors are also included (for the definition of shadow director see Office holders Powers part 13).

There are then a number of specified acts which are ones which are covered by the section. The specified amount for certain of these is £500 or more. Fraudulently removing any part of the company's property to the specified amount is one wrongful act covered. Concealing any part of the company's property to the specified amount is another. And officeholder concealing any debt due from the company is yet another. Making false entries in books or papers regarding the company's property or affairs, or concealing destroying mutilating or falsifying any of the same is equally prohibited. Fraudulently altering, leaving something out of, or parting with documents regarding the company's property or affairs is another trigger. Alternatively pawning pledging or disposing company property obtained on credit and not pay for unless the original obtained was in the ordinary course of the company's business. All of these are acts which can trigger liability and the same applies if the officeholder was party to someone else doing those things.

If this is established then there is an offence unless they defended officeholder is able to establish one of the statutory defences. Essentially in connection with the concealment or false entries in books or papers, it is a defence if the officeholder proves that he or she had no intention to conceal the state of affairs of the relevant company or to defeat the law. In respect of concealment of the company's property or debt or disposal of the property of the company which has not been paid for, there is a statutory defence of proving that the officeholder had no intent to defraud. In connection with fraudulent removal or fraudulent parting with documents etc, there obviously can be no such statutory defence because the conduct has already been determined to be fraudulent.

The penalties for breach can be an unlimited fine and up to 7 years imprisonment on trial on indictment of the Crown Court, or six months and a statutory maximum fine on summary trial before the magistrates (the statutory maximum presently being £5000).

There is a similar provision in section 207 regarding transactions in fraud of creditors. It applies to office holders on winding up in the same way as 206 (albeit that shadow directors are not expressly referred to and therefore presumably omitted). If the relevant officeholder has made a gift or transfer of or similar acts in respect of the company's property, or concealed or removed any part of the company's property when this has occurred within two months before the date at which a judgment to pay money against the company was made and remained unsatisfied, then there will be an offence which is imprisonable on trial on indictment before a jury with up to 2 years imprisonment and unlimited fine, and before the magistrates the same as with section 206. There is no offence if the conduct occurred more than five years before the winding up or if the officeholder proves that he or she at the time of the conduct complained of had no intent to defraud the company's creditors. Again this onus is placed on the officeholder.