Corporate Insolvency Law Crimes
1. Fraudulent Trading (Under Insolvency Law)
Fraudulent trading occurs when business is carried on with intent to defraud creditors or for any fraudulent purpose. It is a criminal offense, and those responsible can be held personally liable for the debts of the company.
Case: Re Patrick and Lyon Ltd (1933)
Facts: The directors continued to trade despite the company being insolvent and unable to pay its debts. They misrepresented the company’s financial status to creditors.
Held: The court found the directors guilty of fraudulent trading. They were held personally liable to contribute to the company’s assets to compensate the creditors.
Significance: This case established that continuing business with intent to defraud creditors, even if the company appears solvent superficially, amounts to fraudulent trading.
2. Wrongful Trading
Wrongful trading happens when directors continue to trade even when they knew or ought to have known there was no reasonable prospect of avoiding insolvency, but they did not take steps to minimize losses to creditors.
Case: Re Produce Marketing Consortium Ltd (1989)
Facts: The directors continued trading the business even though they knew the company was insolvent. They failed to minimize creditor losses.
Held: The court held the directors personally liable to contribute to the company’s debts because they failed to act prudently once insolvency was inevitable.
Significance: This case set a standard of care expected from directors once insolvency is unavoidable, promoting early action to mitigate losses.
3. Fraudulent Preference
This involves a company giving unfair preference to certain creditors over others before insolvency, usually to put some creditors in a better position unfairly.
Case: Re MC Bacon Ltd (1990)
Facts: Before going insolvent, the company repaid loans to some creditors but not others, which was challenged as fraudulent preference.
Held: The court examined the intent behind the payments and whether there was an intention to prefer certain creditors unfairly.
Significance: This case illustrated the need to scrutinize payments or transactions before insolvency for any preferential treatment that disadvantages other creditors.
4. Concealment of Property
This crime involves hiding or transferring company assets to keep them away from creditors during insolvency proceedings.
Case: R v Grantham (1984)
Facts: The directors deliberately transferred company assets to related parties to keep them out of reach of liquidators.
Held: The directors were convicted for concealment of company property.
Significance: This case underscores the illegality of asset stripping or hiding assets during insolvency to avoid payment to creditors.
5. Failure to Keep Proper Accounting Records
Companies are legally required to keep proper books of account, and failure to do so can constitute a crime, especially when it hampers the insolvency process.
Case: Re London School of Electronics Ltd (1986)
Facts: The company failed to maintain proper financial records, making it difficult to ascertain the financial position or trace transactions.
Held: The court held the directors liable for failing to maintain proper accounting, which impeded the insolvency process.
Significance: This case highlights the importance of transparency and accountability in corporate financial management, particularly in insolvency.
Summary
| Crime | Description | Case Example | Key Takeaway |
|---|---|---|---|
| Fraudulent Trading | Trading with intent to defraud creditors | Re Patrick and Lyon Ltd (1933) | Personal liability for directors involved |
| Wrongful Trading | Continuing to trade when insolvency is inevitable | Re Produce Marketing Consortium | Directors must act to minimize creditor losses |
| Fraudulent Preference | Unfairly preferring certain creditors before insolvency | Re MC Bacon Ltd (1990) | Scrutiny of pre-insolvency payments |
| Concealment of Property | Hiding assets from creditors | R v Grantham (1984) | Criminal liability for asset concealment |
| Failure to Keep Records | Not maintaining proper financial records | Re London School of Electronics | Transparency required for insolvency process |
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