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Durham E-Theses View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Durham e-Theses Durham E-Theses An Analysis of the Statutory Regulation of Fraudulent Trading SKUDRA, HENRY,MIKOLAJ How to cite: SKUDRA, HENRY,MIKOLAJ (2012) An Analysis of the Statutory Regulation of Fraudulent Trading, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/3642/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk An Analysis of the Statutory Regulation of Fraudulent Trading Henry Mikolaj Skudra University College, University of Durham Research conducted at Durham Law School, University of Durham This thesis is submitted in fulfilment of the requirements for the degree of Master of Jurisprudence. November 2011 Copyright Declaration All rights reserved. No part of this thesis may be reproduced or transmitted, in any form or by any means, or stored in any retrieval system of any nature, without prior written permission. Any information derived from it should be fully acknowledged. Acknowledgments I wish to thank my supervisors Mr. Chris Riley and Professor Christian Witting for their advice, encouragement and guidance throughout my research. I am also grateful to my friends and my fellow researchers at Durham Law School whose support and friendship during this year has been magnificent. Abstract Fraudulent trading is a concept embodied most unusually in two almost identical provisions on the Statute Book. From its humble beginnings as a single umbrella provision used as a means by which creditors recouped their assets and delinquent directors who defrauded creditors were punished, it has morphed and evolved. This evolution has produced two separate provisions in the civil and criminal arenas and has given rise to academic uncertainty surrounding the purpose, meaning and future of fraudulent trading. Setting the scene and context surrounding the notion of fraudulent trading enables these questions to be then more easily addressed and it is highlighted that it is an unusual but worthwhile tool as a means of recovering assets. Questions still remain over whether criminal fraudulent trading will (eventually) perhaps eclipse its civil law statutory sibling given its procedural and jurisprudential advantages, immense prevalence and the post- conviction options now available to the Courts provided by recent legislation. In the final analysis however, Parliamentary resolve will be required for this to occur and it does not, at the moment, appear to be forthcoming. Table of Contents Introduction 1 Chapter One: The Context of Creditor Remedies- The Stunned Elephant 5 1.1 Introduction 5 1.2 The Nature of Fraudulent Trading 8 1.3 Wrongful Trading Problematics 11 1.4 Tort of Deceit Problematics 27 1.5 Conclusion 32 Chapter Two: The Development of Fraudulent Trading- A Mixed Bag 33 2.1 Outline 33 2.2 Historical Beginnings 34 2.3 Key Elements To Fraudulent Trading 46 2.4 Conclusion 62 Chapter Three: Fraudulent Trading- An Analysis 63 3.1 Introduction 63 3.2 The problematics of “intent to defraud” 63 3.3 Other restrictions of the wording of fraudulent trading which influence the effectiveness 70 and efficacy 3.4 The effects of (non)punishment 75 3.5 Conclusion 78 Chapter Four: s.993 Companies Act 2006 and s.213 Insolvency Act 1986- A Comparison 79 4.1 Outline 79 4.2 Jurisprudential Comparisons 80 4.3 Practical Comparisons 87 4.4 Conclusion 96 Chapter Five: Fraudulent Trading- What Are We To Do? 98 5.1 Introduction 98 5.2 Section 213 of the Insolvency Act 98 5.3 Section 993 of the Companies Act 101 5.4 Section 213 of the Insolvency Act- Here To Stay? 103 Final Conclusions 106 Appendix 1: Companies Act 1928, s.75/ Companies Act 1929, s.275 109 Appendix 2: Companies Act 1948, s.332 110 Appendix 3: Companies Act 1985, s.458 111 Appendix 4: Companies Act 1985, s.630 112 Bibliography i List of Abbreviations BLJ: Banking Law Journal CLJ: Cambridge Law Journal CLR: Cambridge Law Review CLWR: Common Law World Review Crim LR: Criminal Law Review ECHR: European Convention on Human Rights HC: House of Commons HL: House of Lords ICCLR: International Company and Commercial Law Review InsO: 1994 Insolvency Statute (Insolvenzordnung) (Germany) JBL: Journal of Business Law LMCLQ: Lloyd’s Maritime and Commercial Law Quarterly LQR: Law Quarterly Review MLR: Modern Law Review NLJ: New Law Journal OJLS: Oxford Journal of Legal Studies Introduction Outline Companies are constantly subjected to financial stresses and pressures as a normal part of business life. A major source of such pressure is that arising from business debts and/or liabilities whereby the company owes money to one or more creditors1. When, however, a company fails to keep up with its debt repayments or voluntarily is to be brought to an end, the company is wound up2. Winding up can occur following a petition from creditors, members or directors and during this legal and administrative process, its debts and liabilities are assessed and must be contributed towards by members past and present3. Normally, and as according to the principles of limited liability, this contribution will be exceptional narrow and amount to either a nominal sum or will be the monies which the shareholder(s) paid for his or her shares. Very often there are insufficient remaining assets for the company, even when liquidated, to fully repay its creditors and so they will try and recover their losses by piercing the corporate veil and extracting funds from the company’s directors; almost always through the medium of an insolvency professional. To illustrate the potential extent of the problem, there were in England and Wales in the second quarter of 2010, a total of 4, 080 compulsory and creditors’ voluntary liquidations4 with a noticeable rise from 2008 since the Recession. Indeed, Goode aptly highlights this in his latest authoritative work on corporate insolvency law when he identifies a stark rise from 12, 507 liquidations in 2007 up to 15, 535 in 2008 and 19, 077 in 20095 as the Recession hit home. 1 A creditor being a natural or legal person with a pecuniary claim against a company per Lord Mackay of Clashfern (ed), Halsbury’s Laws of England: Volume 15 (5th edn, Lexis Nexis, London 2009), para [1427]. 2 See Part IV of the Insolvency Act 1986. 3 Insolvency Act 1986, s.74. See generally- R. Goode, Principles of Corporate Insolvency Law (4th edn, Sweet & Maxwell, London 2011), [1-39]-[1-57]. 4 The Insolvency Service, ‘Insolvency Statistics: Company Insolvencies’ <http://www.insolvency.gov.uk/otherinformation/statistics/201008/index.htm> accessed 1st November 2010. 5 R. Goode, Principles of Corporate Insolvency Law (4th edn, Sweet & Maxwell, London 2011), [1-31]. - Page 1 - The issue of creditors recouping their losses is highly relevant given the modern financial climate with the U.K. recently coming out of recession, persistent very low economic growth and with very many loans and other financial instruments of credit “going bad”6. However, there is a multitude of ways in which creditors can attempt to recoup their losses by piercing the corporate veil. These include a finding that the company is a mere façade/sham, a finding of implied agency7, contractual agreements and statutory requirements that the veil be lifted8. One of these statutory requirements is where fraudulent trading has been proven. Fraudulent trading comes in the form of both criminal9 and civil10 provisions and both lead to defendants potentially being liable to make a contribution to the assets of the (now normally wound up) company in one manner or another. It is especially noteworthy that assets recovered under s.213 actions are distributed pari passu with chargeholders not being prioritised. This, as Keay eruditely highlights, is due to the fact that liquidators who are solely permitted to bring s.213 actions act, although on behalf of creditors, in their own legal capacity and it is not the company bringing the action11. The position is the same for criminal fraudulent trading, as will be seen below in this thesis12. Of further importance is the fact that both natural and legal persons can be held accountable; thus enabling higher-worth companies to be targeted as well as individuals. This is crucial given that other creditor remedies are much more restrictive in who they can hold to account. It is also essential to bear in mind that fraudulent behaviour holds much more serious standing within the Law of England and Wales than any other forms of proscribed transacting. This is highlighted by the lengthier and more severe punishments and penalties which it attracts. It is submitted that the activity of inducing more credit to be given to a failing company in the knowledge that creditors have little or no chance of recouping their assets ranks amongst the most economically dangerous of business mischiefs. 6 Indeed, at the time of writing, a new global financial crisis has emerged and brings with it extremely poor growth figures and the danger of re-entry in economic recession- a so-called “double-dip recession”.
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