On 15th October, Morrison & Foerster LLP published a briefing concerned with a recent High Court decision involving fraudulent trading under section 213 of the Insolvency Act 1986. It says that the case involves a ground of liability rarely invoked, although it is an important remedy for insolvency practitioners, particularly since it can be raised where the insolvent company’s assets overall have not been diminished in the course of trading – in contrast to ‘wrongful trading’ under section 214. Fraudulent trading is both a criminal offence and a civil liability – and can be fraud against anyone, not just the creditors of the company. It is said that the case shows that dishonesty is a requisite component in establishing liability. The briefing says that the Court also considered whether there is fraudulent trading if a company incurs a new liability in circumstances in which the liability provides no benefit to the company and which liability the company has no intention of servicing or repaying. The briefing concludes that the test for dishonesty in fraudulent trading is now the same whether it is a claim for civil liability or when charged as a crime; incurring debt for the company that directors know the company cannot repay can stray into fraudulent trading; and a claim under section 213 may arise not only against directors but also corporate advisers when new liabilities are being incurred.
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