assignment 2014 fraudulent trading (recklessness)

8/10/2019 Assignment 2014 Fraudulent Trading (Recklessness)

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CORPORATE INSOLVENCY

ASSIGNMENT PAPER 2014

UDENT ID NUMBER: 811003498

Question 2:

To what extent is

recklessness a

important

consideration in

our understanding

of the

Fraudulent

Trading provision

of Trinidad and

Tobago

Companies Act?

Lecturer: Dr. Chumah Amaefule


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TABLE OF CONTENTS

Table of Contents

Abstract ................................................................................................................................................................ 1

Introduction ...................................................................................................................................................... 2

Elements of Fraudulent Trading .......................................................................................................... 3

Analysis of the Fraudulent trading provision in varying jurisdictions ................................ 5

Position in Trinidad and Tobago ........................................................................................................... 12

Conclusion ................................................................................................................................................ 15


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Page 1

Abstract

The sacrosanct principle of limited liability in the House of Lords decision in Salomon v

Saloman, established that a company and its shareholders were to have separate and

distinct legal personalities. Although this principle was deemed unchallenged, over the

years, legislation created exceptions to this concept of limited liability and separate legal

personality. This allowed for the piercing of the corporate veil, thereby holding directorspersonally liable for their obligations towards the company.

The purpose of this paper is to consider of the element of Recklessness in the

Fraudulent Trading provision, Section 447 of the Trinidad and Tobagos Companies

Act, and its effectiveness as a mechanism for creditor protection .

This paper draws upon the evolution of the duty owed towards creditors, and the reason

for actions being implemented by Government and the courts to impose liability on

directors in certain circumstances. This is followed by an examination of the fraudulent

trading provision, and reasons for the severance between the two concepts. The focus of

this paper will give insight to the pertinent tests laid down in the varying jurisdictions

and through evaluation of the strengths and weaknesses, whether a meaning of

recklessness was articulated.


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Introduction

The concept of fraudulent trading was introduced in 1929 by the UK Greene Committee

on Company Reform 1, and imposed civil and criminal liability on persons, who were

knowingly or party to the carrying on of a companys business w ith intent to defraud

creditors, for any fraudulent purpose. 2 The standard of proof was the same, and the

heavy burden of proving dishonesty prompted the Committee to recommend new

provisions for wrongful trading. As a result, there were two aspects of fraudulent trading.

A civil liability which applies when the company is in the course of winding up, and

imposes liability on persons to make a co ntribution to the companys assets as the court

thinks proper. The criminal offence contained in s.993 of the CA 2006 applies regardless

of whether the company is in winding up or not. This indicates the distinction between

the criminal and civil sanctions, that the power to order a contribution to the assets is

compensatory and not penal. The reason for this was the need for a balance to be struck

between the two concepts. A distinction was to be drawn between an individual creditor 3

who is defrauded in the course of the carrying on of the business of a company and as

such he has an individual remedy under the general law and fraudulent trading. 4

1

Report of the Company Law Amendment Committee, Cnmd 2697, HMSO, London 1926. See, in particular,para 61. 2 Insolvency Law and Practice: Report of the Review Committee (The Cork Report), Cmnd 8558 London:HMSO, 1982. 3 A Hicks & S.H. Goo Cases and Materials on Company Law 6 th Edition The word creditorin its ordinarymeaning, denotes one to whom money is owed, whether that debt can presently be sued for its immaterial:R v Smith (Wallace Duncan) [1996] 2 BCLC 109, CA.4 Morphitis v Bernasconi [2003] 2 BCLC 53, CA


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Elements of Fraudulent Trading

Defining fraud has never been an easy task for the courts. 5 In the civil context, the courts

have been content to refer to fraud as an infraction of fair dealing, abuse of confidence,

or unconscionable conduct, or abuse of power as between a trustee and his shareholder

in the management of a company. 6 However, a more stringent approach is required

when fraud is considered as an element of an offence (criminal test). It is in that context

that Maugham J in Re Patrick and Lyon Ltd 7 defined fraud as connoting 'real dishonesty

involving, according to current notions of fair trading among commercial men at the

present day, real moral blame'. Generally, it is not every dishonest act that is fraudulent

in the commercial sense. The act of dishonesty must be such as would be reprehensible

in the business community. This approach assisted the courts in exerting some elements

of objectivity in determining the existence of fraud beyond the subjective intentions of

the wrongdoer. Thus in R v Allsop 8 Shaw LJ observed that though the detriment that

results to the victims of fraud could be secondary and incidental to the company's

purpose, it is intended only in the sense that it is an anticipated outcome of the fraud

that is perpetrated'. Similarly, in R v Grantham 9 Lord Lane CJ held that:

5 A. Keay, Fraudulent Trading: The Intent to Defraud Element (2006) 35 Common Law World Review 121 at123. Keay referred to fraud as a notoriously difficult sate to prove. 6 See Yalaju Amaya v AREC Ltd [1990] NWLR (pt 145) 422 (SC); Daniels v Daniels [1978] 2 All ER 89 (ChD);Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 All ER 437 (ChD). 7 [1933] Ch 786 at 790. 8 (1977) 64 Cr App R 29 at 31. 9 (1984) 79 Cr App R 86 at 90.


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No distinction is to be drawn ... between the state of mind of one who does an act because

he desires it to produce a particular evil consequence, and the state of mind of one who

does the act knowing full well that it is likely to produce the consequence although it

may not be the object he was seeking to achieve by doing the act.

There are other elements of fraudulent trading however in defining recklessness the

courts considered the aspects of knowingly and fraudulent intent .

We will now consider the origin of the fraudulent trading provisions in the

Commonwealth Caribbean and other jurisdictions.


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A Comparative analysis of the Fraudulent trading provisionin varying jurisdictions

The origin of fraudulent trading statutes in Commonwealth countries was section 75(1)

of the Companies Act of 1928(UK). This section stated that directors of a company who

were knowingly parties to the carrying on (of any company business), with intent to

defraud creditors of the company or for any fraudulent purpose , were to be held

personally liable.10

Australia and New Zealand later adopted a version of this provision.Though the Jenkins Committee recommended that reckless trading should be inserted

within this provision, it was never adopted by either the UK or Australia. However, there

were other countries that undertook a more stringent approach, of these included South

Africa and Ireland. For these reasons, the provisions on fraudulent trading in the above-

mentioned jurisdictions will be examined closely, and contrasted with s.447 of the TTs

Companies Act.

The starting point is the position in the UK and Australia , both jurisdictions have,

over the years, moved away from relying upon fraudulent trading, based on criminal

intent, and introduced their own distinctive provisions to address the failure of directors

to deal with their companies financial malaise.

10 Dale A Oesterle, Corporate Directors Personal Liability for Insolvent Trading in Australia (2000)http://www.law.unimelb.edu.au/files/dmfile/Law_Mono-Insolvent_trading.pdf accessed 29 October 2014.
http://www.law.unimelb.edu.au/files/dmfile/Law_Mono-Insolvent_trading.pdfhttp://www.law.unimelb.edu.au/files/dmfile/Law_Mono-Insolvent_trading.pdfhttp://www.law.unimelb.edu.au/files/dmfile/Law_Mono-Insolvent_trading.pdf


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Comparing the legislation in the two jurisdictions is helpful and instructive as the UK

and Australia are both common law jurisdictions with similar corporate law regimes,

this enables us to focus on the differences in the respective laws without the impediment

of having to take into account differences in the structure of the respective legal systems.

Both the UK and Australian provisions factor objective elements into the liability

question. In Australia, a director will be liable if there were, when debts incurred,

reasonable grounds merely to suspect that the company was or would become

insolvent . The UK standard is higher, in that, it must be demonstrated that the director

ought to have concluded that there was no reasonable prospect of the company to avoid

going into insolvent liquidation . In determining what standard has to be adhered to, the

following were taken into consideration by the court to determine liability; the facts

which a director ought to know or ascertain, the conclusions which ought to have been

reached and the steps that ought to have been taken, which would be known,

ascertained, or taken by a reasonably diligent person, who has the knowledge, skill and

experience that may be reasonably expected of a person carrying out similar functions. 11

Besides the objective element the UK also incorporated a subjective element, namely the

general knowledge, skill and experience of the director. The inclusion of the subjective

element does not serve to reduce the standard of knowing or ascertaining, rather it

heightens it if the director is experienced. Hence a director who is well qualified with a

11 Insolvency Act 1986 s. 214(4).


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significant amount of experience cannot escape liability. Equally, if a director is not very

experienced or has qualities that do not match that of the reasonable director he or she

is not able to take advantage of that and be protected from liability. This means that a

director will be judged by two tests and the director has to attain the higher standard set

by the tests.

On the contrary, there is no subjective element in the Australian provision, with the

result that, provided a director meets the objective standard, it matters not that he or

she was a very experienced director and did not do what a reasonably diligent person

with his or her experience would have done. Nevertheless the Australian provisions are

based on the lower level of needing to prove only that there was reasonable suspicion in

the mind of the director that the company was insolvent. 12

In light of this, the decision in Re Continental Assurance Co Ltd 13 provides positive

dictum on Australian Law. The question in this case was whether the directors knew or

ought to have concluded that there was no reasonable prospect of the company avoiding

insolvent liquidation, 14 Park J found for the directors. He held, inter alia, that the

company was not technically insolvent in mid-1991 and that the directors had acted

12 A. Keay Making Company Directors Liable: A Comparative Analysis of Wrongful Trading in the UnitedKingdom and Insolvent Trading in Australia Vol. 14, Issue 1, 27-55 (2005). 13 [2001] BPIR 733. 14 A. Walters, Wrongful Trading: Two Recent Cases [2001] Insolvency Lawyer 211 at 211
http://onlinelibrary.wiley.com/doi/10.1002/iir.v14:1/issuetochttp://onlinelibrary.wiley.com/doi/10.1002/iir.v14:1/issuetochttp://onlinelibrary.wiley.com/doi/10.1002/iir.v14:1/issuetoc


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reasonably in taking the view that the company could continue to trade while a buyer for

its insurance business was sought.

Theoretically directors in the UK are to engage in more risk-taking and a longer term

view than those in Australia, and in fact are able to continue to trade while insolvent,

carefully juggling their companies competing liabilities.

New Zealand , like other Commonwealth countries, inherited the rather unsatisfactory

English case law on the duty and standard of care of company directors. Re City

Equitable Fire Insurance Co Ltd 15 provides a laidback approach to the standard of care.

Shortly after this case, English legislation introduced the provisions on fraudulent

trading. At present, in New Zealand there are now a number of provisions in the

Companies Act 1993 which are relevant. The result is that there are too many provisions

and they are not particularly effective. This raises the question of what level of unfitness by directors should be penalised and how should it be dealt with. 16

The amendments made by the McArthur Committee recommended that New Zealand

company law was to align itself with that of Australian law and move away from that of

the United Kingdom. 17

15 [1925] Ch 407. 16 J Farrar and D Tennent The Unfitness of Directors, Insolvency and the Consequences- Some Comparisons . 17 S.461 D Companies Act of New Zealand. This included: The separation of the fraudulent trading offencewhich was formerly contained in section 320(3), from the provision creating civil liability and the extensionto circumstances that was not only discovered on winding up and; The inclusion of two reckless tradingprovisions within section 320 enabling the Court to make relevant orders where it appeared in the course ofwinding up of a company that: those persons who were knowingly a party to the contracting of a debt or any


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Of these amendments the enactment of the reckless trading provision was the most

significant.

The test for recklessness includes, whether something in the financial position of the

company would have drawn the attention of an ordinary prudent director to the real

possibility , not so slight as to be a negligible risk , that his continuing to carrying on the

business of the company would cause loss to the creditors. 18 This test essentially restates

the standing of the gross neg ligence test that was established by the South African

Courts.

One matter of consideration that has generated concern, is whether the failure of

directors to maintain proper accounts could amount to a finding of recklessness. This

was addressed in the case of R v Pacific Wools Ltd .19 where careless accounting

protected a director from liability on the basis that he was obl ivious to the companys

insolvency and knowledge of the companys financial difficulties was a prerequisite for

liability. This was to be contrasted with the earlier cases where directors concerned in

those instances were aware that their companies were experiencing financial difficulties.

person knowingly a party to the carrying on of any business of the company in a reckless manner were to beheld liable18 Re Bennett, Keane and White Ltd (1988) 4 NZCLC 99, 64,317. 19 (1992)6 NZCLC67, 824.


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South African legislation simply repeated the United Kingdom position until they

amended their provisions on fraudulent trading so as to extend it to reckless trading as

well, this being the highest standard of proof. Both the offence and civil liability was also

extended and effected simply by inserting the words "recklessly" or before "with intent

to defraud" in the section. 20

The most thriving issue considered by the judiciary concerning this provision was the

meaning of the term recklessly . The Van Wyk de Vries Commission, in the course of

recommending these amendments, stated that recklessness was a wide concept which

not only encompassed the carrying out of a business during insolvent circumstances but

also the carrying on of business while the liabilities exceeded the value of assets.

The leading decision is the case of S v Goertz ,21 where Fagan J stated, that the standard

to be implied would be an objective test i.e. it was mandatory to show that the directornot only acted recklessly but this was to be judged by the standards of reasonable

businessmen. This view was adopted in the cases of Ex Parte Lebowa Development

Corporation Ltd 22 and S v Parsons, 23 where Leon J indicated that the word recklessly

20 S.424(1) of SA Companies Act reads:

When it appears, whether it be in winding-up that any business of the company was or is being carried onrecklessly or with intent to defraud creditors of the company or creditors of any other person for any fraudulent purpose, the Courqq``AZt may declare that any person who was knowingly a party to the carrying on of thebusiness in the manner aforesaid, shall be personally responsible, without any limitation of l iability, for all orany of the debts or other liabilities of the company as the Court may direct.21 1980 (1) SA 269 (C). 22 1989 (3) SA 71 (TPD). 23 1980 (2) SA 397 (D).


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applies to gross negligence and recklessness would in fact vary substantially from case

to case. 24

The question as to whether lesser negligence could amount to recklessness was left open

in the Goertz case however, Margo J in the course of his judgement in the Fisheries case

referred to an article by Hyman 25 where he indicated that had the legislature intended

mere negligence to suffice in order to incur liability it would have used the term

negligently and not recklessly. Hymans view was that recklessness is a concept to be

placed somewhere between mere carele ssness and dishonesty, in other words gross

negligence, without necessarily appreciating or being aware of the consequences. 26

Irish law encompasses reckless trading as a lesser offence to fraudulent trading to

capture situations where there was no actual intent to defraud. 27The test adopted is

similar to that of gross negligence. 28

24 Fisheries Development Corporation of SA Ltd v AWJ Investments (Pry) Ltd and Others 1980 (4) SA 156. 25 Hyman Directors Liability for Companys Debts 1980 SA Co Law J E-1. 26 Bond Law Review , Vol. 6 [1994], Iss. 1, Art. 1. 27 Section 297A of the Irish Companies Act 1963 provides; If in the course of the winding up of a company orin the course of examinership proceedings or where an insolvent company is not being wound up, it is foundthat any officer of the company was knowingly a party to the carrying on of the business in a recklessmanner, then pursuant to Section 297A of the Companies Act 1963, such person may be personally liable forall or any part of the debts or other liabilities of the company 28 Reflects on the knowledge, skill and experience expected of a person in that position, he ought to haveknown that his actions would cause loss to any creditor of the company, or he was a party to the contractingof new company debt and did not honestly believe on reasonable grounds that the company would be ableto pay that/other debts when falling due.


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The sole purpose for mentioning these provisions was to highlight how the provision on

fraudulent trading developed or in some instances repressed in the varying jurisdictions

and to which test has our provision come the closest to resemble.

Trinidad along with these jurisdictions also inherited its fraudulent trading provisions

from the UK however, unlike the UK they considered the recommendations made by the

Jenkins Committee.

S.447 of Trinidad and Tobagos Companies Act provides :

If in the course of the winding up of a Company it appears that any business of the

company has been carried on-

(a) With intent to defraud creditors of the company or the creditors of any other

person or for any fraudulent purpose;

(b) With reckless disregard of the companys obligation to pay its debts and

liabilities; or

(c) With reckless disregard of the insufficiency of the companys asse ts, to satisfy its

debts and liabilities, the Court, on the application of any of the above mentioned may,

if it thinks proper to do so, declare that such were knowingly parties to the carrying

on of the business in that manner and as such would be personally responsible,

without any limitation of liability, for all or any of the debts or other liabilities of the

company, as far as the Court may direct.


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The case of Central Bank of Trinidad and Tobago v Goodwill General Insurance

Company provides useful insight on how our provision is to be interpreted. Rajkumar

J, drew analysis of the meaning of recklessly from S.424 (1) Companies Act 1973 South

Africa and S.297 A (1) Companies Act 1963 Ireland.

He accepted that reckless disregard in the context of this case included gross negligence

and failure to have regard to consequences. He made reference to the South African case

of Philotex (Pty) Ltd v Snyman ,29 where Howie J.A. referred to several previous cases

which concluded that, the ordinary meaning of recklessly included gross negligence with

or without risk- taking. Gross negligence he said was, an attitude or state of mind

characterised by an entire failure to give consideration to the consequence of ones

actions, in other words, an at titude of reckless disregard of such consequences. The

formulation of this case has been approved recently by the South African Supreme Court

of Appeal in Ebrahim v Airports Cold Storage (Pty) Ltd 30 .

It was further submitted that there was some degree of overlap between the elements of

recklessness and knowingly. As such, the court stated that Knowingly means having

knowledge of the facts from which the conclusion is to be properly drawn that the

business of the company was or being carried on recklessly; it does not entail knowledge

of the legal consequences of those facts. He continued that Being a party to the conduct

of the companys business does not have to involve the taking of positive steps in the

29 1998 (2) SA 138. 30 [2008] ZASCA 113.


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carrying on of the business; it may be enough to support or concur in the conduct of the

business.

Regarding intent, Bromley J in Re a Company 31 adopted the dictum of Maugham J in

Re Patrick and Lyon Ltd , where he stated, there is intent to defraud....if the person

responsible was intending to deceive or actually deceived a supplier that he would be

paid at the stipulated time or shortly thereafter when the person so intending knew

perfectly well that there was no hope of that coming about. Rajkumar J, also came to

this reasoning.

31 No. 001418 of 19988 [1990] BCC 526


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Conclusion

As shown, many territories have enacted several laws that pierce the Salomon principle,

thus increasing directorial liability. The lowest standard of liability (excluding the

element of recklessness) was seen in Australia, and requires only that a company incurs

debt, when there are reasonable grounds for suspecting that the company is insolvent

and the director is aware of this or ought reasonably to be aware of it. New Zealands

legislation embraced Australian developments, and resulted in a hybrid approach

between South African legislation and the earlier Australian position. Trinidad and

Tobago has adopted the approach that governs the jurisdictions of South Africa and

Ireland. As a result, the inclusion of recklessness allows us to adhere to a more strict

approach when it comes to directors liability on fraudulent trading.

assignment 2014 fraudulent trading (recklessness)

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