Fraudulent and Reckless trading notes april 23 PDF

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Reckless Trading and Fraudulent Trading:"

Court Applications under the Companies Act - 2013 Mahmud Samad Bloomsbury " Reckless Trading: Good and Bad risk-taking in Irish companies - 2017 Irene Lynch Fanon " Corporate Insolvency and Rescue - 2012 Professor Irene Lynch Fannon and Barrister-at-Law Gerard Nicholas Murphy Second Edition Bloomsbury Professional 2012" _________________________________________________________________________________________"

Cork Committee Report’ ( Insolvency Law and Practice, Report of the Cork Review Committee) 1982 “… the aims of a good modern insolvency law are…(i) To recognise that the effects of insolvency are not limited to the private interests of the insolvent and his creditors, but that other interests of society or other groups in society are vitally affected by the insolvency and its outcome and to ensure that these public interests are recognised and safeguarded.”" In 1990 , the legislation was amended to provide for 2 different sections : S. 297 and S. 297 A of the 1963 Act which separately provide for the imposition of criminal liability for FT s. 297 + the imposition of civil liability for FT and RT S. 297A" Fraudulent Trading: " legislative provision which allows a liquidator to pursue those involved in defrauding the creditors of the company " S. 297 of 1963 Act - provided for civil liability for fraudulent trading and also created a criminal offence of FT. There are many criticisms in Cork Report…. from 1963 to 1990 there were very few civil cases where FT had been successfully pleaded in the Irish Courts and no criminal prosecution had been brought. There have been prosecutions for FT in recent times …. People (DPP) v Synott [1996] , People (DPP) v. Clarkin [2003] Director of Corporate Enforcement v Gannon [2004]" Civil liability for FT??? Section 610(1)(b) Companies Act 2014 ”If found guilty of FT a person may be made personally liable without limit for the debts of the company." Criminal Liability FT??Section 722 Companies Act 2014:" "Any person knowingly a party to carrying on the business of a company with intent to defraud creditors of the company or for any fraudulent purpose shall be guilty of a Category 1 offence." Covers any person, not just officers" Test for FT? Must be proven that: a) a person was knowingly a party to the carrying on of the business of a company" b) was a party with intent to defraud" Definite abusive behaviour - such as concealed accounts and double book-keeping systems being operated" The section, therefore naturally includes any officers of the company who were in the required state of knowledge. Thus, an outsider may be caught by the section e.g the purchaser of the premises in Re Hunting Lodges Ltd [1985]- found partially liable for the debts of the company and was ordered by the court to return £12,000 which had been paid to him as a discount on the purchase price of the property in return for his co-operation in concealing the real price of the property. Similarly, in " Gerald Cooper Chemicals [1978] who had “warmed himself at the fire of fraud’ was also held liable because as a creditor of the company he was found by the court to have known that a particular payment made to him, which he accepted, was only made possible by the fraudulent trading, of the controller of the company. " Furthermore - the section will - of course include - in its ambit any ‘shadow directors’ who are de facto in control of the company. For example, the defendants in Kelly’s Carpetdrome No1 were officially connected to the company as either director or shareholder. In the words of Costello J - the courts were accustomed to ‘ the strange phenomenon of young typists owning the issued shares in companies with very large turnover and with puppet directors controlled by the outside masters. In this case, Costello J found that one of the defendant Mr Kelly - was the beneficial owner of the shares in the company, and the two directors, 1  of 18

his brother (the second defendant) and his brother-in-law ‘did his bidding’. The liquidator must prove knowing participation thus, it had been assumed that knowledge of the trading patterns without active participation may not be sufficient to lead to liability " In Kelly’s Carpetdrome (No 2) - separate proceedings were brought against the two partners in a firm of accountants which had provided some accountancy services for the company, but who were held not to be liable by O’Hanlon J : “While I am satisfied that [the accountants] were employed in an important consultative capacity from time to time not only by Matthew Kelly but also the company, and while they have laid themselves open to a good deal of criticism, for their failure to adopt a much tougher line with clients who gave many indications of sailing windward of the law, I have to come to the conclusion that the evidence in the case stops well short of satisfying me that they were, or either of them was, knowingly party to the carrying out of the business of Carpetdrome with intent to defraud creditors of that company” "

- This is a somewhat unsatisfactory conclusion " - The facts and the conclusion thereon do not square well with the remarks of Carroll J relating to the nonexecutive direction in Hunting Lodges Ltd [1985] and the very different conclusion reached in that case! Although no doubt the creditor in Gerald Cooper Chemicals and the purchaser in Hunting Lodges wcan be distinguished from the accountants in Kelly’s Carpetdrome in that they benefited financially from the fraudulent transactions the failure to question ( or adopt a ‘tougher line’ indicated some degree of collusion

A person will only be found liable for FT where s/he is shown to have acting in carrying on the business of the company with intent to defraud. Proving fraud is a difficult task and requires evidence of dishonesty. " one of the major problems is that proof of FT requires proof of actual dishonesty involving, in the words of Maugham J, “real moral blame.” - Re Patrick & Lyons Ltd [1933] a single transaction may amount to fraudulent trading - Re Hunting Lodges Ltd[1985] , Re PSK Construction Ltd [2009] An issue during the 1963-1990 period was whether a consistent pattern of non-payment of Revenue debts is in itself fraudulent trading. The decision of the HC in Re PSK Construction Ltd [2009] resolved this question, in fact there is no real need to establish a consistent pattern of activity in this regard. " Re William C. Leitch Bros Ltd Judge Maugham said in relation to the intention to defraud, "no reasonable prospect of the creditors ever receiving payment of those debts, it is in general a proper inference that the company is carrying on business with the intent to defraud.”"

Reckless trading :The imposition of liability for RT is intended to be compensatory rather than penal and will be taken into account when fixing the amount for which the officer will be personally liable :" Re Produce Marketing Consortium (No 2) [1984] The amount for which an officer is made liable will normally represent the amount for which the company’s assets are shown to have been depleted by his conduct : Re Bangla Television Ltd [2010] The officer may in appropriate circumstances be made responsible for the entirety of the company’s debts if the debts resulted from the misconduct Re Rex Wood Services Centre Ltd [1987] The mere fact that the insolvent company makes payment to one creditor instead of other creditors will not, per se, amount to intention to defraud R V Cox [1982] Payment may in certain circumstances amount to a fraudulent preference or fraudulent disposition Re Sarflax Ltd [1979] The court may, when deciding the issue of intent, take into account the fact that the person was convicted of an offence arising out of the same acts grounding the fraudulent trading application, such as conviction for theft or tax evasion : Re Gerard Cooper Chemicals Ltd [1978]" 2  of 18

• Three seminal cases - discuss dual possibility of civil + criminal liability .. some doubt as to the standard of proof required. These cases interpret these provisions = Kelly’s Carpetdrome Ltd (No1 1983)HC, (No 2 1984), Aluminium Fabricators Ltd, Hunting Lodges Ltd " • Fundamental corporate law concepts such as limited liability, corporate personality and the division between ownership and control are all part of the company law systems in common and civil law countries " • These concepts are designed to encourage and facilitate risk-taking " • As a company increases in size, the delegation of control by shareholders to management becomes more pronounced. Thus, the potential for abuse of these fundamental structures, leading to unacceptable risktaking has been a perennial problem for company law-makers " • Whether the architecture of company law is sufficient to constrain abuse of the fundamental doctrines of company law leading to unacceptable risk-taking and loss to creditors and other share-holders " • The judiciary in many jurisdictions including Ireland have accepted that the duties a director normally owes to the company as a going concern, and thus to the shareholders, may inure to the benefit of the creditors when the company is insolvent. The judicial approach is based on the premise that an insolvent company’s assets are no longer held primarily for the benefit of the shareholders, but are held instead for the benefit of creditors. This represents a radical departure from the traditional common law position and has resulted in personal liability being imposed on directors for breach of their duties with the benefit going to the creditors of the company."

• The provision represents a piercing of the corporate veil in circumstances where a person, who was while an officer of the company, knowingly permitted it to carry on business in a reckless manner or alternatively in a manner intended to defraud the company’s creditors or the creditors of any person or otherwise for a fraudulent purpose " • An application in respect of RT/FT made only be made when the company is insolvent and in the course of being wound up or in examinership. " • There are 2 discrete circumstances in which a person may be liable, and a person may be found liable under either of them may be ordered to personally pay the debts of the company either in whole/in part without any limitation on liability. " • The minimum liability that a court is likely to impose is the amount lost by the company as a result of the fraud "

• The legislative provisions which seek to restrain abuses of the fundamental principles of company law. Both these concern others involved in management, including other ‘officers’ and ‘shadow directors’ " • How these provisions interact with the duties and obligations of directors and management generally under company law " • in reckless trading - again a liquidator or other individuals described in the statute may pursue officers of the company and make them personally liable for the debts of the company " • The office of the Director of Corporate Enforcement has a role in overseeing the enforcement of these provisions of the Companies Acts. " • In addition to disqualification and restriction, provisions in Irish company law and the fraudulent and reckless trading provisions are “part of the legislative armoury to curb harmful and operational risktaking.” which is considered to be at the unacceptable end of the spectrum." • There is a distinction between entrepreneurial risk-taking which company law has always supported… and operational risk-taking, for example where additional debt is incurred at a point of trading where the incurring of that debt leads to insolvency. " • Operational risk-taking is often considered as harmful risk-taking." • There is a distinction between entrepreneurial and operational risk-taking " • Both provisions regarding deemed reckless trading concern the operational risks of causing loss to the creditors not honesty believing on reasonable grounds that the debt could be paid when it fell due "

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• Very rarely does the law seek to penalise entrepreneurial risk-taking, no matter how misguided both entrepreneurial or business decisions might be in hindsight " • In Re USIT world Plc [ 2005] Court: Peart J : “ It is the very essence of entrepreneurial endeavour that risks are taken.”," “ Risks can differ in character.”" “ a risk taken… with appropriate advise taken, might be characterised as a calculated risk without any element of carelessness, rashness or recklessness attached to it.”"

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Award for the benefit of the company as a whole? Where damages are awarded pursuant to s. 297A in favour of a liquidator or examiner that he will hold such damages on trust for the general body of creditors Re William C Leitch Bros Ltd (No2 ) [1933] In Re Cyona Distributers Ltd [1967] Lord Denning MR suggested that the same was not necessarily true in a case where the successful applicant was a collector or contributory. " In that case, it was held that the applicant had a right to personally retain any award without a corresponding obligation to share it with his fellow creditors or contributories. " ‘ an order may be made either at the suit of the liquidator etc or a creditor. The sum may be compensatory or it may be punitive. The court has full power to…

______________________________________________________________________________________________" White-Collar Crime? White-collar crime refers to financially motivated, nonviolent crime committed by businesses and government professionals. It was first defined by the sociologist Edwin Sutherland in 1939 as "a crime committed by a person of respectability and high social status in the course of their occupation”" A shadow director: is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Under this definition, it is possible that a director, or the whole board, of a holding company, and the holding company itself, could be treated as a shadow director of a subsidiary." A nominal director is appointed by the employer. In contrast to a statutory director, a nominal director will be a natural person, not a legal person" ‘Phoenix Syndrome’ - classic example of commercial abuse. Described by Fletcher in “the genesis of Modern insolvency law “ 1989 - The philosophy underlying this system of business recycling could be expressed in one way as “change the name, the game’s the same.” " "phoenix syndrome": the continuation of a company's business, through a new company, where the original company has gone into insolvent liquidation." In regards to FT - in England, there has been an inclination to regard ‘blind-eye knowledge’ as sufficient in this context, where ‘the party in question shuts its eyes to the obvious because of a conscious fear that to enquire further will confirm a suspicion of wrongdoing which already exists’ Manifest Shipping Company Limited V. Uni-Polaris Company limited - this case concerned the interpretation of the Marine Insurance Act 1906, regarding the knowledge of a number of parties as a ship’s seaworthiness but it was cited in approval in Bank of India V. Morris [2005] where the Bank of India was held liable for FT" Lord Scott :" “Blind-eye knowledge requires, in my opinion a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist… to allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be basis of a finding of privity.” " these problems are compounded by the fact that because the provisions included the dual possibility of civil + criminal liability there was some doubt as to the standard of proof required. Was it the civil standard of proof, which relies on the balance of probabilities, or the criminal standard, which normally requires proof beyond reasonable doubt??? The issue was raised but not definitively resolved by O’Hanlon J in Kelly’s Carpetdrome Ltd (No2) however was resolved by Murphy J in O’Keeffe v. Ferris [1993]- the issue of 4  of 18

whether CA 1963 s. 297(1) actually created a criminal offence although couched in the language of a civil wrong is considered.."

__________________________________________________________________________________________" • Fraudulent trading is also a criminal offence and can result in person’s disqualification as a Director." • S. 722 criminal liability for fraudulent trading… covers any person not just officers !!" • People DPP v. Synnot [1996] Synnott is the first director jailed for fraudulent trading :In May 1996 a Dublin broker Mark Synnott was jailed for four years and three months by Judge Cyril Kelly in the Dublin Circuit Court. The judge said Synnott had "wreaked havoc on persons of elderly age and in vulnerable situations”." He was disqualified from acting as director" Former insurance and investment broker Mark A. Synnott, whose firm collapsed with debts of more than Pounds 2 million, has become the first company director in the Republic to be jailed for fraudulent trading.He was jailed for four years and three months by Judge Cyril Kelly after he pleaded guilty at Dublin Circuit Criminal Court to one charge of fraudulent trading and two charges of fraudulent conversion." A total of some Pounds 400,000 was involved in the fraudulent trading charge. Synnott was also disqualified from acting as a company director, auditor or manager for 10 years." "He was a man completely wrapped up in a fantasy world he had created inside his own head," Mr Peter" Charleton SC (with Mr John Major), defending, said.The company, Mark Synnott (Life and Pensions) Brokers Limited, was effectively trading insolvently since 1982 and was also unbonded, Mr Charleton added.Judge Kelly said it was a nasty and callous deceit with a clear intention to defraud. Synnott had induced people to invest their money with promises of high return and had wreaked havoc on elderly and vulnerable people.Judge Kelly praised Det Garda Jim Flanagan for what he failed his meticulous and diligent investigation of a complicated case. He also thanked counsel on both sides for their handling of the case.The case marked the first time the prosecution had successfully obtained a conviction for fraudulent trading under the 1990 Companies Amendment Act.Synnott wasted the funds on a combination of high living and trying to reimburse investors lured by his excessive promises of returns of up to 25 per cent. He also used some of the money invested with him as a down payment on the purchase of Cruicerath House and Stud near Kill, Co Kildare.The court heard the company was a long established, respected business which was founded by the defendant's father, who died in January 1992 it began as an insurance brokerage and the defendant was the driving force behind going into investment broking.Mr Maurice Gaffney SC (with Mr Shane Murphy), prosecuting, said the charges originated in the "very disturbing" findings of a provisional liquidator called in by Synnott when a petition had been made by an investor to have the company wound up in June 1991.Synnott (49), married but separated, with an address at Bettystown, Co Meath, admitted three charges from a total of 39 on the indictment. The prosecution entered a nolle prosequi on the remaining charges.The fraudulent trading charge alleged that, between September 2nd, 1990, and June 13th, 1991, he was knowingly a party to the carrying on of the business of Mark Synnott (Life and Pensions) Brokers Ltd with intent to defraud the creditors of the company by falsely pretending that he, as a director, was engaged in the bonafide business of investing monies entrusted to him when he knew the company was insolvent.He also pleaded guilty to fraudulently converting sums of Pounds 40,000 of the company's money to his own use on a date between June 23rd and June 26th, 1990, and Pounds 10,000 between January 28th and February 1st, 1991.Det Garda Flanagan said Synnott used the Pounds 40,000 in the June 1990 charge as the down payment on Cruicerath House. The Pounds 40,000 was transferred from one of the company's accounts to the defendant's own personal account on his direction on the understanding a letter of ...