Fraudulent trading, Business Law and Ethics

Fraudulent Trading:

Section 323 provides that if, in the course of the  winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other  person, or for any fraudulent purpose, the court, on the application of the official receiver or the liquidator or any creditor or contributory of the company may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible,  without any limitation of liability, for all or any of the debts or other liabilities of the company as the  court may direct.

The personal liability of the person concerned for the company's debts is what constitutes, in an extremely loose sense, an instance of lifting the veil of incorporation. The corresponding section of the English Companies Act is invariably cited in English company law text-books as an instance of lifting the veil. The citation, though hallowed by English academic tradition, is logically  untenable.

No Kenya case appears to have been decided under the  section. However, the relevant English cases do suggest that to be "knowingly parties" to fraudulent trading  under the section some positive step must have been taken by those concerned: Re: Maidstone Building Provisions   Ltd (10).

It should be noted that, on its literal construction,  s.323 appears to be wider than s.33 because it also  covers liabilities other than debts, such as liability in tort, or damages for breach of contract. It can also be invoked against directors, members or anybody else who participated in the fraudulent trading. However, the  obvious limitations of the section is that it can only be invoked on a winding up and the applicant must prove fraud.

If the liquidator applies to the court any money received is distributed to creditors generally and forms part of the general assets of the company: Re William C Leitch Ltd (No 2) (II). However, if a creditor applies the  court may award him his actual loss or, alternatively, order the defendants to pay his actual debt: Re: Cyona Distributors Ltd (12).

Posted Date: 1/12/2013 2:08:02 AM | Location : United States







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