directors presided over the insolvency of a Spanish and Cypriot orange and lemon business. One had experience in bookkeeping

Unlawful trading cases
Main articles: Trading while insolvent, Fraudulent trading, and Wrongful trading

Before a company formally enters an insolvency procedure, the directors (including de facto directors and shadow directors) will commit a criminal offence if they dishonestly keep the company running to defraud creditors, and will be liable to pay compensation if keep trading when they ought to have known a company would not avoid liquidation. The first, fraudulent trading provision lies in the Insolvency Act 1986 section 213,[179] A director must have actually been dishonest, in the sense of the criminal law case R v Ghosh[180] that it was dishonest by ordinary standards and she recognised that.[181] The amount a director may have to pay is not in itself punitive, but only the amount to compensate for the losses incurred in the period when he dishonestly kept the company running. In Morphites v Bernasconi[182] Chadwick LJ held, obiter, that it was not the intention of Parliament to enact a punitive element for damages. Instead, under the Companies Act 2006 section 993, there is a specific offence of fraudulent trading, carrying a fine of up to £10,000.[183] Beyond the directors, anyone who is knowingly party to the fraud will also be liable. Before someone can be an accessory to fraud, there must be an initial finding or allegation that a principal was also fraudulent. So in Re Augustus Barnett & Son Ltd[184] Hoffmann J struck out a liquidator's suit for fraudulent trading against the Spanish wine manufacturer, Rumasa SA, and parent of Barnett & Son, because although it had given a comfort letter for its subsidiary's debts, and although the subsidiary was advised that a fraudulent trading charge may arise, that had not actually been alleged yet. Fraudulent trading depends on "real moral blame" attributable to someone.[185]

By contrast, wrongful trading is a cause of action that arises when directors have acted negligently. The Insolvency Act 1986 section 214 states that directors (including de facto and shadow directors[186]) are culpable for wrongful trading if they continue to trade when "at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation". To determine whether someone "ought" to have concluded this, a director is judged by the skills one ought to have for their office, and a higher standard if the director has special skills (such as an accountancy qualification). In Re Produce Marketing Consortium Ltd (No 2)[187] two directors presided over the insolvency of a Spanish and Cypriot orange and lemon business. One had experience in bookkeeping. Knox J held that although in small companies procedures and equipment for keeping records will be less than in large companies, under section 214 "certain minimum standards are to be assumed to be attained" like keeping the accounts reasonably accurate. Here the accounts were done late even as debts were mounting. While the basic measure of compensation payable by directors for wrongful trading is assessed according to the loss a director creates from the point in time where insolvency was plainly unavoidable, in assessing the level of damages awardable, the court has the discretion to take into account all factors that it feels is appropriate. In Re Brian D Pierson (Contractors) Ltd[188] Hazel Williamson QC held that the directors of a golf course business were culpable for wrongful trading, but reduced their contribution by 30 per cent, given that poor weather had made profitable golf business more difficult than normal.

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Because the misfeasance provision reflects causes of action vested in the company, any money recovered under

Under the Insolvency Act 1986 section 212,[171] a liquidator or administrator can bring a claim for summary judgment in the company's name to vindicate any breach of duty by a director owed to the company. This means the directors' duties found in the Companies Act 2006 sections 171 to 177, and in particular a director's duty to act within her powers, her duty of care and duty to avoid any possibility of a conflict of interest. "Director" in this sense is given a broad scope and includes de jure directors, who are formally appointed, de facto directors who assume the role of a director without formal appointment, and shadow directors, under whose directors the official directors are accustomed to act.[172] The candidates for de facto or shadow directors are usually banks who become involved in company management to protect their lending, parent companies, or people who attempt to rescue a company (other than insolvency practitioners). In Re Paycheck Services 3 Ltd a majority of the Supreme Court held that acting as a director of a corporate director cannot make someone a de facto director unless they voluntarily assume responsibility for a subsidiary company.[173] Similarly to be shadow director, according to Millett J in Re Hydrodam (Corby) Ltd[174] it is not enough to simply be on the board of a parent company.

As an emphasis to the standard codified list of duties, and now reflected in the Companies Act 2006 section 172(4), at common law the duty of directors to pay regard to the interests of creditors increases as a company approaches an insolvent state. While ordinarily, a director's duty is to promote the company's success for the members' benefit,[175] in the vicinity of insolvency a director's actions affect the financial interests of the creditor body the greatest.[176]

Because the misfeasance provision reflects causes of action vested in the company, any money recovered under it is held so that it will go to pay off creditors in their ordinary order of priority. In Re Anglo-Austrian Printing & Publishing Union[177] this meant that a liquidator who had successfully sued directors for £7000 had to give up the funds to a group of debenture holders, who had not yet been paid in full, so there is no discretion to apply the assets in favour of unsecured creditors. A potential benefit is that because the causes of action are vested in the company, they may be assigned to third parties, who may prefer to take the risk and reward of pursuing litigation over the liquidator or administrator.[178] These features are the reverse for money recovered through the statutory based causes of action of fraudulent and wrongful trading.
Unlawful trading

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Under the Insolvency Act 1986 section 212,[171] a liquidator or administrator can bring a claim for summary

Director duty cases
See also: UK company law, Directors' duties in the United Kingdom, Directors' duties, Misfeasance, and CDDA 1986

Under the Insolvency Act 1986 section 212,[171] a liquidator or administrator can bring a claim for summary judgment in the company's name to vindicate any breach of duty by a director owed to the company. This means the directors' duties found in the Companies Act 2006 sections 171 to 177, and in particular a director's duty to act within her powers, her duty of care and duty to avoid any possibility of a conflict of interest. "Director" in this sense is given a broad scope and includes de jure directors, who are formally appointed, de facto directors who assume the role of a director without formal appointment, and shadow directors, under whose directors the official directors are accustomed to act.[172] The candidates for de facto or shadow directors are usually banks who become involved in company management to protect their lending, parent companies, or people who attempt to rescue a company (other than insolvency practitioners). In Re Paycheck Services 3 Ltd a majority of the Supreme Court held that acting as a director of a corporate director cannot make someone a de facto director unless they voluntarily assume responsibility for a subsidiary company.[173] Similarly to be shadow director, according to Millett J in Re Hydrodam (Corby) Ltd[174] it is not enough to simply be on the board of a parent company.

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