The Truth About Dishonesty In Fraudulent Trading Under English Law

Summary

Case: Pantiles Investments Ltd & Anor v Winckler [2019] EWHC 1298 (Ch) (23 May 2019)

A recent decision of the English High Court (the "Court") has found a director guilty of fraudulent trading under s. 213 Insolvency Act 1986 (UK) (the "Insolvency Act"). Section 213 is a ground of liability rarely invoked, yet 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 s. 214 of the Insolvency Act1.

Following Morris v Bank of India2, the Court accepted that, although the term "dishonesty" is not used in s. 213, dishonesty is a requisite component in establishing liability.

In the first application of s. 213 since the Supreme Court's decision in Ivey v Genting Casinos (UK) Ltd ("Ivey")3, the Court held that the question of dishonesty involves, firstly, determining as a question of fact the defendant's actual knowledge or belief as to the facts and, secondly, establishing whether the defendant's conduct was dishonest according to the objective standard of ordinary people. In arriving at a finding of guilt, the Court quoted the following excerpt from the Supreme Court in Ivey:

"The reasonableness or otherwise of his belief is a matter of evidence ... going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When, once the actual state of mind as to knowledge or belief as to facts, is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest' (Emphasis added.)

The law has thus moved away from the further requirement, previously accepted4, that the defendant must realise that what he or she was doing was, by the standard of reasonable and honest people, dishonest.

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.

This alert is relevant to companies in financial stress, as well as to directors, corporate advisors, creditors and insolvency...