| Re Augustus Barnett & Son Ltd | |
|---|---|
 | |
| Court | High Court |
| Citation(s) | [1986] BCLC 170 The Times , December 7, 1985 |
| Case opinions | |
| Hoffmann J | |
| Keywords | |
| Fraudulent trading | |
Re Augustus Barnett & Son Ltd [1986] BCLC 170 is a UK insolvency law case on the standard of fault required to show that directors have been guilty of fraudulent trading.
Augustus Barnett & Sons Ltd (Barnett) was a subsidiary of Rumasa SA and the main retail UK retail store for wine and sherry export. Barnett had a deficiency of assets, and its auditors would not certify accounts on a going concern basis, unless Rumasa confirmed it would keep supporting the company. Rumasa did, saying with a 'letter of comfort' on June 1, 1982 that it would provide additional working capital. It had given £4m in subsidies by 1981.
Rumasa was nationalised by the Spanish government on February 23, 1983. Barnett's asset deficiency was now £4.5m. Auditors and lawyers advised that the directors of Barnett were at risk of personal liability for fraudulent trading (now s.213 Insolvency Act 1986; then s.332 Companies Act 1948 [1] ) unless more money could pay off the debts. On September 2, 1983, Barnett went into voluntary liquidation. The liquidators applied for a declaration that Rumasa was a knowing party to fraudulent trading. Rumasa opposed and argued there was no reasonable cause of action, because it was never alleged that Barnett directors were dishonest or had any intention to defraud.
Hoffmann J agreed with Rumasa's strike out application. The Companies Act 1948, s.332 said that in winding up if it appeared that,
...any business of the company has been carried on with intent to defraud creditors the court may, if it thinks proper to do so, 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.
Hoffmann J held that because this section required a finding of someone carrying on a company "with intent to defraud", it was only when that requirement was fulfilled that knowing parties could be similarly liable. The state of mind of the outsider was irrelevant. There could be an action in the tort of deceit, but not s.332. Because there was no allegation of fraud on Barnett directors, the parent could be no accessory.
In an obiter dictum , Hoffmann J also looked at one of the liquidator's arguments. This was that the Rumasa's letter of comfort, for financial support over the years, should make the parent liable for Barnett's debts. He said the state of law was inadequate on this subject, and it was a question of considerable public importance; but these interlocutory proceedings were not a good opportunity for a wider investigation. In any case the language of s.332 was plain.
Liquidation is the process in accounting by which a company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as wound-up or dissolved, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.
A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for directors to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.
A fraudulent conveyance or fraudulent transfer is the transfer of property to another party to prevent, hinder, or delay the collection of a debt owed by or incumbent on the party making the transfer, sometimes by rendering the transferring party insolvent. It is generally treated as a civil cause of action that arises in debtor/creditor relations, typically brought by creditors or by bankruptcy trustees against insolvent debtors, but in some jurisdictions there is potential for criminal prosecution.
Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".
An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.
An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors. This can occur where the transaction was seriously disadvantageous to the company and the company was insolvent or in immediate risk of becoming insolvent.
In company law, fraudulent trading is doing business with intent to defraud creditors.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Re Cardiff Savings Bank [1892] 2 Ch 100, often called the Marquess of Bute's case is a UK company law case concerning the duty of care owed by members of the board. It is old law but is still often mentioned as an extreme example of to what extent a "subjective" duty of care allowed directors to escape consequences of their negligence.
R v Grantham [1984] QB 675 is a UK insolvency law case which decides that an intent to defraud, now under the Insolvency Act 1986 section 213, needs to be established for a conviction for fraudulent trading, and knowing that there was no prospect of being able to pay debt when they fell due, even if there might be a distant prospect in the future, constituted an intent to defraud.
Re Sarflax Ltd [1979] Ch 592; [1979] 1 All E.R. 529 is a UK insolvency law case concerning voidable preferences and fraudulent trading, now in the Insolvency Act 1986. It concerns the definition of "intention to defraud", which is found in a number of legal provisions.
Re a Company [1990] BCC 526 is a UK insolvency law case, on the offence of fraudulent trading under s.213 of the Insolvency Act 1986.
The Company Directors Disqualification Act 1986 forms part of UK company law and sets out the procedures for company directors to be disqualified in certain cases of misconduct.
Re Produce Marketing Consortium Ltd [1989] 5 BCC 569 was the first UK company law or UK insolvency law case under the wrongful trading provision of s 214 Insolvency Act 1986.
Morphitis v Bernasconi[2003] EWCA Civ 289 is a UK insolvency law and company law case, concerning fraudulent trading.
Re Purpoint Ltd [1991] BCLC 491 is a UK insolvency law and company law case, concerning misfeasance and wrongful trading.
Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 is a UK company law case, concerning the meaning of a shadow director. It is sometimes incorrectly cited in sources as Re: Hydrodam.
Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:
Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:
Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.