The IA 1986, as applied by the IPO and the LLP Regulations 2001, contains a variety of provisions that enable the sums available for distribution to creditors to be swelled as a result of litigation by the office holder. There are two main groups of provisions:
misfeasance, fraudulent trading and wrongful trading provisions, which enable an order to be made against a partner or LLP member, or other, in view of their conduct; and
those which enable the avoidance of transactions.
Provisions in the first group presently apply only in liquidation, whereas the second group apply in both liquidation and administration. The distinction is due to be removed (see 9.1). The first group applies to partners/LLP members1
Where a partnership or LLP is wound up, partners/LLP members and others may be liable to contribute to the firm’s assets on grounds of misfeasance, wrongful trading or fraudulent trading. The IA 1986 contains these laws in Part IV, which applies only in winding up. This part of the Act is applied in respect of partnerships by article 10(3)(a) of the IPO, and applied in respect of LLPs by
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regulation 5 of the LLP Regulations 2001. These laws do not presently apply in administration, and if the administrator considers that there are grounds for the application of these laws, it is necessary for him to consider whether the partnership/LLP should enter liquidation. However, the SBEEA 2015 will amend the 1986 Act to enable fraudulent trading and wrongful trading actions to be brought by administrators.
9.1.2 Misfeasance
Liquidators and others3are able to pursue misfeasance proceedings where an officer of a partnership/LLP member4has ‘misapplied or retained, or become accountable for, any money or other property’ of the partnership/LLP, or been guilty of any ‘misfeasance or breach of any fiduciary or other duty’ in relation to the partnership/LLP.5See 1.4.4 and 10.4.2 regarding the term ‘officer’. The provision covers a wide range of duties, both fiduciary and the duty of care in negligence.6It has been held to include the giving of a preference,7and a liquidator therefore has two lines of attack in respect of such a transaction. These lines of attack present the possibility of liabilities arising concurrently under sections 212, 214, 238 or 239 and, in such circumstances, the court should specify whether liabilities are cumulative.8In considering the business decision of the defendant, the court should be mindful that it has the advantage of hindsight and the boundary between a breach of duty and the taking of an acceptable business risk may not be clear cut.9It is necessary that the partnership should have suffered loss as a result of the transaction. The court may order the officer to repay, restore or account for the money or property in whole or in part, plus interest at such rate as the court thinks just, or to contribute such sum by way of compensation as the court thinks just.10Although this provision is not available to administrators, this does not represent a significant omission. The misfeasance proceedings merely enable the liquidator
3Standing is also given to official receivers, creditors and contributories: IA 1986, s 212(3), as applied by IPO, Schs 3, 4 and 5, and LLP Regulations 2001, reg 5.
4Or a liquidator, administrative receiver of an LLP, agricultural receiver of a partnership, or other person who is, or who has been, concerned or have taken part in the promotion, formation or management of the company. A separate provision applies in respect of administrators: IA 1986, Sch B1, para 75.
5IA 1986, s 212, as applied by IPO, Schs 3, 4 and 5, and LLP Regulations 2001, reg 5.
6Re D’Jan of London Ltd [1994] 1 BCLC 561, [1993] BCC 646.
7See e.g. Re Oxford Pharmaceuticals Ltd [2009] EWHC 1753 (Ch), [2010] BCC 834.
8 See e.g. Re DKG Contractors Ltd [1990] BCC 903; Re Brian D Pierson (Contractors) Ltd
[1999] BCC 26; James Earp, Robert Harry Pick v Kenneth Stevenson, Brian Ramsden [2011] EWHC 1436 (Ch) at [63].
9Facia Footwear Ltd v Hinchcliffe [1998] BCLC 218 at 228.
10IA 1986, s 212(3), as applied by IPO, Schs 3, 4 and 5, and LLP Regulations 2001, reg 5.
to pursue in summary form various breaches of duty that would be actionable even outside liquidation.11The section does not appear to enable a shadow director to be found liable and, on this basis, it should not apply to shadow partners and shadow LLP members.12
9.1.3 Fraudulent trading
Fraudulent trading proceedings may be brought by a liquidator13if it appears that any business of the partnership/LLP has been carried on with intent to defraud creditors of the partnership/LLP, or creditors of any other person,14or
for any fraudulent purpose.15As indicated by the words ‘defraud’ and ‘fraudulent’, liability is based on proof of ‘actual dishonesty involving, according to current notions of fair trading amongst commercial men, real moral blame’.16The requirement of proof of dishonesty presents difficulties for liquidators, although proof is according to the civil standard of a balance of probabilities.17Wrongful trading, discussed at 9.1.4, was introduced in response to these difficulties.
Fraudulent trading may be found even if only one creditor is defrauded by a single transaction.18If finding fraudulent trading the court is able to order the defendant to make such contributions (if any) to the assets of the partnership/ LLP as the court thinks proper. The measure of liability should reflect the loss caused to creditors by the fraudulent trading and should not contain a punitive element.19
Such an order may be made against any persons who participated in the carrying on of business with intent to defraud, and who did so knowing of the fraudulent intent.20Therefore not only those in a managerial role, such as partners/ members, who were knowingly party may be liable but also liability may be
11Re B Johnson & Co (Builders) Ltd [1955] Ch 634 at 648.
12This was common ground between the parties in Holland v The Commissioners for Her Majesty’s Revenue and Customs and Another [2010] UKSC 51, [2010] 1 WLR 2793 at [55].
13The SBEEA 2015 will insert a new s 246ZA into the Insolvency Act 1986 to give administrators the power to pursue fraudulent trading proceedings.
14For example the creditors, such as HMRC, of a partner/member.
15IA 1986, s 213(1), as applied by IPO, Schs 3, 4 and 5, and LLP Regulations 2001, reg 5.
16Re Patrick and Lyon [1933] Ch 786 at 790, cited in Morris v Bank of India [2005] EWCA Civ
693, [2005] BCC 739 at [100].
17Morris v Bank of India [2005] EWCA Civ 693, [2005] BCC 739 at [101].
18Re Gerald Cooper Chemicals Ltd [1978] Ch 262.
19Morphitis v Bernasconi and Others [2003] EWCA Civ 289, [2003] Ch 552 at 579.
20IA 1986, s 213(2), as applied by IPO, Schs 3, 4 and 5, and LLP Regulations 2001, reg 5.
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imposed upon other persons, including outsiders and outsider companies,21who were knowingly party.22‘Knowledge’ can consist of actual knowledge, deliberate blindness or reckless indifference.
9.1.4 Wrongful trading
Wrongful trading liabilities arise in circumstances where:
a partnership/LLP has gone into insolvent liquidation; and at some point before the commencement of liquidation, a person knew or ought to have concluded that there was no reasonable prospect that the partnership/LLP would avoid going into insolvent liquidation; and
the person was a partner/member of the partnership/LLP at that time.23
Note, however, the availability of a defence, discussed below, where a partner/ member took every step to minimise losses to creditors.
In essence, wrongful trading liabilities arise in respect of losses to creditors that could have been avoided if the partners/LLP members had taken action upon realising (or in circumstances where they ought to have realised) that the finances of the partnership/LLP were past the point of no return.24It can, however, be difficult to pinpoint an exact time from which a partner/member had the required knowledge, and from which point which liability arises.25
Partners/members can be aware that a partnership/LLP is insolvent without knowing, or being expected to know, that insolvent liquidation is inevitable. Knowledge of...
