The Criminal Liabilities of Directors to the Creditors of the Company: Section 458 Companies Act 1985

Published date01 April 2002
Date01 April 2002
AuthorGary Scanlan
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 9 No. 4
The Criminal Liabilities of Directors to the Creditors
of the Company: Section 458 Companies Act 1985
Gary Scanlan
The directors of a company owe certain duties to the
company itself as a legal entity distinct from its
members. They also owe duties to its shareholders
in prescribed circumstances, and to a lesser degree
to the company's creditors. This paper, inter alia,
examines the circumstances in which breach of the
duties owed by the directors of the company to its
creditors may give rise to criminal responsibility.
Central to this analysis is an exposition of the concept
of fraud and its associated concept of dishonesty
generally and an analysis of the interpretation by
the courts of the nature and ambit of s. 458 of the
Companies Act. Finally consideration will be given
as to how this offence may be affected by the propo-
sals of the Law Commission in its Consultation Paper
155 as to the future role of fraud and dishonesty
in offences.
The concept of fraud
The director of a company owes certain duties to
what in essence is his principal, namely the com-
pany." Central to the exercise of these duties and
attendant powers is the requirement that, at all
a director must act honestly and in the best
interests of the company. The duties owed to the
creditors of the company are no less onerous and
arise from similar considerations, since it must be in
the best interests of the company and its shareholders
that the company's affairs are so conducted so as not
to constitute a fraud on the creditors. This principle
may have a more practical credibility and application
in the case of
public company, and in particular the
listed company, than in the case of the usual private
limited company in the absence of a requirement
for such a company to have a minimum issued
share capital. Whether a director has acted honestly
in a particular situation is of course a question of
fact to be determined by reference to the state of
mind of the director. However, this does not
compel a tribunal of fact to accept without question
the contention of a director5 that he has acted in
good faith and honestly in any given case. A court
may draw inferences as to a director's state of mind
and his honest intent from the circumstances
surrounding his conduct, and from the character,
experience and expertise of the director.' The most
appropriate offence to deal with the issue of a dishon-
est breach of duty by a director of
company in the
case of the company's creditors is s. 458 Companies
Act 1985.
Section 458 of the Companies Act 1985 provides:
'If any business of a company is carried on with
intent to defraud creditors of the company or cred-
itors of any other person, or for any fraudulent
purpose, every person who was knowingly a
party to the carrying on of the business in that
manner is liable to imprisonment or a fine, or
both. This applies whether or not the company
has been, or is in the course of being wound up.'
Inherent in both the intent to defraud and the carry-
ing on of the business for a fraudulent purpose is the
essential element of dishonesty. For a director to be
guilty of an offence under s. 458, he must be shown
to have acted dishonestly. This interpretation of the
words of the section is based on a series of cases that
establish that dishonesty is an essential ingredient of
fraudulent conduct.
The concept of dishonesty was fully examined, and
its nature finally determined in the case of R v Ghosh.
The facts of Ghosh were as follows.
The defendant was a consultant who had been
acting as a locum tenens at a hospital. He was charged
with attempting to obtain, and with obtaining prop-
erty by deception. ° He had falsely pretended that
certain monies were due to him in respect of opera-
tions which had been carried out by someone else
and/or under the National Health Service. The defen-
dant claimed at his trial that he lacked an essential
element of the offence in that he had not acted
dishonestly, because the sums in question were
legitimately paid to him as consultation fees.
Journal of Financial Crime
Vol 9, No 4, 2002, pp 360-371
Henry Stewart Publications
ISSN 1359-0790
Page 360

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