Insolvent Liquidation

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Institutional Affiliation

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Introduction

Typically, the aspect of insolvent liquidation usually entails a firm having to close down because it is usually unable to take care of bills as they tend to fall due, or the value of the business assets is usually less than the liabilities. In the provided case scenario, we learn that Mr. Jones emerges to be one of the non-executive directors of Fargan Ltd. This company appears to be insolvent liquidation. Mr. Jones has raised several concerns regarding his status since he emerges to be very concerned. He has heard from one of the other directors that there is a risk in these circumstances that they could all be prohibited from acting as directors of companies—being a director of another Davenport Limited company, where he has responsibility for the financial planning and marketing strategy. He’s concerned about his job, and he hopes to apply for an exemption that will allow him to continue in case the worst happens with his previous firm, the Fargan. This paper will issue out the objectives and other imperative aspects that Mr. Jones can utilize to address his concerns.

To begin with, being a director of an organization that is experiencing financial hardships can be frightening and obscure. Generally, and very regularly, the organization directors usually continue to amass the organization’s debt as they see entering liquidation as a personal failure, and that’s typically what is happening with Mr. Jones (Keay & Murray, 2015). They are usually very terrified of being liable personally for any of the firm’s debts. While, in many cases, the directors aren’t generally financially responsible for such obligations, but there is usually a possibility that the personal assets to be sized in the process (Keay & Murray, 2015). As the company’s director, one usually has to act in its best interest, shareholders, and creditors. The extent to which the insolvent liquidation impacts the firms’ directors will significantly be based on their practices before the liquidation. It’s imperative that for Mr. Jones to note that, upon the investigation of the whole issue, if any of the directors could have acted unlawfully or wrongfully, one might be liable personally liable and incur the loss of the personal assets on behalf the firm.

In this case, Mr. Jones should be aware of some imperative objective’s scenario. The first objective is that Mr. Jones should make sure that he doesn’t breach any of the duties of the directors because when such happens, the other firm that he is directing will not trust him to incase it ends badly with Fargan Ltd. Breaches of the directors tend to entail aspects like Insolvent trading, Misfeasance and also fraudulent trading. Another objective regarding this case is that Mr. Jones must ensure that all the company’s affairs have been dealt with and corrected. The necessary action is undertaken before him thinking of heading to Davenport Limited. This is because if all is done and the directors are found to be guilty of any offense that would ruin the chance of Davenport Limited holding to Mr. Jones due to his earlier failures at Fargan Ltd., it is significant that Mr. Jones also makes sure he is distant from all the negative aspect of the insolvent liquidation. If such investigation touches him, it would be disastrous for his other directing job at Davenport Limited. Having in mind this fundamental objective will help our client to make sure that his other job at Davenport Limited is secure since it will be confirmed that his earlier sentiments that he and the other non-executive directors took little part in Fargan ltd management since they typically relied on the advice which was coming from the other four executive directors and this will typically prove that he was completely honest in his work.

The case scenario in questions the facts regarding the issue if Mr. Jones breached any of statutory provisions relating to fraudulent trading or wrongful trading. From what Mr. Jones said, we can learn that he and the other non-executive directors took little part in Fargan ltd management since they typically relied on the advice from the other four executive directors. When we look at this in such a position, Mr. Jones will sigh a minor relief since they were taking orders from above. Such factual data will typically showcase that any fraudulent or wrongful trading that is usually affecting Fargan ltd naturally emerges from the orders that the four executive directors were giving the other non-executive directors. In such a case, this will tentatively exempt Mr. Jones from any aspects of fraudulent trading or wrongful trading. When it comes to business law in the United Kingdom, Insolvency law usually regulates the firms that come short of repaying their debts. Usually, Directors of firms are always subject to several statutory requirements and restrictions regarding the case scenario at hand (Ram Mohan, 2021). Such include their duty to keep proper records and books and restrictions on entering into certain business transactions with a firm or even accepting loans from the firms. Breaching these requirements and duties might result in the directors being disqualified from acting as a director. In many instances, it can lead to the directors incurring some personal liabilities.

Legal Materials and Their Relevancy to Factual Issues

In such cases, there are relevant legal materials that usually address such matters. The following are the specific provisions of the Insolvency Act 1986, which Mr. Jones should be having in mind since his company Fargan Ltd has gone into insolvent liquidation.

• Section 214- Wrongful Trading

This section typically provides that a liquidator of an insolvent firm may request an order from the courts making a director personally responsible for contributing to the organization’s resources. The risk will emerge where the director knew or should have inferred that there was no sensible possibility that the organization would try not to go into insolvent liquidation and afterward neglected to make each stride with the end goal of limiting the expected misfortune to the organization’s creditors that he should have taken (Vaccari, 2020). With regards to this section, Mr. Jones ought to be aware or ascertain the conclusions he ought to arrive at, and the steps that will follow that he should take must be known. This will typically involve him issuing out all the information regarding what this section asserts. Thus, Mr. Jones must prove that he had adequate knowledge and skills and also be sure to confirm that the firm’s accounting processes and equipment don’t come short in him producing the required data to depict its financial position. This is so because this section usually applies to both directors, the non-executive directors, and the executive directors.

• Section 213- Fraudulent Trading

Any individual who is intentionally party to the carrying on of any organization’s business to dupe lenders of the organization or leasers of some other individual or for any deceitful reason will be responsible for contributing to the organization’s resources (Vaccari, 2020). It has been held that an aim to swindle might be deduced if an individual acquires credit when he realizes that there is no acceptable explanation for feeling that finances will be accessible to pay the obligation. Notwithstanding, there should be proof to legitimize a finding of real untruthfulness. On the off chance that this is demonstrated, the director will be at risk of being liable to the organization’s resources and being at genuine fault for a criminal offense. With this section, Mr. Jones must be aware that if by any chance he took part in fraudulent activities, he will also be liable when the firm is being liquidated.

• Section 212- Recovery for Misfeasance

This section asserts that an official receiver, a creditor, a liquidator, or a shareholder may recover the damages from company officers or those that are concerned with the management of the company, who have typically misapplied or become liable or retained or accountable for any money or property of the firm, or have been guilty of Misfeasance concerning the firm (Vaccari, 2020). From this, we see that being part of the management of Fargan ltd, Mr. Jones is typically liable to go under with the firm unless he will be willing to showcase that he didn’t take part in what is currently troubling Fargan ltd. This part will cover, in addition to other things, ill-advised installments of profits, use of monies for an inappropriate or unapproved reason, utilization of funds despite the Companies Acts, and unapproved credits or installments of unapproved compensation to its chiefs. It should be noticed that this section applies notwithstanding the principles identifying with customary law misfeasance but gives a speedier cure than is accessible under the precedent-based law (Vaccari, 2020).

• Sections 238 – Transactions at an undervalue

This section depicts a transaction at an undervalue when a firm tends to dispose of all of its assets for less than they are worth. In this scenario, it’s vital to Mr. Jones to make sure that when it comes to this, his fingerprints should be nowhere with the leading cause of the fraudulent activities since his assets will also be liable to cover up for the company woes.

Findings and Conclusion

After a complete consideration of the facts at the table and what the statutory regulation says, Mr. Jones must take note of the following: He will be liable if the company woes if he knew or should have inferred that there was no sensible possibility that the organization would try not to go into insolvent liquidation and afterward neglected to make each stride with the end goal of limiting the expected misfortune to the organization’s creditors that he should have taken. Mr. Jones will also be liable if he intentionally went ahead with any organization’s business to dupe lenders of the organization or leasers of some other individual or for any deceitful reason, which will make him responsible for contributing to the organization’s resources during the insolvent liquidation. Another finding is that Mr. Jones will typically be liable to go under with the firm unless he will be willing to showcase that he didn’t take part in what is currently troubling Fargan ltd. The client must showcase everything that will prove he didn’t take part in the company’s woes.

Advice for Client

First of all, Mr. Jones should consider all the above aspects and prove that he didn’t participate in activities that led to the misfortune facing Fargan Ltd. He should take the necessary steps to make sure that all he was working on was the instructions from the company’s executive directors if the company goes on to trade. At the same time, it has entered insolvency, and Mr. Jones must uphold his responsibilities so that he will not be accused of wrongful trading and held liable. Mr. Jones must also be ready with all the instructions he was getting from his executives to showcase that he was doing it on behalf of the top company management. This will make him continue managing his other firm without being disqualified.

References

Bacon, L. (2020). Directors and insolvency. Company Director, 36(4), 20-21.

Keay, A., & Murray, M. (2015). Making company directors liable: A comparative analysis of wrongful trading in the United Kingdom and insolvent trading in Australia. International Insolvency Review: Journal of the International Association of Insolvency Practitioners, 14(1), 27-55.

Munnery, J. (2021). Director Duties and Responsibilities If You Are Trading Insolvent. Retrieved 6 November 2021, from https://www.realbusinessrescue.co.uk/company-insolvency/trading-insolvent-director-responsibilities

Ram Mohan, M. P. (2021). Tracing Director Liability Framework During Borderline Insolvency and Corporate Failure in the UK

Vaccari, E. (2020). Changes to UK Insolvency Rules in the Wake of Covid-19: A Much-Needed Help for Businesses or an Unjustified Harm to the Rule of Law?