Under section 213 of the Insolvency Act if, in the course of the winding up of a company, it appears that any business of the company has been carried on with the intent to defraud creditors, or for any other fraudulent purpose, the liquidator can seek a court declaration that anyone who was knowingly party to the fraudulent business make a contribution to the company’s assets. This is known as fraudulent trading.
Only those who were knowingly parties to the fraudulent trading are caught by this section. Case law has shown that it is not enough for fraudulent trading to show that the company continued to run up debts when the directors knew that it was insolvent; there has to be “actual dishonesty, involving, …, real moral blame”.
It is not only directors who may be liable for fraudulent trading. Anyone who is knowingly party to carrying on the business with intent to defraud may be liable for fraudulent trading. In the case of Bank of India v Morris the Court of Appeal held that a bank was a party to fraudulent trading by virtue of its employee’s knowledge.