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Fraudulent & Reckless Trading Notes

BCL Law Notes > Irish Company Law: Financing, Insolvency and Rescue Notes

This is an extract of our Fraudulent & Reckless Trading document, which we sell as part of our Irish Company Law: Financing, Insolvency and Rescue Notes collection written by the top tier of University College Cork students.

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 Fraudulent and Reckless trading are concepts derived to allow the piercing of the corporate veil, removing liability with the overall goal of protecting creditors of a company. The key point to note is that the company needs to be in liquidation for a claim to arise here thus, generally it is the liquidator whom brings the action for fraudulent or reckless trading against any person who is knowingly an actor in the company whom possess the intent to defraud the company.

 The original 1963 Act provided for civil and criminal sanctions for fraudulent trading alone and were considered to be quite strict in nature leaving the fraudulent act quite difficult to prove and the Cork Committees in England deeming of the provision to be inadequate steamed the provisions for reckless trading in Ireland (Lynch Fannon 2017)
and thus, were introduced in the 1990 Act and are now contained in the current 2014 Act.
It is worthwhile to note that the general assumption regarding the incorporation of reckless trading into statute have been seen to be of "extremely limited use in holding directors and other officers to account" (Courtney 2016.)

 The current provisions founded in legislation to impose personal liability for the debts of the company, are found in S.610 of the 2014 Act previously s. 297 of the 1963 Act now concerning civil liability for both fraudulent or reckless trading and S.722 of the 2014 Act which provides for the imposition of criminal liability for fraudulent trading alone. The primary effect of this legislation is to disrupt the corporate personality, imposing personal liability in effort to deter this type of action.

 The definition for both fraudulent and reckless trading are found in s.610 (1)(a)&(b)
reckless trading defined as, "knowingly a party to the carrying on of any business of the FRAUDULENT & RECKLESS TRADING.
company in a reckless manner", it is evident coming from Re Maidstone Building
Provisions Ltd, that a secretary for example cannot be "a party" within this section.
S.610(3) of the Act further states that in regards to reckless trading without prejudice to the above definition, "an officer of a company shall be deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner" and there are a number of subsections following which maps out what could be deemed to be reckless trading. The distinction between these two provisions falls upon actual reckless behaviour and what could be deemed to be reckless which has caused confusion within the courts. (Breen)

 Fraudulent trading defined as, "knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company, or creditors of any other person or for any fraudulent purpose", which was always the case in regards to fraudulent trading and the courts added the need for intention to defraud which has always been the accepted stance as seen in Re Patrick and Lyon Ltd. The standard here is set a lot higher than that of reckless trading on the fact that fraudulent trading can have criminal penalities imposed.

 In this respect the court has the discretion under s.610(2) to make any order they see fit to impose civil liability upon a person, the standard is reckless which tends to be an objective standard and a lot less than that of the standard for the fraudulent aspect here. It is also interesting that the relief provided in s.610(8) for officers of a company is a subjective test for relief, despite the objective test which can impose liability upon them,
s.610 (8) where it holds that relief from personal liability will be granted where the person has acted "honestly and responsibly" with regards to the ongoings of the company.The

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