Fraud via a corporate entity – some out of the box thinking

In order to establish the most cost-efficient way to effect best recovery from a Company who has through its Directors or others, acted fraudulently, the following issues need to be considered most carefully: Work out precisely the nature of the fraud committed against you; Avoid further losses being caused to you; Locate assets which were

Home » David Rosen » Fraud via a corporate entity – some out of the box thinking

In order to establish the most cost-efficient way to effect best recovery from a Company who has through its Directors or others, acted fraudulently, the following issues need to be considered most carefully:

  • Work out precisely the nature of the fraud committed against you;
  • Avoid further losses being caused to you;
  • Locate assets which were the subject of fraud;
  • Identify the potential Defendants against whom proceedings might be brought;
  • Identify the jurisdictions in which such proceedings could be most favourably brought;
  • Decide whether or not you would achieve a better result through Civil Litigation, or by way of an Insolvency process.

Insolvency process for fraud ?

The aim of this article is to give due consideration to the Insolvency process. There will be a further article as to the advantages and disadvantages of using an Insolvency process rather than to seek remedy through the Civil Courts.

Usually, a Winding Up Petition is presented against a Company if the debt is undisputed, over £750, and is a specific figure.

A Statutory Demand does not in the first instance have to be served. You have to give some notice of your intention to present a Winding Up Petition, but it certainly does not have to be 21 days. Usually, in the absence of thinking that someone is about to run off with assets or destroy information or articles, 7 days notice is given. If of course there is a threat of destruction or sudden movement of funds, an Injunction is highly likely to be advised and considered.

If you were to be on the receiving end of such a letter, you would seek immediate legal advice, and your lawyer would hopefully write asking them not to present such a Petition without giving you some proper notice time. If they were to agree, and did serve notice, your Solicitor would likely consider applying for an Injunction to prevent a Winding Up Petition from being presented to the Courts and advertised.

Provisional Liquidator

Before a full Wind-Up of the Company, it is possible to apply to the Courts appointing a Provisional Liquidator (‘PL’) under Section 4.25 (1) of the Insolvency Act 1986 (‘1986 Act’) That appointer could be a creditor of the Company, a shareholder of the Company, a liquidator in main proceedings, or a temporary administrator appointed under Council Regulation of (EC) 1346/2000.

It is also possible that the Secretary of State for Business, Innovation, and Skills would make such an application where it is in the public interest to do so.

The complainant would in the first instance lodge a winding up petition with the Companies Court, and then apply to have the Company placed into provisional liquidation under Section 132(1) of the 1986 Act.

The application notice would be on form 7.1A, and accompanied by an Affidavit specified at rule 4.25(2) of the 1986 Act.

It is important to note that there must be full and frank disclosure. Any possibility of you making such an application based on vexatious or frivolous evidence, will bring with it a substantial damages claim against you. In other words, making such an application is not taken lightly at all and must be given delicate and considered thought.

The PL would then seek to do one or more of the following:

  • Secure assets
  • Secure books and records
  • Investigate recovery of assets

The Court will set a return date by which time at their discretion or by agreement, the following Orders are likely to be given:

  • That the Winding Up Petition be dismissed, and the PL discharged from continuing, or an administrator is appointed, or the Company enters into a voluntary arrangement;
  • That a full liquidator be appointed to proceed with Liquidation;

Once a full Liquidator is appointed, a Liquidator has enhanced powers over and beyond that of a normal creditor in terms of obtaining information and possible assets from Directors of that Company.

Some of these enhanced powers include but are not limited to:

  • Obtaining all Company books, property, paper, and records
  • Seeing all correspondence and documentation which would otherwise be  privileged in terms of legal privilege and privilege against self-incrimination;

The Directors of that Company are under a statutory duty to co-operate in providing such information as may be reasonably required, and it is an offence in itself for such co-operation and assistance to be given.

3rd parties can be compelled to disclose information;

A Liquidator is able to recover the proceeds of fraud without proving fraud itself as follows:

  •  Section 238 Transactions at an undervalue
  • Section 239 Preference
  • Section 244 Extortionate credit transactions
  • S212 Misfeasance
  • S214 Wrongful trading

David Rosen is a Solcitor-Advocate, Partner and head of Litigation at Darlingtons Solicitors. He is a working member of the Fraud Advisory Panel, a Certified Fraud Examiner with the Association of Certified Fraud Examiners, and a member of the London Solicitors’ Litigation Association.

Our general page about fraud and how we can help is here.

David Rosen • Fraud

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