Use of Insolvency as a tool to recover sums obtained from Fraud, Part 2‏

This week’s article focuses upon the advantages and disadvantages of using such processes.  Advantages  Civil Courts tend to treat dishonesty with particular care, because of the stigma accompanying a finding of dishonesty, against a Defendant in a civil case. There appears to be some confusion as to the standard of proof to meet. In criminal

Home » David Rosen » Use of Insolvency as a tool to recover sums obtained from Fraud, Part 2‏

This week’s article focuses upon the advantages and disadvantages of using such processes.

 Advantages

 Civil Courts tend to treat dishonesty with particular care, because of the stigma accompanying a finding of dishonesty, against a Defendant in a civil case.

There appears to be some confusion as to the standard of proof to meet. In criminal cases, the standard of proof is a test ‘beyond all reasonable doubt’. In civil cases, the standard of proof is a test on ‘a balance of probabilities’.

What about a civil case which involves dishonesty? What would happen in such a scenario, where the repercussions and consequences of a finding of guilt, even in a civil case, can be far-reaching for the Defendant?

In the classic case of Hornal v Neuberger Products Limited CA 1957, the test was left in an ambiguous state resulting in a test more than a balance of probabilities, but less than beyond reasonable doubt.

Mr. Justice Mann in the case of Payless Cash & Carry Limited v Patel & Ors [2011], the burden of proof in fraud cases remains the balance of probabilities. However, there are enhanced requirements in evidencing fraud.

So…we are all clear then? Fraud in civil cases is tested beyond a balance of probabilities, supposedly to the extent as to whether the Judge believes/prefer one set of evidence or the other.

A Liquidator, however, is able to recover the proceeds of fraud without providing fraud itself by use of relevant provisions of the Insolvency Act 1986 (‘The 1986 Act’).

Examples are transactions intended to defraud creditors pursuant to Section 423, or fraudulent trading pursuant to Section 213 of the 1986 Act.

Another advantage of using the Liquidation process is that time-frames to bring cases of fraud may still be claimed within Section 32 of the Limitations Act 1980, according to the case of Hill v Spread Trustees Company Limited [2006] EWCA Civ. 542.

Insolvency Practitioners are obliged to make reports to the relevant authorities in respect of the Proceeds of Crime Act 2002, concealing debts due, fraudulently removing Company property, concealing, destroying, or falsifying any book or paper affecting or relating to the Company’s property or affairs, making false entries, or fraudulently parting with or altering or making any omission in any document.

There is no risk of an application for security for costs being made against the Claimant.

Disadvantages

The Insolvency Practitioner and professional fees will be deducted before any monies are distributed from what is recovered. At that point, monies will be distributed in order of rank to secured creditors, and then unsecured creditors, former employees, tax authorities, etc…

Expenses of the Liquidation can be confusing.

There is a distinct loss of control of the Creditors/Claimant.

Other creditors may have opposing wishes to those of the Creditor pushing for Liquidation.

One should check to see who in fact has the biggest claim against the Company, as Creditor, and what of those Creditors are secured or unsecured.

You as the proposed Claimant, may wish to use the Insolvency process as a means to obtain a fraud conviction.  An Insolvency process will not necessarily guarantee that such an aim is achieved.

Other considerations

You do not trigger Insolvency Proceedings, or Civil proceedings, there is a possibility, that Creditors in a foreign jurisdiction may institute insolvency proceedings where different causes of action may be available to them, which are unknown or even disadvantageous to you.

It may, however, be possible to obtain interim relief from the English Courts in support of those proceedings under Article 31 of the Brussels Convention, or alternatively under Article 24 of the Lugano Convention.

There may be contractual terms which dictate how and where proceedings are to be issued, or indeed whether there is an arbitration or a mediation clause. Check terms and conditions before considering issuing proceedings, or invoking Insolvency processes.

If you need advice on suspected business fraud, get in touch with me, I am an expert in this area.

David Rosen – Head of litigation and specialist in fraud law

David Rosen is a Solicitor-Advocate, Partner and head of the Litigation department at Darlingtons Solicitors. He is a visiting Associate Professor of Law at Brunel University, a Certified Fraud Examiner, and a working member of the Fraud Advisory Panel.

David Rosen • Fraud

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