Morphitis v Leonardo Bernasconi Pasqualino Monti Nicholas Bennett & Co (a firm)

Fraud against one creditor in a single transaction may constitute fraudulent trading under section 213 of the Insolvency Act 1986. It does so only where the company’s business was carried on with intent to defraud. A fraudulent act committed during ordinary business does not itself satisfy that requirement.

Any contribution ordered under section 213 must have a nexus with the loss caused to creditors generally by the fraudulent trading. The jurisdiction is compensatory, not punitive. The court may not add an amount merely to punish those knowingly involved.

The liquidator of TMC Transport (UK) Ltd brought proceedings under section 213 of the Insolvency Act 1986 against two former directors and the company’s former solicitors. The claim against the solicitors was settled. The deputy High Court judge found that the directors had participated in fraudulent trading from 12 November 1993 by promising a landlord an instalment which they never intended to pay. He assessed a £35,000 contribution, including a £17,500 punitive element, but treated it as satisfied by the solicitors’ £75,000 payment.

The liquidator appealed concerning the period of fraudulent trading, the amount of the contribution, its satisfaction and costs. The directors cross-appealed against the finding of fraudulent trading and the related conclusions. The central questions were whether the misleading promise meant that the company’s business had been carried on with intent to defraud and, if so, how a contribution under section 213 should be assessed.

1. The liquidator’s appeal was dismissed and the directors’ cross-appeal was allowed. Chadwick LJ delivered the leading judgment. Munby J and Aldous LJ agreed. The order below was set aside and the action against the directors was dismissed.

2. A company’s business may be carried on with intent to defraud even though only one creditor and one transaction are involved. Nevertheless, fraud against a creditor during the course of business does not necessarily mean that the business itself was carried on with the requisite intent. Section 213 of the Insolvency Act 1986 requires attention to the purpose and consequences of carrying on the business, rather than merely to the presence of a fraudulent transaction.

3. The promise made to the landlord on 12 November 1993 was intended to mislead it into postponing enforcement. The evidence did not establish that carrying on the company’s business while the landlord was misled was intended to defraud it. Nor was it shown that the continued trading prejudiced the landlord’s claim in the eventual liquidation. Fraudulent trading was therefore not established.

4. Although unnecessary to the disposition, the court addressed the remaining issues. A contribution under section 213(2) requires a nexus between the loss caused to creditors generally by the fraudulent manner in which the business was carried on and the amount ordered. Appropriate measures may include the value of misapplied assets or the amount by which claims generated by the fraud diminish the assets available to creditors. There was no evidence of either form of loss here.

5. The power under section 213(2) is compensatory and does not permit a distinct punitive element. Punishment is foreign to the principle governing contribution, while the criminal sanction for fraudulent trading was separately preserved by section 458 of the Companies Act 1985. Had fraudulent trading been proved, the £17,500 punitive addition would still have been impermissible.

1. Court of Appeal (Civil Division): The liquidator’s appeal was dismissed unanimously. The directors’ cross-appeal was allowed on the ground that fraudulent trading had not been established. The order below was set aside and the action against the directors was dismissed.
2. High Court, Chancery Division, Companies Court: Mr Anthony Elleray QC, sitting as a deputy High Court judge, found fraudulent trading and assessed a contribution of £35,000, including a punitive element. He treated the contribution as satisfied by the solicitors’ payment and made consequential costs orders. The reported decision was [2001] 2 BCLC 1.