Re W C Leitch Bros Ltd [1932] 2 Ch 71

Facts

  • The case concerns the continuation of business operations by the directors of W C Leitch Bros Ltd when the company faced inevitable insolvency.
  • Directors operated the business despite mounting debts, ongoing trading losses, and no realistic chance of financial recovery.
  • The court assessed directors’ awareness of the company’s deteriorating financial position, considering internal reports, financial statements, and other relevant documents.
  • The case arose under Section 275 of the Companies Act 1929, now reflected in section 213 of the Insolvency Act 1986.

Issues

  1. Whether the directors continued to trade while knowing the company was insolvent.
  2. Whether there was an intent by the directors to defraud creditors by operating the company in these circumstances.
  3. Whether sufficient evidence existed to satisfy the high standard of proof required for a finding of fraudulent trading.
  4. What consequences should flow from a finding of fraudulent trading against the directors.

Decision

  • The court clarified that knowledge of impending insolvency and intent to defraud creditors must both be established to prove fraudulent trading.
  • It emphasised that continuing to incur debts with no reasonable prospect of repayment, or making false statements to induce credit, may evidence fraudulent intent.
  • The burden of proof for fraudulent trading rests with the liquidator or administrator, requiring clear and convincing evidence.
  • Upon finding fraudulent trading, the court may order directors to contribute to the company’s assets for the benefit of creditors.

Legal Principles

  • Fraudulent trading requires proof of both directors’ knowledge of insolvency and intent to defraud creditors.
  • The distinction is drawn between fraudulent trading and simple mismanagement or reckless trading; intent is essential.
  • The liquidator bears a demanding evidentiary burden when alleging fraudulent trading.
  • Directors hold duties to consider the interests of creditors when insolvency is impending; breaching these duties by engaging in fraudulent trading may result in personal liability.
  • Section 213 of the Insolvency Act 1986 (previously Section 275, Companies Act 1929) empowers courts to require those knowingly involved in fraudulent trading to compensate the company’s creditors.

Conclusion

Re W C Leitch Bros Ltd [1932] 2 Ch 71 established the key requirements for fraudulent trading: directors’ knowledge of insolvency and intent to defraud creditors, setting a lasting precedent for director liability and creditor protection within UK company law.

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