CORPORATE INSOLVENCY

ASSIGNMENT PAPER 2014

Question 2:
To what extent is

STUDENT ID NUMBER: 811003498

recklessness an
important
consideration in
our understanding
of the

Fraudulent

Trading provision
of Trinidad and

Tobago
Companies Act?

Lecturer: Dr. Chumah Amaefule

TABLE OF CONTENTS
Table of Contents
Abstract ................................................................................................................................................................1
Introduction...................................................................................................................................................... 2
Elements of Fraudulent Trading .......................................................................................................... 3
Analysis of the Fraudulent trading provision in varying jurisdictions................................5
Position in Trinidad and Tobago ........................................................................................................... 12
Conclusion ................................................................................................................................................ 15

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Abstract
The sacrosanct principle of limited liability in the House of Lords decision in Salomon v
Saloman, established that a company and its shareholders were to have separate and
distinct legal personalities. Although this principle was deemed unchallenged, over the
years, legislation created exceptions to this concept of limited liability and separate legal
personality. This allowed for the piercing of the corporate veil, thereby holding directors
personally liable for their obligations towards the company.
The purpose of this paper is to consider of the element of Recklessness in the
Fraudulent Trading provision, Section 447 of the Trinidad and Tobagos Companies
Act, and its effectiveness as a mechanism for creditor protection.
This paper draws upon the evolution of the duty owed towards creditors, and the reason
for actions being implemented by Government and the courts to impose liability on
directors in certain circumstances. This is followed by an examination of the fraudulent
trading provision, and reasons for the severance between the two concepts. The focus of
this paper will give insight to the pertinent tests laid down in the varying jurisdictions
and through evaluation of the strengths and weaknesses, whether a meaning of
recklessness was articulated.

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Introduction
The concept of fraudulent trading was introduced in 1929 by the UK Greene Committee
on Company Reform1, and imposed civil and criminal liability on persons, who were
knowingly or party to the carrying on of a companys business with intent to defraud
creditors, for any fraudulent purpose.2 The standard of proof was the same, and the
heavy burden of proving dishonesty prompted the Committee to recommend new
provisions for wrongful trading. As a result, there were two aspects of fraudulent trading.
A civil liability which applies when the company is in the course of winding up, and
imposes liability on persons to make a contribution to the companys assets as the court
thinks proper. The criminal offence contained in s.993 of the CA 2006 applies regardless
of whether the company is in winding up or not. This indicates the distinction between
the criminal and civil sanctions, that the power to order a contribution to the assets is
compensatory and not penal. The reason for this was the need for a balance to be struck
between the two concepts. A distinction was to be drawn between an individual creditor3
who is defrauded in the course of the carrying on of the business of a company and as
such he has an individual remedy under the general law and fraudulent trading. 4

Report of the Company Law Amendment Committee, Cnmd 2697, HMSO, London 1926. See, in particular,
para 61.
2 Insolvency Law and Practice: Report of the Review Committee (The Cork Report), Cmnd 8558 London:
HMSO, 1982.
3A Hicks & S.H. Goo Cases and Materials on Company Law 6 th Edition The word creditorin its ordinary
meaning, denotes one to whom money is owed, whether that debt can presently be sued for its immaterial:
R v Smith (Wallace Duncan) [1996] 2 BCLC 109, CA.
4 Morphitis v Bernasconi [2003] 2 BCLC 53, CA
1

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Elements of Fraudulent Trading
Defining fraud has never been an easy task for the courts.5 In the civil context, the courts
have been content to refer to fraud as an infraction of fair dealing, abuse of confidence,
or unconscionable conduct, or abuse of power as between a trustee and his shareholder
in the management of a company.6 However, a more stringent approach is required
when fraud is considered as an element of an offence (criminal test). It is in that context
that Maugham J in Re Patrick and Lyon Ltd7 defined fraud as connoting 'real dishonesty
involving, according to current notions of fair trading among commercial men at the
present day, real moral blame'. Generally, it is not every dishonest act that is fraudulent
in the commercial sense. The act of dishonesty must be such as would be reprehensible
in the business community. This approach assisted the courts in exerting some elements
of objectivity in determining the existence of fraud beyond the subjective intentions of
the wrongdoer. Thus in R v Allsop8 Shaw LJ observed that though the detriment that
results to the victims of fraud could be secondary and incidental to the company's
purpose, it is intended only in the sense that it is an anticipated outcome of the fraud
that is perpetrated'. Similarly, in R v Grantham9 Lord Lane CJ held that:

A. Keay, Fraudulent Trading: The Intent to Defraud Element (2006) 35 Common Law World Review 121 at
123. Keay referred to fraud as a notoriously difficult sate to prove.
6 See Yalaju Amaya v AREC Ltd [1990] NWLR (pt 145) 422 (SC); Daniels v Daniels [1978] 2 All ER 89 (ChD);
Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 All ER 437 (ChD).
7 [1933] Ch 786 at 790.
8 (1977) 64 Cr App R 29 at 31.
9 (1984) 79 Cr App R 86 at 90.
5

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No distinction is to be drawn ... between the state of mind of one who does an act because
he desires it to produce a particular evil consequence, and the state of mind of one who
does the act knowing full well that it is likely to produce the consequence although it
may not be the object he was seeking to achieve by doing the act.
There are other elements of fraudulent trading however in defining recklessness the
courts considered the aspects of knowingly and fraudulent intent.
We will now consider the origin of the fraudulent trading provisions in the
Commonwealth Caribbean and other jurisdictions.

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A Comparative analysis of the Fraudulent trading provision
in varying jurisdictions
The origin of fraudulent trading statutes in Commonwealth countries was section 75(1)
of the Companies Act of 1928(UK). This section stated that directors of a company who
were knowingly parties to the carrying on (of any company business), with intent to
defraud creditors of the company or for any fraudulent purpose, were to be held
personally liable.10 Australia and New Zealand later adopted a version of this provision.
Though the Jenkins Committee recommended that reckless trading should be inserted
within this provision, it was never adopted by either the UK or Australia. However, there
were other countries that undertook a more stringent approach, of these included South
Africa and Ireland. For these reasons, the provisions on fraudulent trading in the abovementioned jurisdictions will be examined closely, and contrasted with s.447 of the TTs
Companies Act.
The starting point is the position in the UK and Australia, both jurisdictions have,
over the years, moved away from relying upon fraudulent trading, based on criminal
intent, and introduced their own distinctive provisions to address the failure of directors
to deal with their companies financial malaise.

Dale A Oesterle, Corporate Directors Personal Liability for Insolvent Trading in Australia (2000)
http://www.law.unimelb.edu.au/files/dmfile/Law_Mono-Insolvent_trading.pdf accessed 29 October 2014.
10

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Comparing the legislation in the two jurisdictions is helpful and instructive as the UK
and Australia are both common law jurisdictions with similar corporate law regimes,
this enables us to focus on the differences in the respective laws without the impediment
of having to take into account differences in the structure of the respective legal systems.
Both the UK and Australian provisions factor objective elements into the liability
question. In Australia, a director will be liable if there were, when debts incurred,
reasonable grounds merely to suspect that the company was or would become
insolvent. The UK standard is higher, in that, it must be demonstrated that the director
ought to have concluded that there was no reasonable prospect of the company to avoid
going into insolvent liquidation. In determining what standard has to be adhered to, the
following were taken into consideration by the court to determine liability; the facts
which a director ought to know or ascertain, the conclusions which ought to have been
reached and the steps that ought to have been taken, which would be known,
ascertained, or taken by a reasonably diligent person, who has the knowledge, skill and
experience that may be reasonably expected of a person carrying out similar functions.11
Besides the objective element the UK also incorporated a subjective element, namely the
general knowledge, skill and experience of the director. The inclusion of the subjective
element does not serve to reduce the standard of knowing or ascertaining, rather it
heightens it if the director is experienced. Hence a director who is well qualified with a

11Insolvency

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Act 1986 s. 214(4).

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significant amount of experience cannot escape liability. Equally, if a director is not very
experienced or has qualities that do not match that of the reasonable director he or she
is not able to take advantage of that and be protected from liability. This means that a
director will be judged by two tests and the director has to attain the higher standard set
by the tests.
On the contrary, there is no subjective element in the Australian provision, with the
result that, provided a director meets the objective standard, it matters not that he or
she was a very experienced director and did not do what a reasonably diligent person
with his or her experience would have done. Nevertheless the Australian provisions are
based on the lower level of needing to prove only that there was reasonable suspicion in
the mind of the director that the company was insolvent.12
In light of this, the decision in Re Continental Assurance Co Ltd

13

provides positive

dictum on Australian Law. The question in this case was whether the directors knew or
ought to have concluded that there was no reasonable prospect of the company avoiding
insolvent liquidation,14 Park J found for the directors. He held, inter alia, that the
company was not technically insolvent in mid-1991 and that the directors had acted

A. Keay Making Company Directors Liable: A Comparative Analysis of Wrongful Trading in the United
Kingdom and Insolvent Trading in Australia Vol. 14, Issue 1, 27-55 (2005).
13 [2001] BPIR 733.
14 A. Walters, Wrongful Trading: Two Recent Cases [2001] Insolvency Lawyer 211 at 211
12

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reasonably in taking the view that the company could continue to trade while a buyer for
its insurance business was sought.
Theoretically directors in the UK are to engage in more risk-taking and a longer term
view than those in Australia, and in fact are able to continue to trade while insolvent,
carefully juggling their companies competing liabilities.

New Zealand, like other Commonwealth countries, inherited the rather unsatisfactory
English case law on the duty and standard of care of company directors. Re City
Equitable Fire Insurance Co Ltd15 provides a laidback approach to the standard of care.
Shortly after this case, English legislation introduced the provisions on fraudulent
trading. At present, in New Zealand there are now a number of provisions in the
Companies Act 1993 which are relevant. The result is that there are too many provisions
and they are not particularly effective. This raises the question of what level of unfitness
by directors should be penalised and how should it be dealt with. 16
The amendments made by the McArthur Committee recommended that New Zealand
company law was to align itself with that of Australian law and move away from that of
the United Kingdom.17

[1925] Ch 407.
J Farrar and D Tennent The Unfitness of Directors, Insolvency and the Consequences- Some Comparisons.
17 S.461 D Companies Act of New Zealand. This included: The separation of the fraudulent trading offence
which was formerly contained in section 320(3), from the provision creating civil liability and the extension
to circumstances that was not only discovered on winding up and; The inclusion of two reckless trading
provisions within section 320 enabling the Court to make relevant orders where it appeared in the course of
winding up of a company that: those persons who were knowingly a party to the contracting of a debt or any
15
16

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Of these amendments the enactment of the reckless trading provision was the most
significant.
The test for recklessness includes, whether something in the financial position of the
company would have drawn the attention of an ordinary prudent director to the real
possibility, not so slight as to be a negligible risk, that his continuing to carrying on the
business of the company would cause loss to the creditors.18 This test essentially restates
the standing of the gross negligence test that was established by the South African
Courts.
One matter of consideration that has generated concern, is whether the failure of
directors to maintain proper accounts could amount to a finding of recklessness. This
was addressed in the case of R v Pacific Wools Ltd.19 where careless accounting
protected a director from liability on the basis that he was oblivious to the companys
insolvency and knowledge of the companys financial difficulties was a prerequisite for
liability. This was to be contrasted with the earlier cases where directors concerned in
those instances were aware that their companies were experiencing financial difficulties.

person knowingly a party to the carrying on of any business of the company in a reckless manner were to be
held liable
18 Re Bennett, Keane and White Ltd (1988) 4 NZCLC 99, 64,317.
19 (1992)6 NZCLC67, 824.

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South African legislation simply repeated the United Kingdom position until they
amended their provisions on fraudulent trading so as to extend it to reckless trading as
well, this being the highest standard of proof. Both the offence and civil liability was also
extended and effected simply by inserting the words "recklessly" or before "with intent
to defraud" in the section.20
The most thriving issue considered by the judiciary concerning this provision was the
meaning of the term recklessly. The Van Wyk de Vries Commission, in the course of
recommending these amendments, stated that recklessness was a wide concept which
not only encompassed the carrying out of a business during insolvent circumstances but
also the carrying on of business while the liabilities exceeded the value of assets.
The leading decision is the case of S v Goertz,21 where Fagan J stated, that the standard
to be implied would be an objective test i.e. it was mandatory to show that the director
not only acted recklessly but this was to be judged by the standards of reasonable
businessmen. This view was adopted in the cases of Ex Parte Lebowa Development
Corporation Ltd22 and S v Parsons,23 where Leon J indicated that the word recklessly

S.424(1) of SA Companies Act reads:

When it appears, whether it be in winding-up that any business of the company was or is being carried on
recklessly or with intent to defraud creditors of the company or creditors of any other person for any fraudulent
purpose, the Courqq``AZt may declare that any person who was knowingly a party to the carrying on of the
business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or
any of the debts or other liabilities of the company as the Court may direct.
21 1980 (1) SA 269 (C).
22 1989 (3) SA 71 (TPD).
23 1980 (2) SA 397 (D).
20

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applies to gross negligence and recklessness would in fact vary substantially from case
to case.24
The question as to whether lesser negligence could amount to recklessness was left open
in the Goertz case however, Margo J in the course of his judgement in the Fisheries case
referred to an article by Hyman25 where he indicated that had the legislature intended
mere negligence to suffice in order to incur liability it would have used the term
negligently and not recklessly. Hymans view was that recklessness is a concept to be
placed somewhere between mere carelessness and dishonesty, in other words gross
negligence, without necessarily appreciating or being aware of the consequences. 26
Irish law encompasses reckless trading as a lesser offence to fraudulent trading to
capture situations where there was no actual intent to defraud.

27The

test adopted is

similar to that of gross negligence.28

Fisheries Development Corporation of SA Ltd v AWJ Investments (Pry) Ltd and Others 1980 (4) SA 156.
Hyman Directors Liability for Companys Debts 1980 SA Co Law J E-1.
26 Bond Law Review, Vol. 6 [1994], Iss. 1, Art. 1.
27 Section 297A of the Irish Companies Act 1963 provides; If in the course of the winding up of a company or
in the course of examinership proceedings or where an insolvent company is not being wound up, it is found
that any officer of the company was knowingly a party to the carrying on of the business in a reckless
manner, then pursuant to Section 297A of the Companies Act 1963, such person may be personally liable for
all or any part of the debts or other liabilities of the company
28 Reflects on the knowledge, skill and experience expected of a person in that position, he ought to have
known that his actions would cause loss to any creditor of the company, or he was a party to the contracting
of new company debt and did not honestly believe on reasonable grounds that the company would be able
to pay that/other debts when falling due.
24
25

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The sole purpose for mentioning these provisions was to highlight how the provision on
fraudulent trading developed or in some instances repressed in the varying jurisdictions
and to which test has our provision come the closest to resemble.
Trinidad along with these jurisdictions also inherited its fraudulent trading provisions
from the UK however, unlike the UK they considered the recommendations made by the
Jenkins Committee.
S.447 of Trinidad and Tobagos Companies Act provides:
If in the course of the winding up of a Company it appears that any business of the
company has been carried on(a) With intent to defraud creditors of the company or the creditors of any other
person or for any fraudulent purpose;
(b) With reckless disregard of the companys obligation to pay its debts and
liabilities; or
(c) With reckless disregard of the insufficiency of the companys assets, to satisfy its
debts and liabilities, the Court, on the application of any of the above mentioned may,
if it thinks proper to do so, declare that such were knowingly parties to the carrying
on of the business in that manner and as such would be personally responsible,
without any limitation of liability, for all or any of the debts or other liabilities of the
company, as far as the Court may direct.

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The case of Central Bank of Trinidad and Tobago v Goodwill General Insurance
Company provides useful insight on how our provision is to be interpreted. Rajkumar
J, drew analysis of the meaning of recklessly from S.424 (1) Companies Act 1973 South
Africa and S.297 A (1) Companies Act 1963 Ireland.
He accepted that reckless disregard in the context of this case included gross negligence
and failure to have regard to consequences. He made reference to the South African case
of Philotex (Pty) Ltd v Snyman,29 where Howie J.A. referred to several previous cases
which concluded that, the ordinary meaning of recklessly included gross negligence with
or without risk-taking. Gross negligence he said was, an attitude or state of mind
characterised by an entire failure to give consideration to the consequence of ones
actions, in other words, an attitude of reckless disregard of such consequences. The
formulation of this case has been approved recently by the South African Supreme Court
of Appeal in Ebrahim v Airports Cold Storage (Pty) Ltd30.
It was further submitted that there was some degree of overlap between the elements of
recklessness and knowingly. As such, the court stated that Knowingly means having
knowledge of the facts from which the conclusion is to be properly drawn that the
business of the company was or being carried on recklessly; it does not entail knowledge
of the legal consequences of those facts. He continued that Being a party to the conduct
of the companys business does not have to involve the taking of positive steps in the

29
30

1998 (2) SA 138.

[2008] ZASCA 113.

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carrying on of the business; it may be enough to support or concur in the conduct of the
business.
Regarding intent, Bromley J in Re a Company31 adopted the dictum of Maugham J in
Re Patrick and Lyon Ltd, where he stated, there is intent to defraud....if the person
responsible was intending to deceive or actually deceived a supplier that he would be
paid at the stipulated time or shortly thereafter when the person so intending knew
perfectly well that there was no hope of that coming about. Rajkumar J, also came to
this reasoning.

31

No. 001418 of 19988 [1990] BCC 526

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Conclusion
As shown, many territories have enacted several laws that pierce the Salomon principle,
thus increasing directorial liability. The lowest standard of liability (excluding the
element of recklessness) was seen in Australia, and requires only that a company incurs
debt, when there are reasonable grounds for suspecting that the company is insolvent
and the director is aware of this or ought reasonably to be aware of it. New Zealands
legislation embraced Australian developments, and resulted in a hybrid approach
between South African legislation and the earlier Australian position. Trinidad and
Tobago has adopted the approach that governs the jurisdictions of South Africa and
Ireland. As a result, the inclusion of recklessness allows us to adhere to a more strict
approach when it comes to directors liability on fraudulent trading.

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