Morphitis v Bernasconi [2003] EWCA Civ 289 is a UK insolvency law

UK insolvency law

United Kingdom insolvency law deals with the insolvency of firms and individuals in the United Kingdom. The important statutes are the Insolvency Act 1986, as amended by the Enterprise Act 2002, as well as the Company Director Disqualification Act 1986 and the Companies Act 2006.Insolvency is a...

 and company law case, concerning fraudulent trading

Fraudulent trading

Fraudulent trading is an insolvency law concept, and in particular a UK insolvency law concept. It refers to a company that has carried on business with intent to defraud creditors.-Law:...

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Facts

TMC Transport (UK) Ltd’s former directors were Mr Bernasconi and Mr Monti. Mr Morphitis was the liquidator. They hired a group of solicitors who advised that the Insolvency Act 1986 rules on trading while insolvent could be circumvented by setting up a new company, resigning, and transferring the assets but not the liabilities there. The case turned on whether knowingly failing to pay a final instalment to their landlord was enough to constitute fraudulent trading

Fraudulent trading

Fraudulent trading is an insolvency law concept, and in particular a UK insolvency law concept. It refers to a company that has carried on business with intent to defraud creditors.-Law:...

 under IA 1986 s 213.

Judgment

Chadwick LJ held that there was not enough to constitute fraud in this case on this single instance. Not every fraudulent transaction makes the business a business carried on with intent to defraud. Moreover, there must be a causal connection between the fraud and the loss, or ‘some nexus between (i) the loss which has been caused to the company’s creditors generally by the carrying on of the business in the manner which gives rise to the exercise of the power and (ii) the contribution which those knowingly party to the carrying on of the business in that manner should be ordered to make to the assets in which the company’s creditors will share in the liquidation.’ Then, obiter he said it could not have been the intention of Parliament to allow more than compensatory claims under section 213. Disapproving the order of the judge below, he said that the provision for criminal charges in CA 1985 s 458 (now CA 2006 s 993) precluded any necessity for a punitive element.