INGENIEUR
INGENIEUR
The Plaintiff traded with companies managed by the Defendants . The Plaintiff sold to CHSSB whose directors and shareholders were CCH and LMY . CCH ’ s older brother , CCO , was the salesman and the Plaintiff ’ s point of contact who ordered steel products from the Plaintiff for CHSSB and several other entities . The claim was for outstanding debts owed by CHSSB to the Plaintiff for the sales of steel products .
The dispute began with a dishonoured cheque from CHSSB given by CCO to the Plaintiff . The post-dated cheque was given so that CCO could order more goods from the Plaintiff despite having already accumulated a rather substantive debt . As the date of the cheque lapsed , CCO requested the Plaintiff not to bank in the cheque . About four months later , the Plaintiff presented the cheque for payment only to have it bounced . CHSSB ’ s bank account was closed . Before it closed CYY incorporated CF2 SB to carry out a similar business to CHSSB .
From this encounter sprung the Plaintiff ’ s suspicions and through a discovery application , the Plaintiff obtained information and documents relating to CHSSB ’ s bank account . It was found that monies had been withdrawn via cash cheques to CCH in the period CHSSB ’ s debt to the Plaintiff increased . Substantial sums were withdrawn right after CHSSB received payments from clients . It was also found that CHSSB had not filed its audited financial statements and had not paid income tax and goods and services tax for several years . After the closure of the bank account , CHSSB directed its clients to pay to another company owned by WML and it was inferred that CHSSB ’ s machineries were transferred to CF2 SB .
Section 540 of the Companies Act 2016
Like the law of lifting the corporate veil , Section 540 of the Companies Act 2016 affords creditors of a company a remedy personally against directors or persons knowingly assisting them , that is , fraudulent trading . To succeed in a claim for fraudulent trading , the three elements that must be established and proven are :
1 . The plaintiff is a ‘ creditor ’ for the purposes of sSction 540 .
2 . The business of the company has been carried out with the intent to defraud creditors or for any fraudulent purpose .
3 . The parties being sued were knowingly a party to the carrying on of the business in that manner .
Once the elements are established , Section 540 allows the Court to declare any person to be personally responsible , without any limitation of liability , for all or any of the debts or other liabilities of the company .
The word “ creditor ” is interpreted in the widest sense . It includes anyone who has a monetary claim against the company and can enforce its claim by an action of debt . “ Carrying on of the business ” is not limited to the ordinary course of business that the company usually engages in but includes any dealing by the company or its alter ego such as its directors and shareholders . The most contentious part of Section 540 is in the meaning of “ intent to defraud creditors ” or “ for any fraudulent purpose ”. Fraud can be proven in many ways and is often inferred from the facts including the surrounding circumstances and the defendant ’ s conduct . Dishonesty is an essential ingredient of “ intent to defraud ”. Much depends on the strength of the evidence but there need not be many creditors or transactions or a complex scheme . A single act to defraud suffices . Finally , “ knowingly a party ” is also construed widely to include outsiders who could not be said to have carried on the business but nonetheless in some way participated in the fraudulent acts .
Decision of the High Court
The High Court found that the three elements of fraudulent trading are made out against the first to fourth Defendants , that is , CCO , CCH , CYY and LMY . There is no dispute as to the first element . The Court found overwhelming evidence against them in relation to the second and third elements . Accordingly , the Court ordered the first to fourth Defendants to be jointly and severally liable to pay the Plaintiff , which means that the said sum could be claimed against any one or all of them .
34 VOL 98 APRIL - JUNE 2024