188 12: Corporations and legal personality Part D The formation and constitution of business organisations
6.1.2 Fraudulent and wrongful trading
When a company is wound up, it may appear that its business has been carried on with intent to defraud
creditors or others. In this case the court may decide that the persons (usually the directors) who were
knowingly parties to the fraudulent trading shall be personally responsible under civil law for debts and
other liabilities of the company: s 213 Insolvency Act 1986.
Fraudulent trading is also a criminal offence. Under the Companies Act 2006 any person guilty of the
offence, even if the company has not been or is not being wound up, is liable for a fine or imprisonment
for up to ten years.
If a company in insolvency proceedings is found to have traded when there is no reasonable prospect of
avoiding insolvent liquidation, its directors may be liable under civil law for wrongful trading. Again a
court may order such directors to make a contribution to the company’s assets: s 214 Insolvency Act
1986.6.1.3 Disqualified directors
Directors who participate in the management of a company in contravention of an order under the
Company Directors Disqualification Act 1986 will be jointly or severally liable along with the company for
the company's debts.6.1.4 Abuse of company names
In the past there were a number of instances where directors of companies which went into insolvent
liquidation formed another company with an identical or similar name. This new company bought the
original company's business and assets from its liquidator.
The Insolvency Act 1986 makes it a criminal offence and the directors personally liable where; they are a
director of a company that goes into insolvent liquidation and; they become involved with the directing,
managing or promoting of a business which has an identical name to the original company, or a name
similar enough to suggest a connection.Questions in this area may require the identification of circumstances where the veil of incorporation will
be lifted.6.2 Lifting the veil to prevent evasion of obligations
A company may be identified with those who control it, for instance to determine its residence for tax
purposes. The courts may also ignore the distinction between a company and its members and managers if
the latter use that distinction to evade their existing legal obligations.Gilford Motor Co Ltd v Home 1933
The facts: The defendant had been employed by the claimant company under a contract which forbade him
to solicit its customers after leaving its service. After the termination of his employment he formed a
company of which his wife and an employee were the sole directors and shareholders. However he
managed the company and through it evaded the covenant that prevented him from soliciting customers
of his former employer.
Decision: An injunction requiring observance of the covenant would be made both against the defendant
and the company which he had formed as a 'a mere cloak or sham'.6.2.1 Public interest
In time of war a company is not permitted to trade with 'enemy aliens'. The courts may draw aside the
veil if, despite a company being registered in the UK, it is suspected that it is controlled by aliens: Daimler
Co Ltd v Continental Tyre and Rubber Co (GB) Ltd 1917. The question of nationality may also arise in
peacetime, where it is convenient for a foreign entity to have a British facade on its operations.Exam focus
point