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Alex J.
Alex J., Solicitor
Category: Law
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Experience:  Solicitors 2 years plus PQE
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A commits a fraud. As a result of A's fraud is in breach

Customer Question

A commits a fraud.
As a result of A's fraud B is in breach of certain statutory regulation.
Can B then be sued as he had no control over (unconnected) A and was not aware of the fraud?
Submitted: 1 year ago.
Category: Law
Expert:  Jo C. replied 1 year ago.
Hi.

Thank you for your question. My name is ***** ***** I will try to help with this. What is the nature of the fraud?
Customer: replied 1 year ago.
A buys Co. Shares from B. Share sale agreement is defective (another facet of potential dispute). A takes control of B's Co and within ten weeks commits fraud rips £250k out of Co. then puts it into creditors voluntary liquidation. As a result of the liquidation B is now responsible ( correctly by way of Co. Act) for shortfall in the liquidation which is similar in value to that fraudulently traded out by A in ten weeks of trading B's Co.!
Expert:  Jo C. replied 1 year ago.
In what way is it defective?
Customer: replied 1 year ago.
The share sale agreement should have had an indemnity clause that indemnified B in the event of the Co. failing in the period of twelve months following the share sale agreement (the Company purchased its own shares) and it didn't have it, poorly drafted!
Expert:  Jo C. replied 1 year ago.
Ok.
I actually think this is a corporate question rather than a criminal fraud.
I wil refer this to our corporate specialist.
Customer: replied 1 year ago.
Yes it is corporate. I was looking to see if there is a precedent set where say B could not be challenged because of the wrongdoing of A. The action against B is subservient to the action taken by A which can be proved. But thanks for listening.
Expert:  Alex J. replied 1 year ago.
Hi,
Thank you for your question and welcome. My name is ***** ***** my colleague has asked me to assist you. I am a company law expert.
In the SPA you state the company purchased its own shares - on the assumption it cannot have purchased all its own shares - what happened to the remaining shares?
Are you being accused of fraud as a director (i.e an offence under the Insolvency Act 1986) or by the purchaser?
To re assure you, the threshold for proving civil and/or criminal fraud is so high that the likelihood of you being convicted of something you were unaware of is remote.
I will be available until 10pm - if you do not hear from me before then please do not be concerned I will respond in the morning.
Kind regards
AJ
Customer: replied 1 year ago.
Good morning - thank you for your informed response.B had a successful Company that was reasonably cash rich, A didn't have any money to buy shares so B as 100% shareholder sold his shares (wrongly as we now know 100% SH cant do this - bad advice that is maybe a secondary claim/matter) to the Co. which A then purchased. Post sale A then went on to incur costs through the Company and invoice through a different Company (the fraudulent activity) creating a massive shortfall and failure of the Company which then went into a CVL in ten weeks form the point of sale.Liq now pursuing B under S.76 of the Insolvency Act 1986 which he is right to do, there is no defence. B received poor advice and a poorly drafted agreement.Liq has issued particulars of claim which are pretty much correct. My original question was researching whether there was a president on the matter of someone being sued as a direct result of another’s actions."To re assure you, the threshold for proving civil and/or criminal fraud is so high that the likelihood of you being convicted of something you were unaware of is remote." - B is not being pursued for the fraud, but for the deficiency in the CVL due to the share buy-back which was not lawful.B has no redress against A or his Co. that benefited from the sales income (which was funded through B's sold Co.) as A is now bankrupt and all the assets have disappeared!So back to the question, can the court impose sanctions on B when the illegal activity (breach of the IA) was brought about by the fraudulent activity of another. It was certainly not in the mind-set of parliament when drafting the relevant sections – I would suggest.I am away all day today, but would be interested on your further comments and or observations in respect of the original question.Many thanks.
Expert:  Alex J. replied 1 year ago.
Thank you. Was the share buy back done from capital or profits? I will prepare a detailed response following this additional information. Kind regards AJ
Customer: replied 1 year ago.
Evening, just back in!it would be from profits brought forward within the Co.Thanks.
Expert:  Alex J. replied 1 year ago.
Hi, Thank you. S.76 only applies to a purchase out of capital not profits. Have you provided the liquidator with evidence that the purchase was made out of profits? Kind regards AJ
Customer: replied 1 year ago.
Thank you!I need to do some checking. Grateful for your time and knowledge.Best wishesTerry
Expert:  Alex J. replied 1 year ago.
Thank you.
Please do not hesitate to contact me when you have checked this point?
Kind regards
AJ

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