In relation to corporate insolvency,
a) i) Explain what is meant a contributory.
ii) Distinguish between fraudulent and wrongful trading. Against whom may proceedings brought for breaches of provisions against fraudulent trading and wrongful trading?
ANSWER
i) Under the Companies Act “contributory” means “every person liable to contribute to the assets of a company in the event of its being wound up.”
• The liability of a contributory creates a debt from him to the company.
• These are persons who owe the company in respect of shares held.
• A contributory may be a present or past member of the company.
ii) If in the course of winding up a company, it appears that any business of the company has been carried on,
• With intent to defraud its creditors or creditors of any other person or
• For any fraudulent purpose.
The court may, on application of the official receiver or liquidator or creditor or contributory of the company, declare that any person who was knowingly party to the carrying on of the company‟s business as such personally responsible without any limitation of liability, for any debts or other liabilities of the company as the curt may direct.
• All persons who are knowingly parties to the carrying on of the company‟s business are liable to an imprisonment for a term not exceeding 2 years or a fine not exceeding Kshs.10,000 or both.
• If the person(s) is a creditor to the company, the court may order that he ranks behind all other creditors in the satisfaction of claims.
• If the person(s) is a creditor to the company, his claim against the company is offset against the amount due from him to the liquidator.