Re Augustus Barnett & Sons Ltd is a case of UK insolvency on fault standards show that directors have been even guilty of fraudulent trading.

The main retail store in the UK for sherry and wine export and Rumasa SA had a subsidiary called Augustus Barnett & Sons Ltd.

Unless Rumasa confirmed its ongoing support for the company, the auditors refused to certify accounts as on a need to do basis, also Barnett had a deficiency of assets. Rumasa did support Barnett and in a letter of comfort to them on 1st June 1982, stated that they would provide them with additional working capital. By 1981 Rumasa had given Barnett £4 million in subsidies.

Rumasa was later nationalized on 23rd February 1983 by the Spanish Government. By now Barnett’s asset deficiency was £4.5 million. Barnett’s directors were now at the risk of personal liability as for fraudulent trading unless they had more funds to pay off debts, all this was as advised by the auditors and lawyers.

Barnett voluntary liquidated on 2nd September 1983. A declaration was applied for, by the liquidators declaring that Rumasa as a party had known about this fraudulent trading. Rumasa in its defense opposed and argued that it found no reason to take action against the Barnett Directors, as it had not yet been made known to them, any dishonesty or an intention to defraud.

Hoffman J, a British judge, agreed with Rumasa’s application. He pointed out Section 332 of the companies Act 1948, which was being applied against Rumasa at that particular time.

This section however required finding a person conducting a company with an intention to defraud and only when this requirement was filled in, that the knowing parties would be liable. Hoffman J indicated that the thoughts of the outsiders were not relevant but the case however could have been considered as tort of deceit but not as per S.332 and so till there was no allegation of fraud on Barnett’s directors, Rumasa could not be considered as an accessory to fraud.

Hoffman J, also took a look at the letter, which Rumasa had given in favour of Barnett, thus the liquidator claimed that Rumasa had made itself liable for Barnett’s debt. In this regard he said that the law was inadequate and required more investigating.