Limited Company Fraudulent Trading Explained

What is Fraudulent Trading?

Fraudulent trading occurs when a company conducts business with the aim of intentionally misleading and defrauding its creditors. 

This is a criminal offence, and being proven guilty of such actions can result in significant consequences at both a personal and business level.

Consequences encompass personal responsibility for company debts, disqualification from future directorial roles, and, in specific instances, the prospect of imprisonment.

 

Unlocking the differences between fraudulent trading and wrongful trading?

Crucially, it’s vital not to mix up fraudulent trading with wrongful trading. Although both relate to the continued activities of an insolvent company, there are notable differences between wrongful trading and the more severe offence of fraudulent trading:

• A company engages in fraudulent trading when it conducts business with a deliberate aim to defraud creditors. This constitutes a criminal offence (as well as a civil liability) and falls under the jurisdiction of either the magistrates’ court or the Crown Court.
• Wrongful trading occurs when a company persists in its usual operations, despite its directors being aware (or should have been aware) that the company was insolvent and had no genuine chance of sidestepping a formal insolvency process, such as liquidation or administration. Wrongful trading constitutes a civil offence, not a criminal one. Nevertheless, directors found guilty of this action can face significant repercussions, including personal responsibility for company debts and/or a prohibition from serving as directors of a limited company for a maximum period of 15 years.

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The key difference between fraudulent trading and wrongful trading lies in the presence or absence of intent. 

 

Fraudulent trading is a deliberate action, carried out with the aim of defrauding creditors. 

On the other hand, wrongful trading happens when a company persists in trading and accumulating debts while being knowingly insolvent, yet without proven dishonesty or malicious intent.

If you are uncertain about whether you have violated any laws regarding fraudulent trading, our guide on directors’ duties can provide additional guidance.

 

What are the directors’ duties for fraudulent trading?

Any company undergoing a winding-up process, whether through compulsory liquidation or voluntary liquidation, or entering administration, will undergo a comprehensive investigation led by the appointed liquidator.

An aspect of this inquiry is to determine if the company’s directors were involved in fraudulent trading before the company became insolvent. Depending on the findings by the liquidator, this might initiate an investigation by the Insolvency Service.

 

What does the law say about fraudulent trading?

Fraudulent trading falls within section 213 of the Insolvency Act, which asserts that ‘if in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose,’ further action can be pursued.

When fraudulent trading is suspected, the liquidator can request the court to hold anyone who knowingly participated in the fraudulent business ‘liable to make such contributions (if any) to the company’s assets’.

It’s crucial to note that all parties knowingly involved in the intent to defraud can be held accountable for fraudulent trading; this encompasses third parties, not limited to directors and shareholders.

 

Read More:  

• Are directors liable for limited company HMRC tax debts
• What are voidable transactions in an insolvency process
• What are the risks of trading while insolvent
• SEIS/EIS loss relief in insolvency and liquidation
• What is an insolvency practitioner

 

Tips to Avoid Fraudulent Trading Accusations

As a director, your duty is to act in the best interests of your creditors and promptly minimise potential losses for them once you become aware that your company may be heading towards insolvency.

As fraudulent trading is an intentional act, preventing it is entirely within your control. 

Once you recognise that your company is facing financial or operational challenges and can no longer meet its financial obligations, it is crucial to prioritise consulting with an insolvency practitioner.

In addition to seeking expert insolvency advice, here are some tips to assist you once you’ve realised your company is trading insolvent:

• Do not deceive creditors or attempt any falsehoods. Keep in mind, that prioritising their interests and preventing further losses is essential.
• Act in the overall best interest of all creditors; avoid favouring any specific party to whom you owe.
• Avoid selling your assets (such as inventory, equipment, property, etc.) at a price lower than the market value; this might be seen as a transaction at undervalue.
• Maintain comprehensive records of all income and expenditure. 
• Avoid taking on additional debt or borrowing that you know your company will be unable to fully repay. This encompasses formal finance agreements like loans and leases, as well as accepting customer deposits for work you cannot complete and obtaining credit from a supplier for goods you won’t be able to repay.
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If you’re worried about the possibility of facing allegations of fraudulent trading soon, get in touch with us today or send an email to engage in a free consultation. We will assist you in evaluating your current risk and formulate a plan of action to ensure compliance with the laws outlined in the Insolvency Act 1986.