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Fraudulent trading

Fraudulent trading

Fraudulent trading is where the directors carried on a business with the specific intent of defrauding creditors.

Fraudulent trading It is not an accidental offence.

It means the directors have taken in customers’ money with no intention of supplying the service or, they have just run up credit with suppliers with no intention of paying them back.

Sometimes you read about businesses in the news that have been set up purely to defraud members of the public and those companies have been dissolved by the courts as a matter of public interest. A typical example of fraudulent trading would be a business selling tickets for a music concert that it has no real intention of actually holding. Fraudulent trading is both a civil and criminal offence.

Who is at risk of such claims?

Any persons who were knowingly party to the carrying on of the business in the above manner are at risk but this tends to be the company’s directors.

Who brings about such a claim?

Originally a claim of fraudulent trading could only be brought about by a liquidator, however, a criminal provision brought in some years later under the Companies Act 2006 can be brought about outside of liquidation and more recently administrators can now also specifically bring about such claims.

The sort of matters that will be taken into account in these cases include; the amounts of money involved, how the fraud was carried out, whether members of the public have lost out, how long it has gone on, what sort of abuse of trust was committed and the personal benefit made by the offender.

What will the IP / Claimant need to be able bring about a successful claim?

A fraudulent trading claim is made under S.213 of the Insolvency Act 1986.

The Claimant will need to prove intent to defraud beyond reasonable doubt.  This is a large burden of proof and IPs typically pursue the easier to prove wrongful trading instead. 

However, an IP will need to prove that a company was insolvent for a successful wrongful trading claim to be made but does not need to prove insolvency at a certain date to bring a fraudulent trading claim.

Such claims are significantly time consuming to put together and highly expensive to bring about so for this reason cases are rare because IPs often do not have enough resources to pursue the action and cannot always justify incurring such costs to do so.  In some circumstances however the Insolvency Service may be prepared to step in and help to fund the case. 

What are the consequences?

If fraudulent trading can be proven, the biggest consequence may be a penalty of up to ten years in prison.

In addition, an IP may obtain a court order that the persons concerned are held liable to make such contributions to the company’s assets as the court sees fit.

Basically they can be made to pay all the creditors and all the costs.

As well as the above, if the fraudulent trading has been committed by a director their conduct will warrant a negative report filed by the IP against them to The Insolvency Service, which could result in their being banned from being a director for up to fifteen years.

Of course this latter consequence would be of little concern for the director if they had been subjected to ‘jail time’ and forced to pay a financial contribution back to the company.

David Kirk ACA FABRP

David Kirk

David Kirk is a Chartered Accountant and Licensed Insolvency Practitioner.
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